Eli Lilly and Company (LLY) suffered a blow recently in the form of an unfavorable court ruling in its patent infringement case regarding Strattera. The US District Court for the District of New Jersey ruled that the method-of-use patent protecting Eli Lilly’s attention deficit hyperactive disorder (ADHD) drug, Strattera, is invalid. This means that Strattera will face generic competition shortly.
The court ruled in favor of generic company Actavis Elizabeth,which is seeking to launch a generic version of Strattera. In addition to Actavis, other generic players such asApotex Inc., Aurobindo Pharma Ltd., Mylan Pharmaceuticals Inc. (MYL), Sandoz Inc., Sun Pharmaceutical Industries Limited and Teva Pharmaceuticals (TEVA) are seeking to bring generic versions of Strattera to market. Several of these companies have already received tentative approval from the US Food and Drug Administration (FDA) for their generic versions of Strattera.
Revenue Guidance Cut
Although Eli Lilly intends to appeal the recent court ruling, the company announced a change in its revenue guidance for 2010 on the assumption that generic versions of Strattera will enter the market soon. Consequently, Eli Lilly now expects 2010 revenue growth in the low-to-mid single digit range, down from its earlier expectation of delivering top-line growth in the mid-single digit range.
Eli Lilly, however, maintained its earnings guidance for the year and expects earnings in the range of $4.50 – $4.65 per share. With other key products slated to lose patent exclusivity in the next few years, Eli Lilly also announced its intention to reduce costs by at least $1 billion by 2011. As a part of this initiative, Eli Lilly intends to cut down its workforce.
The unfavorable court ruling is a disappointment for Eli Lilly. Although Strattera is not a major contributor to Eli Lilly’s pipeline, the earlier-than-expected entry of generics will be a blow for the company. The patent was scheduled to expire in 2017. Strattera posted $609.4 million in revenues in 2009 (3% of total revenue) and we expect a rapid decline in Strattera revenues once generics hit the market.
Neutral on Eli Lilly
We currently have a Neutral recommendation on Eli Lilly, which is supported by a Zacks #3 Rank (Hold). Strong sales from key products such as Cymbalta, Cialis, the diabetes business and Alimta will drive revenue growth in 2010 with the ImClone deal providing incremental growth.
However, we expect the top and bottom line to come under pressure from late 2011 with the loss of exclusivity on Zyprexa. Barring significant cost-cutting efforts or additional revenue catalysts, 2013 will be the beginning of a challenging period with Cymbalta losing US patent protection during the year. On the flip side, strong performance of the diabetes business, the ramp of Effient and upside from the ImClone deal should offer some downside support. We are also pleased to see Eli Lilly pursuing small acquisitions and in-licensing deals to boost its pipeline.
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