Lilly taps hedge fund to cut research costs for Alzheimer’s drugs

Eli Lilly and Co.’s unorthodox efforts to develop new treatments for Alzheimer’s disease–if successful–could usher in
a new approach to drug development.

The Indianapolis-based pharmaceutical company announced that a New York hedge fund, TPG-Axon Capital,
will invest up to $325 million to help cover the exorbitant development costs of two experimental compounds
to treat Alzheimer’s disease.

"The pharma industry is changing, and Lilly is trying to change," said Les Funtleyder, a pharmaceutical analyst
at Miller Tabak & Co. in New York.

Funtleyder said he had never heard of a drugmaker tapping hedge fund money for drug development.
TPG-Axon, which mainly buys shares in insurers and basic manufacturers, dipped its toe into drug development
financing less than two years ago.

Lilly also is trying to speed up clinical testing of its Alzheimer’s medicines by relying on different kinds of data–called
biomarkers–to make decisions about whether the drugs are working.

If these unusual moves help Lilly win a fiercely competitive race to introduce a new Alzheimer’s
treatment, a memory-sapping malady with no effective treatment, the company could reap a financial bonanza.
One analyst estimates the potential global market for effective Alzheimer’s drugs at $20 billion.

That’s slightly bigger than the market for antipsychotics,
which Lilly pioneered with Zyprexa, a drug with sales topping $4 billion a year.

If Lilly fails, it will go back to the drawing
board in an industry-wide effort to reduce the time and cost associated with developing new drugs. Facing
a future where medicines treat smaller groups of people, and therefore generate less in sales, drugmakers
must find cheaper ways to develop lots of new medicines–and fast.

Lilly is trying to do that on several fronts. On Aug. 6, it agreed to sell its early-stage development
labs in Greenfield to New Jersey-based Covance Inc. for $50 million and to more than double the amount
of safety and clinical studies Covance performs for Lilly. Lilly also outsourced some of the administrative
work for its clinical trials to two other companies.

Those announcements followed two moves Lilly has made to trim its manufacturing work force. In
June, the company cut 335 manufacturing jobs in Indianapolis through a voluntary-buyout program. It used
the same method the year before to trim its staff at a plant in Lafayette. And now, Lilly is considering
whether to shutter that facility, which employs 780 people.

Both plants use chemical processes to synthesize drugs, but Lilly needs less of that work as one-third
of its drugs in development now are biotech compounds, made using bacteria cultures that produce a medicinal
protein.

Non-pharma
funds

As Lilly
looks to save its own dollars, it’s also looking to use other people’s money.

Historically, the pharmaceutical business was so lucrative that companies funded all their own
research and development. They have, in the last two decades, limited their R&D costs by buying new
drugs discovered and at least partially developed by smaller biotech firms.

But it’s a recent phenomenon for drugmakers to look
outside the pharmaceutical world to help them cover the average $800 million it costs to find, develop
and commercialize a new medicine.

TPG-Axon was introduced to drug development financing by NovaQuest, a unit of North Carolina-based Quintiles Transnational
Corp., which helps drug companies manage the financial risk of developing or launching new drugs. Quintiles is conducting
the clinical trials for Lilly’s two Alzheimer’s compounds.

Ten percent of the money TPG-Axon invests with Lilly will come from NovaQuest.

As Lilly moves its Alzheimer’s molecules closer
to a market launch, TPGAxon and NovaQuest will get as much as $330 million in payments along the way.
And if either of Lilly’s Alzheimer’s compounds wins approval from regulators to hit the market, Lilly
will pay its partners a percentage of sales that will range from the mid- to high-single digits.

"Our agreement effectively provides Lilly with
a hedge as we enter new and uncharted territory," said Lilly CEO John Lechleiter during a July 24
conference call with investors and analysts.

It’s not the first time Lilly has sought help from NovaQuest. It gave Lilly money as it achieved certain milestones in its
development of the antidepressant Cymbalta. Since the drug launched in 2004, NovaQuest has claimed 8.25 percent of its sales.

Since its founding in 2000, NovaQuest has done
80 deals with drugmakers large and small, with a total value of $2.7 billion.

Ron Wooten, president of NovaQuest, said his company’s
previous partnerships with Lilly, plus the huge opportunity Alzheimer’s represents, piqued his interest.

"What we want to do is work on their most
strategic, innovative opportunities," Wooten said. He added, "Alzheimer’s itself, the number
of people stricken with it is growing. It’s got a totally unmet need."

Race to market

Indeed, finding a treatment for Alzheimer’s would be a huge breakthrough.

Existing drugs, such as Aricept and Cognex,
can delay the symptoms of Alzheimer’s, but only six to 12 months, according to the Chicago-based Alzheimer’s
Association, an advocacy group.

Alzheimer’s disease afflicted 4.5 million Americans as of 2004, according to the Alzheimer’s Association. By 2050, the group
expects as many as 16 million Americans to suffer from the disease.

Worldwide, the Alzheimer’s population neared 27 million in 2006, according to researchers at Johns
Hopkins University. They expect that total to top 100 million by 2050.

Such huge numbers explain why half a dozen major pharmaceutical companies, and a handful of small
biotech firms, are chasing new treatments for the disease.

UBS pharmaceutical analyst Roopesh Patel estimates the global market for Alzheimer’s drugs could
top $20 billion, according to a July research note to investors.

The companies furthest along are New Jersey-based Wyeth and Ireland-based Elan Corp. Their molecule,
bapineuzumab, entered Phase 3 clinical trials in December. However, data released July 29 were inconclusive
about the drug’s effectiveness, which sent the share price of both companies tumbling.

"Our view remains that this is still a
high-risk compound," Patel wrote in a July 30 note to investors. Results from a Phase 3 trial of
Wyeth’s drug won’t be available for at least two years.

Time-saving trials

Lilly is taking a different approach than Wyeth, which set up its test to collect data both on
biomarkers and whether patients improved their mental ability.

By contrast, Lilly has tested patients only for side effects and to see if the drugs lowered levels
of a key biomarker of Alzheimer’s disease–the presence of a protein called amyloid beta.

Amyloid beta builds up in the brains of Alzheimer’s
patients and forms sticky plaques. The prevailing theory about Alzheimer’s disease is that the buildup
of amyloid beta proteins causes memory loss and dementia, and that reducing their levels would help alleviate
those symptoms.

Since
it takes a lot of time to measure changes in a person’s mental state, Lilly is saving time by measuring only the extent
to which its drugs reduce levels of amyloid beta. In its Phase 3 studies, however, Lilly will measure whether its drugs improve
patients’ memories and ability to do daily activities.

"While Alzheimer’s disease is a tremendous unmet medical need, it’s a particularly risky
area for drug development," Lechleiter told analysts and investors. "The prevailing hypothesis
of the pathology of the disease, the amyloid hypothesis, is yet to be proven. Furthermore, unlike traditional
proof-of-concept approaches, in which small studies can be done in Phase 2 to show clinical efficacy,
Alzheimer’s disease trials require large numbers of patients to be treated for extended periods of time
to show a meaningful clinical effect."

Lilly’s atypical effort to navigate that difficult process caught the attention of analysts, even if they’re not yet ready
to call it a success.

Lehman Brothers analyst Charles Anthony Butler, in a research note, wrote, "What remains interesting to us is the somewhat
unorthodox way the compound is progressing."