Analysts: Lilly faces ‘ugly’ period until its pipeline produces

For Eli Lilly and Co., it's going to get worse before it gets better.

Investors smiled on the Indianapolis-based drugmaker early last week when the company unveiled experimental cancer drugs and an aggressive play for the animal health market in China. But those smiles turned to frowns after Lilly disclosed surprisingly deep cuts to its U.S. sales force.

Lilly saw its stock price rise 2.7 percent from its closing price on April 9 until a peak on April 11—just after the news of the sales force layoffs broke.

That mini rally was fueled by a report out of China on April 8 that Lilly’s Elanco Animal Health unit had invested $100 million to acquire a 20-percent stake in China Animal Healthcare Ltd., and by Lilly’s release the next morning of new details about cancer drugs in its pipeline.

But when Lilly said it would cut roughly 1,000 salespeople—which is about 30 percent of its total U.S. sales force, according to the Wall Street Journal—the company's stock dropped 1.3 percent. Lilly shares closed Friday at $57.47 apiece.

Lilly's stock price has risen 45 percent in the past year, not counting its healthy dividend, mainly on rising hopes for the success of drugs in its pipeline.

“Lilly’s got some things in the pipeline, but until they actually see the light of day, they’re like a lot of people in pharma; they have to align costs with revenue,” said Les Funtleyder, a health care investing analyst at Polliwogg in New York City. He added, “I hope Lilly gets a few new drugs and then they can hire more people.”

In fact, Lilly does plan to submit as many as three new diabetes drugs for regulatory approval this year and, if approved, those drugs could lead the company to hire 300 salespeople, according to the Wall Street Journal, which cited a person familiar with the situation. Lilly has been trying to grow its diabetes, animal health and emerging markets' business units to counteract revenue it is losing from a string of patent expirations that began in 2010.

But the only certainties at this point are that Lilly will see two of its blockbuster drugs lose their U.S. patents in roughly the next year, which will sap $4.7 billion in annual sales as patients switch to cheaper generic versions of those drugs.

Losing patent protection will be antidepressant Cymbalta, Lilly’s best-seller, and the osteoporosis drug Evista.

Wall Street analysts still expect Lilly’s overall revenue to fall from $22.6 billion last year to as low as $20 billion in 2014. Lilly’s revenue already declined from an all-time high of $24.3 billion in 2011, after the patent expirations of its blockbuster cancer drug Gemzar in 2010 and its blockbuster antipsychotic Zyprexa in 2011.

“It is going to get a little ugly for Eli Lilly in this transition period,” said David Williamson, the health care analyst for the personal finance website Motley Fool. “If you believe in Eli Lilly’s pipeline, you shouldn’t be shaken by job cuts in the near term.”

In addition to diabetes, cancer is the other big category in which Lilly is trying to bring new drugs to market. Its leading experimental cancer drug candidate right now is ramucirumab, which it is studying as a treatment for gastric and breast cancer.

On April 10, Lilly also unveiled four early-stage drugs that it is studying as treatments for melanoma, lymphoma, non-small-cell lung cancer, ovarian cancer, gastric cancer, and cancers of the bile duct and liver.