Lilly pledges up to $1.8B to Pfizer for access to potential blockbuster

Eli Lilly and Co. and Pfizer Inc., which are both suffering through some of the largest patent cliffs in the industry, have found a new answer to their struggles: hold each other up.

The two drugmakers have entered into a deal to bring a troubled osteoarthritis drug to market. If successful, the deal could see Indianapolis-based Lilly pay as much as $1.78 billion to New York-based Pfizer.

The drug at the center of the deal, tanezumab, was predicted as recently as 2010 to have potential for more than $1 billion in annual sales.

That was before patients taking the drug in clinical trials reported higher rates of blowing out their joints—apparently because the drug was so effective at reducing pain, that the patients over-exerted themselves.

That led the U.S. Food and Drug Administration to place a hold on the drug. Pfizer worked through that issue, but then last December, the FDA placed another hold on the development of tanezumab and all similar drugs. This second hold was due to concerns about nervous system effects seen in animal studies of these kinds of drugs, which are called anti-NGF inhibitors.

Pfizer said late last month that it will submit new dosing data about tanezumab in the first half of 2014. If the FDA gives the drug a green light to restart a Phase 3 clinical trial of the drug, Lilly and Pfizer will split any future development and commercialization costs for tanezumab, and then will split any profits if the drug makes it to market.

In a securities filing, Lilly said it won’t pay anything until the FDA gives a response to Pfizer’s clinical data. But if the companies get the OK, Lilly will pay Pfizer $200 million immediately. After that, Lilly could pay up to $350 million as tanezumab hits further regulatory milestones. And then, depending on tanezumab’s sales, Lilly could pay another $1.23 billion to Pfizer.

It’s a creative way both companies might get a new blockbuster on the market—something both companies desperately need.

Lilly’s revenue peaked at $24.3 billion in 2011, the year its bestselling drug Zyprexa saw its U.S. and European patents expire. Now, at the end of 2013, Lilly will see its new bestseller, Cymbalta, lose its U.S. patents.

Analysts expect Lilly’s revenue next year to fall to just below $20 billion—18 percent below the peak in 2011.

And while the company has submitted four new drugs for approval this year, all of which stand a good chance of reaching the market, they won’t produce enough revenue to replace the nearly $8 billion Lilly will have lost in Zyprexa and Cymbalta sales.

For its part, Pfizer saw patents expire on Lipitor—the all-time bestselling in pharma history—in 2011. The loss of Lipitor’s peak annual sales of $13 billion has helped Pfizer’s revenue plunge nearly 10 percent last year and to fall another 7 percent so far this year.

“We're very excited about the deal that we've announced today with Eli Lilly,” said John Young, president of Pfizer’s primary care business unit, during an Oct. 29 conference call with analysts. “And we believe that represents a very positive opportunity for us to collaborate to take tanezumab into Phase 3 clinical development and ultimately we believe into the marketplace, which clearly has significant need and opportunity for new pain treatment options.”