Lilly’s Effient launch just one of its many challenges

 Eli Lilly and Co. has blasted past analysts’ earnings projections for two straight quarters. But if Lilly officials
take that as a sign they can breathe easier, they need only flip through a stack of Wall Street research reports on the company.

“We see long-term earnings and cash flow declines under all reasonable scenarios,” wrote David Risinger,
a pharmaceutical analyst with Morgan Stanley.

Added C. Anthony Butler, an analyst with Barclays Capital: “We
believe long-term investors are keenly and rightfully focused on one of the most challenging patent cliffs remaining in the
industry.”

“Patent cliffs” certainly sounds scary, and it is. From 2011 to 2017, Lilly is set
to lose patent exclusivity on drugs producing 60 percent of revenue. Unless Lilly strikes a game-changing acquisition, it
will have to rely to an uncomfortably large extent on ushering drugs through its R&D pipeline—an inherently iffy
process.

Add to that the difficult-to-predict outcomes of a series of patent challenges pending against key Lilly
drugs. A loss on that front would force the company to become even more reliant on its pipeline.

Against that backdrop,
it’s easy to understand why analysts and investors are so focused on the launch of Effient, the blood thinner set to
debut in the United States next month that is Lilly’s first new drug in four years.

Effient hopes to capture
a chunk of the revenue that now goes to Plavix, a blood thinner sold by Bristol-Myers Squibb Co. and Sanofi-Aventis that racked
up a whopping $8.6 billion in sales in 2008.

Advocates of Effient—also known by the name of its active ingredient,
prasugrel—believe it is a superior choice for some patients, including diabetics. It also will be an appealing option
for patients who don’t respond to Plavix.

But before approving the drug this month, the Food and Drug Administration
mandated that Effient packaging include a black-box label that the drug can cause sometimes-fatal bleeding.

Lilly
officials acknowledge the warning creates a marketing challenge. In a recent conference call with analysts, Lilly Research
Laboratories President Steven Paul said: “The box warning for bleeding risk may necessitate a more in-depth discussion
of prasugrel’s benefits and risks with some physicians … so that they appropriately weigh the benefits with the
risks, as opposed to focusing solely on the risks.”

Thanks in part to the warning wild card, analysts are
all over the map on Effient’s sales potential. Citi Investment Research and Morgan Stanley say annual sales might reach
$2 billion by 2015. Meanwhile, Barclays Capital projects a mere $590 million in Effient sales by 2013, while BMO Capital Markets
projects $975 million by 2015.

After the FDA mandated the black-box warning, Deutsche Bank cut its 2013 sales estimate
from $1.3 billion to $1 billion.

And even analysts high on Effient aren’t necessarily bullish on Lilly stock.
That’s partly because Lilly must share sales of the drug with its development partner—Japan’s Daiichi Sankyo—and
because the drug alone isn’t enough to offset expected declines in blockbusters going off patent.

The company’s
earnings potential after the rash of patent expirations “is highly dependent on the successful development of a late-stage
pipeline with low visibility and/or high risk,” Deutsche Bank analyst Barbara Ryan said in a report.

That
helps explain why Lilly shares haven’t gotten a big pop from a recent surge in quarterly earnings. The stock is around
$35—down two-thirds from its late-1990s high.

The company has 26 compounds in phase two or phase three testing,
including truly innovative medications that treat some of the most vexing health problems of our time, such as Alzheimer’s
and obesity.

The good news is Lilly and the rest of the pharmaceutical companies have moved beyond the “me-too”
drugs that helped juice sales in the 1990s. Companies that pioneer entirely new medicines, as Lilly is trying to do, can reap
a huge financial windfall if they succeed. But the downside is failure leaves them empty-handed.

Lilly’s
Paul said on the call that the company has 66 compounds in its development pipeline and that 15 to 20 might reach market as
“best in class” or “first in class” medicines in the next decade.

Morgan Stanley’s
Risinger is skeptical, saying that success rate surpasses what the industry has historically achieved. He said it’s
also hard to predict a drug will be tops in class because other companies could be quietly working on competing treatments.

Regardless, Indianapolis’ most important corporate citizen faces one of the most challenging stretches in its
133-year history. The next decade is sure to go down either as one of its bleakest or brightest.•