Lilly setbacks fail to dent anti-merger view

By Ransdell Pierson

INDIANAPOLIS (BestGrowthStock) – The chief executive of Eli Lilly and Co (LLY.N: ) remains opposed to mega-mergers because they hurt innovation and he said recent setbacks for a handful of Lilly’s most important drugs will not greatly hamper company strategy.

“We have enough critical mass to achieve breakthrough innovation,” CEO John Lechleiter told Reuters in an interview at the drugmaker’s U.S. headquarters. “Our basic rationale continues to be that large-scale combinations don’t achieve long-term growth.”

While rival U.S. drugmakers Pfizer Inc (PFE.N: ) and Merck & Co (MRK.N: ) are digesting separate recent acquisitions valued at $67 billion and $41 billion, respectively, Lilly continues to go it alone despite its arguably worse slate of coming patent expirations that will open the floodgates to cheaper generics.

Sanofi-Aventis’ (SASY.PA: ) $18.4 billion bid for Genzyme Corp (GENZ.O: ), made as Sanofi reels from generic competition, has ignited speculation that even Lilly would have to consider a major deal.

But Lechleiter said the company’s stance against big deals remains firm, despite a stream of courtroom and laboratory setbacks in the past month and looming patent expirations that Wall Street expects to maul company revenue and profit through 2014.

Two court rulings since late July could pave the way for cheaper generic forms of Lilly’s Gemzar cancer drug and Strattera attention deficit disorder treatment.

Meanwhile, one of its two experimental treatments for Alzheimer’s disease was scrapped after failed clinical trials and an advisory panel to the U.S. Food and Drug Administration last week gave only a partial endorsement for use of its Cymbalta depression drug as a treatment for chronic pain.

Lilly will lose U.S. patent protection on its biggest product, the $5 billion-a-year Zyprexa schizophrenia treatment, in October 2011. Its No. 2 product, $3.5 billion a year Cymbalta, faces generics in mid-2013 and its Evista osteoporosis treatment will also face generics in the next few years.

All told, Soleil Securities analyst Manoj Garg expects Lilly’s current products to lose a third of their 2009 sales by 2012, shrinking by 56 percent in 2015.

Lilly Chief Financial Officer Derica Rice said on Wednesday that annual company revenue should be above $20 billion in 2014, helped by sales of new drugs and growing demand in emerging markets. That is roughly in line with 2009 revenue.

But he projected net profit of more than $3 billion in 2014, well below Lilly’s current annual profit in the $5 billion range, as higher taxes and a higher percentage of older drugs crimp profit margins.

Even so, Rice voiced an anti-merger stance every bit as stentorian as Lechleiter’s.

“We’re not interested in deals like Merck and Pfizer, nor do we think they create long-term value,” Rice said. “We’re not using mergers and acquisitions to bridge revenue declines.”

Lilly’s resolve is reminiscent of 2001, when the company avoided a big merger despite the unexpected loss of patent protection for its Prozac anti-depressant. The drug, with annual U.S. sales of $2.4 billion, accounted for some 30 percent of Lilly revenue.

At the time, then-CEO Sidney Taurel said no company had survived a patent expiration of such magnitude without losing its independence.

“When we lost Prozac we did not panic because we were looking at the potential launch of nine new products,” Rice said. He noted they are now among the company’s biggest drugs — including Strattera, Cymbalta, anti-impotence pill Cialis and cancer treatment Alimta.

Similarly, the company is relying again on its own laboratories and drugs licensed or purchased through deals typically valued under $2 billion, with plans to launch two new drugs a year beginning in 2013.

“The challenge we have now is to maintain our strong cash position through this (patent cliff),” Lechleiter said, “and maintain our dividend at least at its current level, while continuing to do some acquisitions.”

Rice said he expects a patent cliff “trough” in 2014, creating a base for sales growth in subsequent years, as Lilly’s latest slate of medicines comes to the fore.

“There will be a new Lilly, in terms of a new drug portfolio.”

(Reporting by Ransdell Pierson; editing by John Wallace, Andre Grenon and Matthew Lewis)

Lilly setbacks fail to dent anti-merger view