Wall Street analysts gave Eli Lilly (Indianapolis, IN) executives the third degree last Thursday when the company presented its third-quarter results. Lilly’s revenue had increased only 2%, mostly because it had raised its prices. Although demand for its products had stayed flat, the company boosted its profits by 38% mostly through layoffs and cost-cutting measures. The patents on many of the company’s top drugs (e.g., Zyprexa and Actos) will expire in the next few years, however, and no new drugs seem poised to replace them. Analysts wanted to know how Lilly would weather the storm.
John Lechleiter, Lilly’s chairman and chief executive officer, told analysts during a conference call that acquiring small and medium-sized companies will continue to be part of the company’s strategy, according to the Indianapolis Star. His audience didn’t seem to be convinced that this plan would work.
“I think the prevailing consensus among investors is that given some of the big expirations that lay ahead, at some point, Lilly will have to do a larger acquisition to fill the gaps,” said Tim Anderson, a drug analyst at Sanford Bernstein, according to the Star. He also suggested that Lilly could seek to be acquired.
Lilly expects a “trough period” to begin in 2014, when several patents will expire before the company can launch new major drugs. Derica Rice, Lilly’s chief financial officer, said that the company plans to pursue growth opportunities in overseas markets to help it through difficult times, according to the Star.
Lilly’s situation is emblematic of the problems Big Pharma faces right now. AstraZeneca (London), GlaxoSmithKline (London), Merck (Whitehouse Station, NJ), and Pfizer (New York) all face patent expirations in the coming years. Companies have tried to remain profitable by cutting costs and laying off employees. We’ve also seen Pfizer gobble Wyeth (Madison, NJ) and sanofi-aventis (Paris) pursue Genzyme (Cambridge, MA) to gain access to new drugs and increased revenue. And Lilly is not alone in trying to find new and emerging markets for its products. But I think these tactics treat the symptoms rather than the underlying problem.
What the industry needs is innovation. Without fresh investment in research and development, companies will not discover new drugs that could become the top products of the future. Of course, discovery and development are difficult processes, and setbacks are common. Lilly itself recently abandoned developmental drugs to treat diabetes and Alzheimer’s disease that had failed to live up to their promise.
Although the development process may be tougher now than before, I think it is still the industry’s best route to profitability. After a while, drugmakers will run out of employees to lay off, small companies to buy, and emerging markets to exploit. On the other hand, patients still have medical needs that could be met with new therapies. Companies that redouble their effort and investment in discovery will be more likely to survive the trying times ahead.