Can Eli Lilly Win Any Important Patent Lawsuit?

Already one of the most vulnerable big drugmakers to patent expirations, Eli Lilly was dealt a serious blow late yesterday when a federal judge invalidated a method-of-use patent on its Strattera ADHD pill. The upshot means that a slew of generic pills from Teva Pharmaceutical and Sandoz, among others, are now expected to appear imminently, instead of in 2017.

In a sobering statement, Lilly execs lowered their revenue forecast to low to mid-single-digit growth for the year, given that Strattera generated about $445 million in sales last year. And they put on a brave face by discussing the virtue of ongoing cost-cutting moves, which are likely to accelerate. This is the second time in recen weeks Lilly has lost a patent case. On July 28, a federal appeals court upheld a ruling that a patent on the Gemzar cancer med was invalid, throwing open the door to generic rivals two years earlier than Lilly had planned. So what do Wall Street wags say about this latest body blow? As you can imagine, the prognosis is gloomy...

Jon LeCroy of Hapoalim Securities sums it up this way in his research note: "The patent loss was unexpected and adds to Lilly’s already industry-worst patent exposure through 2014...Eli Lilly scores last on 2010-2014 patent exposure, has a below average pipeline, and average on company-specific factors, in our opinion."

The decision "is the latest setback to a company already facing a massive patent cliff and with a pipeline that is scientifically interesting but still several years away from being able to contribute meaningful revenue," writes Credit Suisse analyst Catherine Arnold in an investor note. "In overturning the method-of-use patent, the judge ruled that Lilly failed to include certain test data in their application for the patent. The results of this case has no bearing on how Lilly will do in fighting off ongoing challenges to products that are larger than Strattera (e.g. Alimta, Cymbalta, Evista), but we expect investors to become somewhat more guarded on Lilly’s ability to win these cases regardless, especially since it just lost the Gemzar case last month."

"We've updated our model to assume that Strattera generics enter the US market within weeks. This reduces our FY10 total sales estimates by $100 million and lowers our 2011- 2016 total sales estimates by $400 million to $415 million," writes Leerink Swann analyst Seamus Fernandez in a research note. "Because Strattera is a small molecule drug with modest cost of good sold and associated SG&A and R&D support, we do not assume incremental cost reduction efforts mitigate the revenue loss significantly. Lilly plans to appeal the ruling, although we believe the odds of success are low. This news reinforces our view that Lilly needs to move more aggressively on partnering and acquisition activity due to its challenged long-term outlook."

For the forward looking, Arnold points out Lilly faces three important moments before the FDA over the next three months: on Aug. 19, there's an advisory committee meeting to review the use of Cymbalta for treating chronic pain; on Sept 16, an FDA decision is expected on AstraZeneca's Brilinta, a potential competitor to Lilly's Effient bloodthinner, and on Oct 22, an FDA decision is expected on whether to approve the Bydureon diabetes drug, a follow-up to Byetta.