A Shock to Lilly's System?


By David Shook With the first available treatment for sepsis, which kills 215,000 people annually in the U.S., Eli Lilly was supposed to have a blockbuster on its hands. Analysts who projected 2002 sales of up to $475 million for the new drug, Xigris, figured it would help Lilly make up for sales lost to generic-drug makers when Prozac went off patent in 2001. Instead, on Mar. 4, Indianapolis-based Lilly (LLY) disclosed that Xigris' initial sales aren't nearly as robust as analysts expected -- a mere $14 million in the first quarter.

The stock barely budged following the announcement, remaining around $78 -- about where it was trading a year ago. But investors might want to think twice before shrugging off the disappointing news about Xigris.

PREMIUM PRICE. Lilly's stock is already one of the more expensive in the sector, and Xigris is an integral part of the company's growth strategy. True, Lilly has several other drugs that should help to make up for the loss of Prozac's $2.2 billion in annual sales, and Xigris, at best, was projected to contribute just a small percentage of total 2002 sales (estimated at $11.5 billion). But Lilly has a forward price-earnings ratio of 28, and any continuing weakness in Xigris sales is likely to put pressure on the shares.

Xigris attracted attention on Wall Street because there's no comparable treatment for sepsis, also known as septic shock. The often lethal condition, which is triggered by bacterial infections, is marked by acute and total organ failure. Inflammation sets in. The lungs and kidneys can shut down. Blood pressure and body temperature may both drop.

With no competition, analysts predicted that Xigris could easily become a star capable of generating more than $1 billion annually within a few years.

IDENTITY CRISIS? That's if hospitals and trauma centers embrace the drug. So far, that hasn't been the case. Based on Xigris' cost and the revenues it has produced thus far, an estimated 2,100 patients have been given the drug since Jan. 1. "Some challenges have affected the initial uptake," Lilly Chief Financial Officer Charles E. Golden explained in the Mar. 4 statement. The company says hospitals are still figuring out the most appropriate way to use the drug, which situations and patients it is suited for, and how to pay for it.

Xigris, which is delivered intravenously, costs an average of $6,800 per treatment. Stock analysts point out that the drug has one of the higher profit margins in the business. But cash-strapped hospitals are worried that it could break their emergency-room budgets. "The drug is perceived as expensive, although I'd hesitate to call a life-saving drug expensive," says Ed Saltzman, president of Defined Health, a drug-industry consulting firm in Millburn, N.J.

Another obstacle to Xigris' widespread adoption is that it can be hard to identify candidates for treatment. The drug is intended for patients at a high risk of death from severe sepsis. Some physicians use it only if two or more organs fail, others prefer different criteria. "It's not always easy to tell when a patient is at an extraordinarily high risk of death from sepsis," explains Saltzman. That's when Xigris' high cost may become an issue, he says, adding: "There may be some subtle pressure on physicians from the hospitals as to when this drug should be used."

"BOUTIQUE DRUG." The biggest limitation on sales, however, is probably the drug's efficacy. In clinical studies, 25% of patients given Xigris died from severe sepsis, vs. 31% of those given a placebo. Statistically, that's a very significant benefit -- a 20% relative reduction in the death rate. But in absolute terms, it represents only a 6% decrease, which may not translate into big sales. "Overall, my suspicion is that Xigris will be a boutique drug, not a real slam dunk," says Dr. Steven Weisholtz, chief of infectious disease treatment at Englewood Hospital & Medical Center in Englewood, N.J.

While some analysts have tempered their forecasts, Dr. Mark Effron, a medical director at Lilly, remains confident that Xigris will emerge as a significant advance in the treatment of sepsis as emergency rooms embrace it over time. In the near term, however, "our Xigris sales forecast appears to have been too optimistic," Banc of America Securities analyst Leonard Yaffe wrote in a Mar. 5 note. While maintaining a strong buy on Lilly, he lowered his 2002 sales estimates for the drug from $445 million to $245 million, and from $700 million next year to $535 million for 2003. Yaffe admits, however, that with Lilly trading at 28 times estimated earnings for 2002 and 23 times estimated profits in 2003, the stock is at a premium to its peers.

ABN Amro analyst Girish Tyagi says he remains comfortable with his estimate of $220 million in Xigris sales this year, a figure he sees reaching $450 million in 2003. "But at this point, who knows if the drug will ever cross $500 million in sales?" he says. "Given the performance so far, it's debatable."

FULL PIPELINE. Many analysts continue to believe that Xigris could be a late-blooming hit and have lowered neither their sales projections for the drug nor their ratings on Lilly. Even without Xigris, Lilly has a rich pipeline and is considered one of Big Pharma's better-positioned companies. Its upcoming drugs include Forteo for osteoporosis, Gemzar for cancer, an inhaled insulin product, and a drug for erectile dysfunction that's intended to compete against Pfizer's Viagra.

If Xigris fails to match expectation, it would likely put pressure on Lilly's stock, even as the company scrambles to replace the enormous sales lost because of Prozac going off patent, a figure that amounted to 22% of pharmaceutical revenues in 2000. But Xigris may not be Lilly's next big winner. And without a major hit, shareholders could take a short-term hit themselves. Shook covers biotechnology issues for BusinessWeek Online. Follow The Biotech Beat every week, only on BusinessWeek Online


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