Eli Lilly and Co (NYSE:LLY) was the disaster of the day Monday, falling about 4% on early trade after what was called a “rejection” of its anti-arthritis drug, barictinib. The morning’s fall in LLY stock took out about a quarter of a speculative run-up that had taken shares from a December low of $66 per share to a high of over $85 per share.
The headlines certainly looked bad. “FDA Rejects Arthritis Drug Due to Safety Concerns.” Ouch. “A Stunning Setback.” Oof.
But a closer look reveals both that the news is not quite as bad as advertised, and that there is plenty of other good news on the way from the Indianapolis-based drug maker.
Remember: LLY was being called “the new darling of big pharma” as recently as last week.
How Bad Is It?
A close reading of the letter the Food and Drug Administration sent the company, called a Complete Response Letter, does reveal some problems.
Barictinib is known as a Janus Kinase Inhibitor, or JAK inhibitor. The kinases whose actions they inhibit were originally called “Just Another Kinase” by scientists with a sense of humor, but were eventually named for the Roman god Janus because exhibit two nearly identical phosphate-transferring domains, one of which exhibits the kinase, and the other which inhibits or regulates it.
The letter says the FDA wants more information on dosing and safety. This should have been expected after Lilly sent more information about the drug to the agency earlier this year, and the agency responded by extending its pricing decision on the drug by three months.
The drug has already been approved in Europe, under the name Olumiant. The drug was co-developed with Incyte Corporation (NASDAQ:INCY), which being more dependent on it is down by more than 10% in April 17 trading.
The drug has gone through four successful Phase III trials in the U.S., and an additional study has been launched for China. About 23 million people suffer from rheumatoid arthritis, and having a new treatment pathway could be a very big deal.
Lilly is scheduled to report earnings April 25, with analysts expecting for 96 cents per share — and hoping for another penny, given the whisper number — on revenue of $5.24 billion. That would be about 20% more earnings on slightly less revenue compared with the year-ago quarter.
The latest setback doesn’t impact those numbers.
LLY has a new cancer drug expecting Phase III data in June, it has a solid franchise in diabetes care, and a total of 20 compounds are going through the regulatory process. This does not include Taltz, a psoriasis drug which like other immune suppressants is being looked-at regarding other conditions, and Cyramza, a monoclonal antibody used for gastric cancer which is also being examined for other possible uses.
The Bottom Line on LLY Stock
It seems that the FDA letter on baractinib, or Olumiant, does not halt the drug’s progress toward the market, only delays it, perhaps by as much as six months.
Lilly has a lot of other drug candidates to refill its pipeline, along with over $6 billion in cash and short-term securities on the balance sheet it can use, along with its stock, to secure more. More cash is coming in — the company had $4.8 billion of operating cash flow in last year’s fourth quarter alone.
Once the company’s quarterly report comes in, and analysts get a chance to digest the new numbers, especially on cash flow, LLY stock could quickly snap back to its earlier value.
Dana Blankenhorn is a financial and technology journalist. He is the author of the political polemic Saving Trumpistan, Restoring Democracy, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.