Eli Lilly & Co., on the precipice of one of the steepest patent cliffs in the industry, announced a diabetes collaboration with Boehringer Ingehheim GmbH Jan. 11 that will recharge the company's diabetes pipeline but may leave investors longing for bigger M&A action.

The Lilly/BI arrangement marks one of the largest risk-sharing deals in the industry, spanning four drugs with an option to add a fifth.

Under the deal, the drug makers will develop and commercialize a portfolio of diabetes drugs in mid- to late-stage clinical trials. The program includes two oral diabetes drugs from BI, linagliptin, a dipeptidyl peptidase-4 (DPP-4) inhibitor, and BI10773, a sodium-dependent glucose co-transporter-2 (SGLT-2) inhibitor, and two basal insulin analogues from Lilly: the novel basal insulin LY2605541 and an insulin glargine product LY2963016, which may be positioned as a biosimilar version of Sanofi-Aventis SA's Lantus. The deal also gives BI an opportunity to opt in to co-develop and co-commercialize Lilly's anti-TGF-beta monoclonal antibody, in development for chronic kidney disease, pending the outcome of Phase II data.

Combined, the drugs could have peak sales of $10 billion, with each having peak sales potential above $2 billion, BI predicted.

Can Linagliptin Compete With Januvia?

But the benefits of the deal seem more clear cut for BI, which gets an initial one-time payment of €300 million ($388.6 million) from Lilly, two potential insulin products to round out its emerging diabetes portfolio and an experienced diabetes marketing partner as it prepares to launch its first diabetes drug.

Lilly gains two oral diabetes products in large and emerging classes, but the sales potential of linagliptin and BI10773 are far from certain. If approved later this year as expected, linagliptin will be the third DPP-4 drug on the market, behind Merck & Co.'s first-to-market Januvia (sitagliptin) and Bristol-Myers Squibb Co./AstraZeneca PLC's Onglyza (saxagliptin). Linagliptin was filed with regulatory authorities in the U.S., EU and Japan in the second half of 2010.

Thus far, Januvia has held its market-leading ground against the competition. Onglyza, which launched in 2009, generated just $85 million in sales in the first nine months of 2010, while Januvia generated $1.71 billion in sales during the time period and Janumet, a line extension combined with metformin, generated another $666 million.

Additional DPP-4s like Takeda's alogliptin also could launch in the future, further segmenting the market. The competitive dynamics in the class and regulatory requirements for diabetes drugs led Forest Laboratories, Inc. to scrap plans to develop a DPP-4 in partnership with Phenomix last year (Also see "Forest Ends Phenomix Partnership, But Says Its Many Deals Are Bearing Fruit" - Pink Sheet, 20 April, 2010.).

BI and Lilly argue that linagliptin's differentiating profile will give it an edge. Only about 5% of linagliptin is excreted through the kidneys, versus 75% to 80% for Januvia, which could offer a safety advantage, particularly for use in type 2 diabetes patients with moderate or severe renal impairment. About 60% of patients with type 2 diabetes have some form of renal impairment and an estimated 25% have severe renal impairment, according to company estimates.

"A number of things will allow us to effectively compete," said Lilly's Diabetes President Enrique Conterno in an interview. "We are pretty excited and we do think that we are in a different position than Onglyza was when we look at the package we submitted to FDA."

Nonetheless, Januvia's strong safety profile is one of its best attributes, and getting payer support for a new product will prove challenging in an environment where payers give formulary preference to better known products, all things being equal.

Future Of SGLT-2s Remains Uncertain

SGLT-2s are a new class of drugs that work by blocking reabsorption of glucose in the kidneys. While there are currently no SGLT-2s on the market, enthusiasm for the class has been muted due to a potentially troublesome side effect profile that includes genital and urinary tract infections. BI/Lilly's SGLT-2 inhibitor is likely to be a follower too, since Bristol/AZ are on track to launch the first SGLT-2 product, dapagliflozin, later this year. The sponsors filed dapagliflozin with FDA in late 2010, whereas BI10773 is currently in Phase III testing, with a regulatory filing targeted for 2013.

In Phase IIb testing, the incidence of urinary tract infections following treatment with BI10773 was low at 1.2% and was comparable to placebo, the firms said. Incidences of genital infections were reported, 0.8% for mycosis and 1.2% for pruritus, versus none on placebo or metformin.

The two insulins are further out in development. Lilly expects the novel basal insulin to be a long-acting option that could offer improved glucose control over existing products, of which Lantus is the market leader. The product is being tested in two Phase II clinical studies, which are expected to complete in the second quarter. Phase III trials are planned to begin later this year, with a regulatory filing targeted for 2014. The insulin glargine product is being developed as a cost-effective, user-friendly option, a product that could be positioned as either a biosimilar or a cost-effective brand drug depending on the regulatory environment at the time of its submission, intended in 2014, Lilly said.

For Lilly, Patent And Pipeline Woes

By partnering with BI, Lilly enhances its pipeline and commercial footprint without relying on disruptive M&A, a stated goal of management. But Lilly is on the cusp of one of the steepest patent cliffs in the industry, and investors aren't buying its pipeline story.

The company will lose the atypical antipsychotic Zyprexa (olanzapine) to generic competition in the U.S. in October, a drug that generated $4.92 billion in 2009 sales. The company already lost Gemzar (gemcitabine) in the U.S. in November, earlier than anticipated, after losing a patent challenge, and Cymbalta (duloxetine) and Evista (raloxifene) are expected to follow in 2013 and 2014, respectively. U.S. sales of those four drugs represent close to 30% of Lilly's 2009 top-line.

The period ahead for Lilly is so daunting the company refers to the timeframe as the "years YZ." Lilly has disavowed M&A to help it through the patent cliff and has said it will rely on its pipeline, product acquisitions or licensing deals, and cost savings.

But a series of pipeline setbacks have called that strategy into question. An FDA advisory committee recommended against approving its liprotamase for pancreatic insufficiency Jan. 12; Lilly suspended a Phase III trial of tasisulam in metastatic melanoma due to safety issues in December; a Phase III trial of a novel biologic teplizumab in type 1 diabetics failed to meet its primary endpoint in October; FDA bounced Bydureon, a long-acting form of exenatide for diabetes for the second time in October; and the company halted development of a gamma secretase inhibitor semagacestat in August due to a lack of efficacy. The failures are mounting up to serious pressure for Lilly.

The deal with BI "provides Lilly with two potential launches in our YZ period," CEO John Lechleiter told investors during a presentation at the JP Morgan Healthcare Conference Jan. 12.

But industry analysts, while pleased to see Lilly taking action, were not bowled over by the news.

"While it is good that Lilly is making strides towards filling up its pipeline, none of the four main drugs that Lilly/BI will share are first-in-class, and the two companies will face competition in all of these categories," Bernstein Research analyst Tim Anderson commented in a same-day note.

"We do not believe this deal will be viewed very positively for Lilly," said Deutsche Bank analyst Barbara Ryan, citing the dilution associated with the deal and the fact that both of the products will likely be followers to market.

"This deal should inject some life into Lilly's diabetes franchise," said a more positive Credit Suisse analyst Catherine Arnold, but she added, the "value of BI's oral agents needs to be elucidated."

Lilly's stock was mainly flat on the news, closing Jan. 11 at $34.91.

A Veteran And Novice Team Up

Lilly is a stalwart in the field of diabetes, though it markets only injectable products with a portfolio that includes Humalog insulin and the glucagen-like peptide-1 analogue Byetta (exenatide), which it markets with Amylin Pharmaceuticals Inc. The company has 11 diabetes candidates in clinical development, including the two additions from BI. The other Phase III drug in development is another GLP-1 drug, known as GLP-1 fc.

In contrast, BI, a newcomer to diabetes, is better known for its products like Mycardis (telmisartan) for cardiovascular disease and Spiriva (tiotropium) for chronic obstructive pulmonary disease. More recently, the company beat out big pharma rivals like Pfizer Inc., BMS and Johnson & Johnson to launch the first oral anticoagulant to compete with warfarin, Pradaxa (dabigatran), a first-in-class direct thrombin inhibitor.

BI's potential as a serious diabetes contender only began to emerge recently. The company presented 18 posters, including four Phase III trials on linagliptin, at the American Diabetes Association meeting in June 2010 (Also see "Boehringer Ingelheim Plays Catch-Up In Diabetes, Close To Filing DPP-4 Drug" - Pink Sheet, 19 July, 2010.). As a private company, however, BI isn't under pressure to provide regular updates to investors about its research, enabling its diabetes pipeline to fly under the radar. Nonetheless, for a company that came into diabetes recently, in 2001, the German firm has put together a significant pipeline (Also see "Boehringer Ingelheim: Privacy Has its Virtues" - In Vivo, 1 October, 2009.).

Management from both companies espoused the benefits of the deal during separate same-day conference calls. "It will allow both companies to generate more value than each company alone would have been able to do," said BI's Engelbert Tjeenk Willink, member of the board of managing directors, marketing and sales, human pharma. "It is a new way of working together in the industry, and it will be a win-win situation to all parties involved."

"Combining BI's and Lilly's development and commercial expertise and expanded presence with a broad portfolio will allow each company to generate more value than we could have generated on our own," added Lilly's Conterno. "This deal also creates an innovative balanced portfolio that will allow us to offer treatments to patients and physicians across the progression of the disease."

The deal will double the commercial strength behind each drug. Lilly said it plans to begin ramping up its sales organization immediately, though the force's ultimate size is not certain, at least publicly. Lilly declined to provide details on the size of the sales force, but in a follow up interview Conterno said, "It is going to be significant. It is beginning as we speak."

"We are going to be scaling up in pretty much every region where we market our products," he said.

Deal Will Be Dilutive To Lilly In 2011

Under the terms of the agreement, Lilly will make the one-time payment to BI, and each company will be eligible to receive success-based regulatory milestones, €625 million ($809.7 million) for BI for linagliptin and BI10773, and $650 million for Lilly for the two insulins. Should BI opt-in to the Phase III development and commercialization of the anti-TGF-beta monoclonal antibody, Lilly would be eligible for another $525 million in opt-in and success-based regulatory milestone payments. The companies will share equally ongoing development, as well as future commercialization costs and profits. Each company could also earn performance payments on sales of the molecules they contribute to the collaboration.

Lilly expects the transaction will have a dilutive effect on 2011 earnings per share in the range of $0.45 to $0.50 per share, including a charge of approximately $0.27 per share related to the one time payment. The company expects the deal to be progressively less dilutive in 2012 and 2013, pending a successful launch of linagliptin, and to contribute no dilution in 2014 before becoming accretive in 2015 and beyond. The company will provide updated 2011 guidance during its fourth quarter sales and earnings announcement Jan. 27.

By Jessica Merrill

In Deal With BI, Lilly Gets Late-Stage Diabetes Drugs

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