| The
high cost of being Lilly
January 31, 2004
Cymbalta, Zyprexa, Humulin, Humalog, Stattera,
Cialis,
Forteo, and Gemzar. It sounds like an orchestra
of newly invented instruments and this lineup
of emerging blockbuster drugs is remaking Eli
Lilly because its older drugs, especially Prozac,
are attacked by generic competitors. But this
biotech symphony doesn't come cheap.
Lilly on Thursday reported sales growth of
17 percent in the fourth quarter and annual
revenue growth of 14 percent, but disappointed
investors with stagnant earnings. Despite strong
sales, Lilly's profit grew only 1 percent in
the fourth quarter of 2003 due to rising marketing,
administrative research, and development costs.
For the year, Lilly turned in a net income of
$2.56 billion, a 5 percent decline compared
to 2002.
Citing the conventional wisdom, many reports
blame R&D expenses, which account for 20
percent of Lilly's sales, for the lower profits.
But Lilly also disclosed rapidly rising marketing
and administrative costs, which were up 23 percent
in the quarter to $1.34 billion, for the ramp
up for a number of new drugs. Marketing costs
accounted for $400 million more in expenses
during the fourth quarter than R&D.
Cymbalta, a new antidepressant Lilly will launch
this summer, has been costly to develop. While
the company hasn't disclosed the expenses for
development of the drug, Cymbalta may have cost
as much as $1 billion to bring within shooting
distance of the market. Lilly, however, has
already received $30 million of upfront payments
that could total as much as $110 million from
Quintiles Transnational, before the U.S. Food
and Drug Administration approves it. Quintiles,
which has 500 drug salespeople on the street,
will take 8 percent of Cymbalta revenues for
its services after the initial payments to Lilly.
In fact, the move to consumer advertising for
drugs is driving most of the cost of new drugs.
Soft-focus feel-good ads that tout drugs like
Cialis, a new impotence pill, without explaining
what Cialis does, are airing today to pave the
way for consumer calls to their doctors demanding
Cialis because it will make them more confident
and happy. But investors might wonder, given
the falling profits at Lilly, whether the consumer
advertising strategy is paying off
source:-http://www.redherring.com
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