Summary

Eli Lilly terminated the development of evacetrapib this week.

Eli Lilly shares tumbled on the news.

The bad news comes shortly after the company’s positive Jardiance data.

Eli Lilly (NYSE:LLY) tumbled earlier this week after the company announced that it has terminated the development of its cardiovascular drug evacetrapib. The drug was in a Phase III trial. A cholesterol ester transfer protein (CETP) inhibitor, evacetrapib was being developed for the treatment of atherosclerotic cardiovascular diseases.

The decision to abandon evacetrapib was taken after an independent data monitoring committee recommended discontinuing the development. The independent committee's recommendation was based on the fact that evacetrapib was not expected to meet the primary endpoint of the trial.

This is certainly a significant blow to LLY, which like other major pharma companies has been hurt by competition from generic drugs. Major pharma companies have been focusing on strengthening their pipeline through internal R&D and acquisitions. Evacetrapib, if successful, certainly would have boosted LLY's top line significantly. Jeffries had forecast peak sales of $5 billion for the drug. Leerink had forecast peak sales of $2.4 billion by 2026.

The market's reaction therefore was not surprising. However, the decision to scrap the evacetrapib development came a few days after LLY had announced positive data for its type diabetes drug Jardiance. In fact, I believe that Jardiance's potential, after the recent data, has softened the blow somewhat.

As I noted in a digest recently, LLY has struck gold with its diabetes drug after data showed that it significantly reduced the risk of the combined endpoint of cardiovascular (CV) death, non-fatal heart attack or non-fatal stroke by 14% when added to SoC in patients with type 2 diabetes at high risk of cardiovascular events. The findings are from a large study, involving 7,020 patients. Jardiance has already been approved by the FDA but this data will significantly increase the use of the diabetes drug, especially if there are any changes to the treatment guidelines set by the American Diabetes Association (ADA).

Prior to the data, the peak sales estimate for Jardiance was $2 billion. I believe that the data has the potential to boost peak sales by 3 to 4 times. In fact, several analysts even boosted their peak sales estimate to $8 billion.

The reaction to the Jardiance data was positive, with LLY crossing $90. I had noted at the time that LLY traded at a premium to its peers although the high valuation was justified based on Jardiance and pipeline. However, since then LLY has given up all of the gains it registered after the Jardiance data. The sell-off in the biotech sector, combined with Monday's sell-off, have pushed LLY below $80. The question is whether LLY is a buy at these levels. At current levels, LLY trades at 4.12x estimated 2016 sales, which is in line with the average for pharma companies based on data from Stern. I believe that after the failure of evacetrapib, LLY's pipeline is a little less attractive. Despite the potential of Jardiance, I would remain on the sidelines with LLY for now.