FDA Panel's Rejection of Xigris Comes as a Painful Shock to Lilly

Eli Lilly's (LLY Quote) experimental sepsis drug, Xigris, was dealt a blow Tuesday after an advisory panel to the Food and Drug Administration voted not to recommend the drug's approval.

The problem: Evidence was presented at the panel meeting suggesting that Xigris was not as effective or safe as previously thought. Panel members, clearly concerned about these findings, voted to recommend against approval and asked Lilly to conduct additional clinical studies.

The Xigris setback will hurt Lilly, which has been trying to restart strong earnings growth after the decimation of its Prozac franchise. Xigris is one of five key products coming to market this year and next that the drugmaker is counting on to contribute to earnings growth in the high-teens range beginning in 2003. Lilly's loss of Prozac sales due to generic competition has pushed 2001 and 2002 earnings growth down into the single digits.

The panel's recommendation will now be forwarded to the FDA for a final decision. The FDA usually, but not always, abides by the recommendations of its advisory panels. Today's decision, at the very least, all but guarantees additional testing of Xigris, which will delay the product's launch.

The actual vote count is not clear. A Bloomberg report called it a 10-10 deadlock, which still would be a negative recommendation. But one hedge fund manager watching a broadcast of the panel said the vote was 10 against approval, 9 for approval, with one abstention.

Lilly closed Tuesday up 94 cents, or 1.2%, to $79 per share. In after-hours trading, shares were down $4.21, or 5.3%.

Tuesday's ruling clearly took most of Wall Street by surprise because Xigris was considered a shoo-in for a positive recommendation from the advisory panel. But clues to the negative decision were telegraphed Monday when the FDA released comments and questions about Xigris to be discussed during the meeting.

Specifically, Xigris does not appear to work as well on patients with less serious forms of sepsis, according to an FDA staff review of the drug. In many of these cases, patients seem to respond just as well to existing treatment options, such as antibiotics to tackle the source of the infection.

Lilly also changed the patient entry criteria midway through its clinical trial, which some panel members said exaggerated Xigrus' efficacy results.

And Xigris seems to have some safety issues as well, namely bleeding in the brain. According to information released publicly for the first time Monday, 13 of 520 patients developed "intracranial bleeds" while being administered Xigris. These patients were given the drug as part of a compassionate use program, so they were not prescreened as closely as patients taking the drug as part of Lilly's clinical testing.

A similar percentage of patients enrolled in Lilly's trials also experienced bleeding problems, although so did patients taking placebo.

Even before today's surprise decision, some Wall Street analysts were scaling back revenue projections for Xigris because of these safety and efficacy fears. Conventional wisdom was that the FDA would approve Xigris but with restrictions on the drug's use.

Deutsche Banc Alex. Brown drug analyst Barbara Ryan believes the FDA will approve Xigris with restrictions that limit its use to a smaller set of patients than previously expected. There are about 750,000 people diagnosed with sepsis in the United States every year, but only about 200,000 of these people could be recommended for Xigris. Ryan rates Lilly buy and her firm hasn't done underwriting for Lilly.

"Therefore, we believe that Lilly will be forced to price the drug at the high end of expectations, possibly as high as $10,000 per course of treatment," she wrote in a research note published earlier Tuesday. The result: a quick rise in Xigris sales but reaching lower peak levels than Wall Street expects. Ryan forecasts worldwide Xigris sales of $700 million in 2002, growing to $1.43 billion by 2005.

By comparison, some of the more bullish Wall Street estimates peg Xigris' peak annual sales at well over $2 billion.

Morgan Stanley drug analyst Jami Rubin also saw the FDA approving Xigris for a more restrictive use, capping peak sales of the drug at $1.3 billion in 2006, according to a research note published Monday. If this happens, Rubin believes Lilly shares could pull back slightly into the mid-$70 range. If the FDA goes ahead and awards Xigris a broader label, Lilly shares could move into the mid-$80s, she says. Rubin rates Lilly outperform and her firm has a banking relationship with the company.

Of course, today's negative recommendation from the FDA advisory panel throws Xigris' future into doubt, and with it, Lilly's ability to get earnings growth moving again.

Earlier this month, Lilly warned of lower 2001 and 2002 earnings due to a severe erosion in Prozac sales, which has lost about 80% of its market share to generic competition since August.

But the company said it expected to replace lost Prozac sales and rebuild earnings growth in 2003 through sales of five new drugs, including Xigris, the osteoporosis drug Forteo and the erectile dysfunction drug Cialis.