Eli Lilly Anxiously Awaits FDA Vote on Xigris

Eli Lilly LLY investors, circle Oct. 26 on your calendar. This is when the Food and Drug Administration should decide the fate of Xigris, the drug giant's experimental sepsis drug.

Of course, Oct. 26 was supposed to bring a slam-dunk approval for the drug -- the next Lilly blockbuster. But then Tuesday night happened. An FDA advisory panel voted not to recommend Xigris for approval, a surprise ruling that throws a huge monkey wrench into the works.

Now Lilly officials, Wall Street analysts and other drug-industry mavens all are trying to figure out what the FDA will do. It looks like Lilly will be celebrating an early Halloween on Oct. 26. Unfortunately, no one knows for sure whether the day will bring tricks or treats to the drugmaker.

Investors, reacting to the Xigris uncertainty, sent Lilly shares lower by $3.80, or almost 5%, to $75.20 in Wednesday trading. Lilly traded as low as $74.

Remember, Lilly needs Xigris desperately to help 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 year 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.

Lilly officials reacted with shock at Tuesday's negative panel decision, all but describing the panel members as ignorant bumpkins for not understanding Xigris' trial design or the results.

Telling reporters that he was "stunned" by the vote, Lilly medical director Bill Macias said the company was "surprised by some of the advisory panel questions, particularly those around the protocol amendment, as they had not been raised by the FDA."

Lilly changed the patient entry criteria midway through its clinical trial, which some panel members said exaggerated Xigris' efficacy results. There were also concerns expressed about changes made to the way Xigris was manufactured. If it wins an OK from the FDA, Xigris would be the only approved treatment for sepsis, a serious bacterial infection that can lead to organ failure and death.

Other Lilly officials insisted that the data from Xigris' clinical trial proved the drug was safe and effective, and that it saves lives. They expressed confidence that ongoing discussions with the FDA will result in the drug's approval on Oct. 26.

Lilly might be right in believing the FDA will overturn the advisory panel's decision. Speaking to the biotech industry trade publication BioCentury Tuesday, Jay Siegal, a top FDA official, said the agency was not concerned about Xigris manufacturing changes, and that the FDA is "more interested in the advice we get from the committee than the actual vote."

But the panel's advice might just lead the FDA to ask Lilly to conduct another clinical trial on Xigris, which could delay the drug's approval and launch by as long as two years.

One of the Xigris panel members held a conference call with institutional investors this morning, stating his belief that there is a 60% chance the FDA will ask Lilly to conduct another trial. This panel member had voted to approve the drug, but he altered his opinion after conferring with other panel members once the meeting adjourned. The conference call was organized by MedaCorp, an independent medical consultancy that evaluates the safety and efficacy of drugs.

Dan Dubin, president of MedaCorp, said that the panel member gave 40% odds that the FDA approves Xigris on Oct. 26, but with severe restrictions on its use in patients.

Wall Street Takes Lilly Down

This latter scenario seems to be the one favored by Wall Street sell-side analysts, many of whom are cutting Xigris revenue estimates, and in some cases, taking down Lilly earning forecasts for the next few years.

J.P. Morgan drug analyst Carl Seiden believes there is a 65% chance the FDA approves Xigris, albeit with a delay of between three and six months. The drug's label also will be restricted for use in only patients with severe cases of sepsis, he believes.

If this happens, Seiden will chop Xigris sales estimates from $700 million to $470 million in 200, and from $1 billion to $750 million in 2003. He rates Lilly a buy and his firm doesn't have a banking relationship with the company.

Deutsche Banc Alex. Brown analyst Barbara Ryan also sees an FDA approval with a restricted label, which will cut Xigris' peak annual sales from $1.4 billion to $1 billion. Ryan is maintaining her buy rating on Lilly, but is taking down 2002 earnings forecasts from $2.70 per share to $2.57 per share, and 2003 earnings forecasts from $3.20 per share to $3.05 per share. Ryan's firm doesn't have a banking relationship with Lilly.

But Sanford Bernstein drug analyst Richard Evans takes a more bearish approach. He gives 60-40 odds that the FDA will ask for another Xigris trial, which could delay the drug to late 2003 at the earliest. Evans rates Lilly underperform and his firm doesn't do underwriting.