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How the Market Responded to Eli Lilly’s Evacetrapib Termination

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Oct. 14 2015, Published 11:06 a.m. ET

Market response

After announcing the termination of its research program for Evacetrapib, a CETP (cholesteryl ester transfer protein) inhibitor drug, Eli Lilly and Company (LLY) witnessed a sudden drop in share prices, which culminated in the loss of about $6 billion of the company’s market capitalization.

Eli Lilly’s share price closed at $79.4 on October 12, 2015, a drop of about 9.2% from its $86.1 share price on the previous closing day, October 9, 2015. Merck & Company (MRK), which is currently exploring another CETP inhibitor drug called Anacetrapib, also witnessed a drop in share price of about 0.5%, as investors feared the possibility of another CETP inhibitor drug failure. Amgen (AMGN) and Regeneron Pharmaceuticals (REGN) proved winners with their new cardiovascular drugs, Repatha and Praluent, respectively, which are expected to benefit from the continued failure of CETP inhibitor drugs.

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Negative investor sentiment

The major research firm Jefferies Group had projected peak sales of $5 billion for Evacetrapib. The consensus estimate, however, was much lower, at around $800 million. A drug’s peak sales is an estimation of the maximum revenues that it can earn in its life cycle.

The termination of the research program has strongly affected investor sentiment because investors seem to have priced the future revenues from Evacetrapib in Eli Lily’s share price. Also, the failure has made the investor community doubtful of Eli Lilly’s other research programs, especially those related to its investigational Alzheimer’s drug, Solanezumab.

Eli Lilly also announced that the discontinuation of Evacetrapib’s research program will result in a 4Q15 charge of around $90 million on a pre-tax basis, or $0.05 per share on post-tax basis. Negative sentiment and an anticipated reduction in the company’s guidance for 2015 have been instrumental in affecting Eli Lily’s share prices.

You can reduce your exposure to Eli Lilly while participating in the company’s upside potential by investing in the Health Care Select Sector SPDR (XLV). Eli Lilly and Company accounts for 3.0% of XLV’s total holdings.

Continue to the next and final part of this series for a look at analyst recommendations for Eli Lilly’s stock after the termination of Evacetrapib.

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