Is There Any Hope for Eli Lilly & Co. (LLY)? – Merck & Co., Inc. (MRK), Pfizer Inc. (PFE)

Lilly calls active as shares soar; Put spreads constructed on Verizon, AT&TAre we beating up too much on Eli Lilly & Co. (NYSE:LLY) ?  The company was tagged as having the “most perilous pipeline” in the industry by my Foolish colleague Sean Williams. Another Motley Fool contributor (namely, me) piled on by dubbing Lilly as the “frailest big pharma of all.” Some might say that we’re being overly critical of the company and are overlooking some of its positives.

It is certainly true that we have been looking at the company’s prospects over the next few years. This time horizon focuses on late-stage drugs only. But what about Lilly’s phase 2 pipeline? Could there be reason for hope down the road? Let’s take a look.

Steady but stirring
One number jumps out when examining Lilly’s phase 2 pipeline over the past few years: 21. That’s the number of drugs in the company’s mid-stage pipeline until 2012.

Source: Company annual reports and pipeline updates.

However, the relative steadiness of the total number of drugs in phase 2 masks a lot of activity. Over the past three years, 20 new drugs have entered phase 2 testing. Seven drugs advanced from phase 2 to phase 3. That’s the good news.

The bad news is that one drug previously in phase 3 was sent back to phase 2. Eleven programs in phase 2 were canceled. Lilly also sold one mid-stage drug — its CD20 antibody, which targets treatment of non-Hodgkin’s lymphoma.

Not so bad?
How do Lilly’s phase 2 numbers stack up against other drug companies? Actually, they look pretty good in comparison.

Source: Company annual reports and pipeline updates.

Of the companies shown, AbbVie is the closest to Eli Lilly & Co. (NYSE:LLY) in terms of annual revenue. In terms of sheer numbers, Lilly greatly outpaces the newly formed spin-off. Lilly’s number of drugs in phase 2 even compares favorably to larger pharmaceutical companies, also — edging out Merck & Co., Inc. (NYSE:MRK) and only slightly trailing Pfizer Inc. (NYSE:PFE) .

There is one area where Eli Lilly & Co. (NYSE:LLY) stands out from the pack. Its proportion of phase 3 drugs to phase 2 drugs is lower than all of the other companies shown. That’s bad for the immediate future because Eli Lilly & Co. (NYSE:LLY) has fewer opportunities for new products. With several drugs going off patent, this presents a big dilemma for the company.

However, it could be good in the longer run — but only if Lilly is able to advance a large number of the drugs now in phase 2 on to phase 3 and ultimately to approval. The company has at least some grounds for optimism. Its number of discontinued drugs in phase 2 has been steadily declining over the past few years.