Eli Lilly clinical test results affect several pharma firms

Eli Lilly's plans to discontinue development of a cholesterol drug is likely to have ramifications that stretch beyond the Indianapolis-based drugmaker to include several of its competitors, as well.

Eli Lilly shares dropped Monday after it said that its drug evacetrapib, one of a class of cholesterol drugs known as CETP inhibitors, showed a lack of effectiveness in clinical testing. Shares of Merck, another company that's developing a CETP cholesterol treatment, were also lower on Monday, though they were off their morning lows.

"Bottom line: Today's news is a negative for LLY and we anticipate that investors will also likely read across negatively to MRK, whose CETP inhibitor, anacetrapib, is also being studied in an outcomes trial with data expected in early 2017," analyst Mark Schoenebaum of Evercore Partners said in a research note on Monday.

Eli Lilly's office in La Jolla, California.
Konrad Fiedler | Bloomberg | Getty Images
Eli Lilly's office in La Jolla, California.

That also could be "permanent" good news for a competing class of inhibitor drugs known as PCSK9, Piper Jaffray Senior Research Analyst Richard Purkiss told CNBC on Monday.

"The fact that Lilly's drug today failed essentially on an efficacy issue suggests that the CETP class overall are not going to deliver the benefit … from an efficacy standpoint," Purkiss said. "PCSK9 inhibitors are much more likely to generate much more upside."

PCSK9 inhibitor drugs lower "bad" cholesterol significantly more than the CETP drugs do. Amgen, Sanofi and Regeneron all make PCSK9 drugs either individually or jointly, and the shares of all three companies were higher Monday.

"The only thing you can really conclude today is there's clearly a lot of risk around Merck's 30,000-patient study called Reveal, and it's obviously good news for Amgen and Sanofi-Regeneron," three companies that have drugs in the PCSK9 class, Purkiss added.

Despite PCSK9 drugs' "win," Purkiss cautioned that investors shouldn't write off Eli Lilly or Merck just yet.

Despite Eli Lilly's news, Purkiss said that final data from Merck's study are more than one year away, and it's impossible to know what those results will say. It's still possible that Merck's study could show a benefit to patients, Purkiss added.

Purkiss also said he believes Eli Lilly's stock itself has been hit by far more than the value evacetrapib was contributing to the drugmaker in the first place.

"Today's news does impact the long term value but by a relatively small amount," he said.

Even after Monday's drop, the shares are still up nearly 15 percent year to date, and according to Purkiss, is the best-performing pharma stock. He said he expects the stock to trade back up as people begin to unwind their short positions in Eli Lilly.

"My price target is $120 dollars on Lilly. I think that Lilly is one of the strongest growth stories over the next four years in the sector," Purkiss said. "It's attractive for lots of other reasons other than [what happened today]."

— CNBC's Meg Tirrell contributed to this report.