$72 Billion Pharma Company Gives Away Miracle Drug

Over Thanksgiving, I wrote my readers of Breakthrough Technology Alert about a pharmaceutical firm that may be responsible for saving more lives than any other in history.

It has to do with a miracle drug they developed in the 1920s that keeps more than 40,000 Americans alive every day.

That company has 25 drugs in FDA Phase 1 studies, 21 in Phase 2 trials and eight in Phase 3. It has recently applied for two New Drug Applications for drugs that have completed Phase 3 trials.

Most people would chalk this company’s impressive future possibilities up solely to its innovation and massive drug pipeline.

But they’d be wrong.

Its success is based on something much deeper…

A $72 Billion Anomaly

Imagine for a moment your child had a life threating disease. Without medicine, they would never reach adulthood.

That’s exactly what happened to just about every person who got diabetes before the early 1920s. Type 1 diabetes is a childhood disease. Fortunately for millions of diabetics who have lived full lives, back in 1876, a Civil War veteran with a can-do attitude decided to start a drug company.

As the only manufacturer of insulin, his company could have charged parents any price to save dying children.

Yet he initially gave the medicine away for free, and then tried to keep its price low.

The number of lives his company saved by figuring out how to make insulin when it seemed impossible to do so is a story of vision and determination. It’s a classic American tale of not giving up and doing the right thing.

How is it that one pharmaceutical company was born with a sense of fairness when so many others companies seem as if they could not care less?

Hard Work and Fairness

During a recent trip to Indianapolis, I could see their towering headquarters with its old-fashioned script logo from a wall of windows in my hotel room. I like the Midwest. And I like the people who grow up there.

Throughout my career on the East Coast, I’ve homed in on people who come from the Midwest as people I try to hire.

They come from a culture of hard work and a deep ethic of fairness. They seem generally happier than other people in this country and a bit wiser about what’s truly important in life.

I learned a lot about Midwesterners as a child. Although I grew up in the Washington, D.C., suburbs, each summer, my mother would pack my brother and sister and I into a car and drive 1,400 miles, mostly on two-lane roads, to the upper northwest corner of Missouri — Atchison County — as in Atchison, Topeka and Santa Fe Railroad. That’s where my grandfather, who taught me a lot about business, owned a tiny automobile dealership in the county’s largest town, Rock Port, home to about 1,500 souls, then and now. He was the only one of eight brothers in his family who didn’t go into farming nearby.

We’d spend a couple of months in Missouri each summer, and I’d hang around my grandfather’s roll-top desk at the car dealership until he’d decide I needed more to do and ship me off to one of his brothers’ farms. One of my great uncles had a pig farm, another raised mostly corn and soybeans, another raised hops and contracted them to Anheuser-Busch and a couple of them had dairy farms. I got exposed to a lot of agricultural diversity. I fed chickens, drove tractors, baled hay, rode horses bareback and learned firsthand how hard farm work really is.

The work was hard, but satisfying. It left you with a sense of peace at the end of the day.

Years later, a colleague from my days at The Washington Post quit his job as the star reporter who covered the Agriculture Department. He bought a small farm on the border of Maryland and Pennsylvania. I thought he was crazy to trade a prestigious position on the national desk at the Post for what I well knew was incredibly hard work raising organic vegetables. When I asked him about it, he told me this:

“You know, at the Post, I worked really hard all day and went to bed at night anxious and dissatisfied. At the farm, I work really hard all day and fall into bed with a smile on my face.”

 

I imagine it was this same sense of purpose that pushed the employees of this company back in1920 to help save the lives of diabetics.

Back then, it was called juvenile diabetes. Adults rarely developed it. In fact, there were practically no adult diabetics because almost anyone who developed it was dead by the time they were 20.

Diabetes was a 100% fatal disease and an enigma. As a child’s body became less and less able to process sugars, their blood turned to syrup. The only effective treatment, which also didn’t work very long, was near starvation. Diabetic children who didn’t die from starvation died after entering a coma or when their organs failed.

The idea that insulin was a protein that could be derived from the pancreases of animals was thought up by Frederick Banting, a Canadian physician. Because he didn’t know how to develop the concept, he ended up working with a physiologist at the University of Toronto named John Macleod. In 1923, the two were awarded the Nobel Prize in physiology or medicine for developing insulin. Banting felt Macleod didn’t deserve the prize, so he did not attend the ceremony. He felt that his assistant, Charles Best, deserved to be named, though he never was. Banting gave Best half his prize money.

The trouble with the discovery was that no one could figure out how to manufacture insulin in reliable strengths and mass quantities. From the moment he got wind of Banting’s idea, George Clowes, the company’s research director, tried to convince Banting to apply for an American patent and to let his company figure out how to manufacture insulin. Banting resisted, wanting to keep production in Toronto, but eventually relented when the company he was using became unable to make significant quantities in reliable doses. His patients in trials began dying. Banting traveled to Indianapolis to beg for help from the company. It had been working on the problem and had a cache of the new drug. The company president and Clowes met Banting at the train station with a quantity of insulin in reliable-strength doses. When he was given the insulin, Banting reportedly broke down crying.

This Midwestern company was using advanced scientific ideas and new manufacturing processes to develop a new idea in the pharmaceutical world — taking raw materials into one end of the plant and shipping medicines from the other end. Insulin was tricky to make and required enormous processing vats and refinement methods, but one of the biggest problems was getting enough animal pancreases.

The business was ideally located near the nation’s largest slaughterhouses, but the slaughterhouses had no interest in changing how they cut up pig and cow carcasses and how they sold the organs. Both Cowles and the president of the company, the Civil War colonel’s grandson, had to personally make trips to slaughterhouses to convince them. They won them over only by pleading for the thousands of children who were dying every year.

The rest is a long history of developing, refining and improving insulin. There are a number of heroes in the story, and although the company eventually made a fortune selling insulin, it kept the price far below what it could have charged.

There are 3 million Americans with Type 1 diabetes, and 15,000 children are diagnosed every year. Without insulin, they would all die. Because of insulin, children with Type 1 diabetes can live long, healthy lives. Therefore, about 85% of Type 1 diabetics these days are adults.

The family of the founder put a huge portion of its wealth into a foundation that is now one of the 10 largest in the United States. The contributions of the foundation to arts and culture and human well-being are obvious wherever you travel in Indianapolis as well as the rest of the state.

What is this heroic company? I’m talking about Eli Lilly and Co. (NYSE: LLY)

Lilly is the most obvious institution in Indianapolis and employs nearly 40,000 people worldwide. A little more than 11,000 of them live in Indiana and have an average salary higher than $160,000 a year. Think what a figure like that does for the economy of a city and a state. Like any company in business since 1876, Lilly has had its ups and downs, but the path has been pointing up in the last few years. Since 2012, Lilly’s stock price has doubled, and its pipeline of drugs is impressive. The company has 25 drugs in FDA Phase 1 studies, 21 in Phase 2 trials and eight in Phase 3. The company has recently applied for two New Drug Applications for drugs that have completed Phase 3 trials.

Lillywith a market capitalization of $72 billion, is not the sort of company I am likely to add to our portfolio — it can’t grow as fast as a young startup. But as pharmaceutical companies go, it seems more concerned with doing the right thing than others, and because it remains rooted in Indiana, it can’t help but be infused with that Midwestern sensibility I’m fond of. And at least since the 1990s, Lilly has been run about as ruthlessly as most drug companies. It was fined a record $1.4 billion in 2009 for marketing Zyprexa, its anti-psychotic medication, as a dementia therapy, an off-label use.

As a business, I believe Lilly is going to do well in the next few years as more of its pipeline moves toward approval. Meanwhile, it pays nearly a 3% dividend. Watch for any dips in share price. If you can catch this stock under $65, that’s a good buy. If I were buying it, I’d put in a limit order for $66.95 and see what happens. We won’t add it to our portfolio, but from time to time, I’ll look in on it and tell you what I see.

Regards,

Stephen Petranek
for The Daily Reckoning

The Daily Reckoning