Lilly could suffer in wake of drug allegations

NEW YORK (CNNMoney.com staff writer) -- Eli Lilly & Co. could have a rough time dealing with recent allegations that it concealed risks about its top-selling drug Zyprexa.

But pharmaceutical companies are often accused of misrepresenting the risks associated with their drugs, and the gravity of these particular allegations is thus far unclear. That may be why Lilly's shares are only down 2.8 percent to $53.00 in afternoon trading.

Lilly's (down $1.41 to $53.11, Charts) stock price could take more of a hit today in the wake of a Sunday piece from The New York Times, which profiled lawyer James Gottstein's allegations that Lilly concealed obesity and blood-sugar-level risks about its schizophrenia drug Zyprexa.

Lilly denied the allegations that it concealed risks. Lilly spokeswoman Tarra Ryker told CNNMoney.com that risks of weight gain, increased blood sugar levels and diabetes have been acknowledged on Zyprexa's FDA-approved label since the drug went on the market in 1996. Ryker added that Zyprexa has never been proved to cause diabetes.

"There is no evidence that there is a causal link between Zyprexa and diabetes," said Ryker. "There is no cause and effect there."

Zyprexa sales totaled $4.2 billion in 2005, off 5 percent from the year before. "Zyprexa's going in the wrong direction anyway," said Miller Tabak analyst Les Funtleyder.

Separately, the Indianapolis drugmaker announced on Monday that it had increased the bidding price for the Washington-based biotech ICOS Corp. (up $0.52 to $33.87, Charts) to $34 a share, from $32 a share - a price that many analysts still consider cheap. This deal would give Lilly full control of the erectile dysfunction drug Cialis, which totaled nearly $300 million in 2005 sales.

In addition, Lilly on Monday announced a 6.2 percent dividend increase for the first quarter.

Lilly's shares are off 6 percent in the year to date, but Funtleyder says the stock is too pricey.

"We think the capital [of investors] is better invested elsewhere," said Funtleyder, who rates Lilly a "neutral." "We are really concerned, given that [Lilly is] trading at premium valuations compared to the rest of pharma."

But he isn't necessarily concerned about about the Zyprexa allegations, noting that drug companies get sued over alleged side effects all the time.

"There probably is some litigation risk, but there's always litigation risk when you invest in a drug," he said.

Barbara Ryan, analyst for Deutsche Bank North America, also downplayed the significance of the Zyprexa accusations and the ICOS bidding.

"None of this has any impact on what we think of Lilly," said Ryan, who rates Lilly a "neutral." "This doesn't concern my investment strategy."

Lilly is the seventh-largest drugmaker in America, behind Pfizer (up $0.23 to $25.87, Charts), Johnson & Johnson (up $0.28 to $66.57, Charts), Abbott Laboratories, Merck (down $0.14 to $43.86, Charts), Bristol-Myers Squibb (down $0.03 to $25.58, Charts) and Wyeth.

The analysts interviewed for this story do not own Lilly stock. Miller Tabak does not conduct business with Lilly, though Deutsche Bank N.A. does seek investment banking business with them.