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What the Eli Lilly Theft Means for Pharma


Thieves are catching drug companies off guard.


When the legendary Willie Sutton was asked why he robbed banks, he answered, "Because that's where the money is."

But in 2009, bank robberies fell to their lowest point in 10 years.

"With the economy, we expected an increase," Brad Bryant, head of the FBI's Violent Crimes and Major Offenders unit, told USA Today.

Nowadays, the money's in pharmaceuticals, with thefts totaling $184 million last year.

This past Saturday, thieves broke into a Connecticut warehouse owned by Eli Lilly (LLY) and made off with an estimated $76 million worth of medications, including the antidepressants Prozac and Cymbalta, ADHD drug Strattera, schizophrenia drug Zyprexa, cancer drugs Gemzar and Alimta, and the cardiovascular drug Efient.

The Pharmaceutical Cargo Security Consortium reports that the theft "is consistent with a similar pharma warehouse burglary that occurred in 2009 in Richmond, Virginia," in which the perpetrators stole 25,000 Advair inhalers worth about $5.5 million from a GlaxoSmithKline (GSK) distribution facility.

Statistics gathered by Freight Watch International show that pharma theft makes up only 4% of all cargo theft by volume, but far surpasses all other commodity groups in terms of value. Take a look at a sample of average losses per theft:

  • Alcohol: $227,000
  • Tobacco: $765,000
  • Electronics: $814,000
  • Pharmaceuticals: $4,000,000

The average take from a bank robbery is a bit over $4,000.

Les Funtleyder, a Health Care Strategist at Miller Tabak and the author of Healthcare Investing: Profiting from the New World of Pharma, Biotech, and Health Care Services, says that even though pharma theft will likely "not be a material problem" for Lilly (on which he has a Neutral rating) and other drug companies, it must continue to take steps to ensure the security of its supply chains.

"The knock-on effect of pharmaceutical theft is that people could start to feel concerned about where their drugs are coming from," Funtleyder notes. "Supply chain integrity is incredibly important in the US -- you need to be able to trust your drugs are what they are, that they're coming from where they're supposed to be coming from, and that they're in the condition they need to be in."

Funtleyder points out that as pharmaceutical companies delve deeper into emerging markets, which is the big growth driver for the industry, they need to be ever more vigilant regarding their overseas supply chains-an issue Funtleyder does not think has "been resolved by any of the major companies, much less discussed yet." (See also The Next Big Opportunity for Big Pharma Is BRIC.)

While he couldn't put a finger on the exact amount companies like Lilly, Glaxo, Pfizer (PFE), Merck (MRK), and Bristol-Myers Squibb (BMY) spend on security, Funtleyder says that they do all have extremely strong security divisions, run by people with extensive experience in law enforcement and intelligence who consistently try to get ahead of the next threat.

For example, every box of Pfizer's Viagra sold in the United States includes a Radio Frequency Identification tag -- a sort of LoJack device for pills, not unlike the GPS systems some banks have implanted into the bags of cash they hand over to robbers, allowing investigators to track their locations from laptops as they flee.

"[Bank robbery] is not a good way to make money," Doug Johnson, vice president of risk management for the American Bankers Association, says.

As pharma security continues to improve, it's likely that robbing warehouses filled with Prozac won't be, either.

No positions in stocks mentioned.
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