Gene Marcial's Stock Picks

Marcial: Is Eli Lilly Ripe for a Rebound?


What's not to like about global pharmaceutical giant Eli Lilly (LLY)?

Bears on the stock would point to a number of things. Lilly could lose an estimated 36% of its 2008 revenues of $20.3 billion from patents expiring on Zyprexa and Cymbalta by 2013. And, as some bears assert, the success of Lilly's new Effient anti-clotting drug is questionable, as it has been linked to bleeding risks.

Reflecting these woes, Lilly's stock has underperformed the market, dropping from its 52-week high of 40.78 last January to 35 on Nov. 10, while the Dow has streaked above 10,200, garnering a 16.5% gain so far this year.

Are there reasons to buy shares of the maker of prescription drugs for the treatment of cancer, neurological disorders, and cardiac problems? One of the few bulls on Lilly, Keith Goddard, president of Capital Advisors Growth Fund (CIAOX), says the stock is now among the cheapest of the large-cap pharmaceutical companies.

"This blue-chip company is one of the most stable earners in the industry, and has 66 promising compounds in its product pipeline," says Goddard. Lilly spends some $4 billion a year on research and development, including a drug for Alzheimer's disease.

Clinical-Trial Data Could Be a Boost "If any one of the drugs in the pipeline gets some exciting data, Lilly's stock will certainly jump," he adds. "You could double your money in the stock if, for instance, Lilly's Solanezumab—an anti-amyloid monoclonal antibody aimed at delaying the progression of Alzheimer's disease—produces some positive data," says Goddard. Lilly is preparing to launch two phase III clinical trials on Solanezumab.

Lilly is definitely an attractive long-term investment play, says Goddard, but in the meantime there are some new drugs that could deliver impressive returns over the short term—plus, the company's dividend yield of 5.5% is alluring in this environment, he adds.

The other positives on Lilly, say the bulls: The company is benefiting from attractive sales growth of Cymbalta, a treatment for depressive disorder, which leaped 10% in the third quarter, to $790.2 million; Cialis, a treatment for erectile dysfunction, up 5%, to $397.2 million; Byetta, a diabetes treatment, up 6%, to $115.8 million; and Alimta, a cancer treatment, which saw sales jump 47%, to $461.9 million.

Analyst John Cogan of Daiwa Securities America notes, however, that sales of Zyprexa, Lilly's biggest-selling product, which treats schizophrenia and bipolar disease, may slow due to competition from low-priced generic Risperdal and some safety concerns. Sales of Zyprexa in 2008 slipped to $4.7 billion from 2007's $4.8 billion. In 2009's third quarter, Zyprexa sales increased 3%, to $1.2 billion.

ImClone's Promising Anticancer DrugsWhat could help offset that decline, Cogan says, are products from ImClone, which Lilly acquired in 2008, including Erbitux, as well as other anticancer products in the works. Cogan believes three drugs that could be introduced during 2012-2015 are promising: IMC-1121B for breast cancer and IMC-A12 for broad tumor type cancer, both now in phase III trials; and IMC-11F8, now also in phase III testing, an Erbitux follow-on drug.

"ImClone expanded Lilly's biologics base and has provided cost synergies," says Standard & Poor's equity analyst Herman B. Saftlas. He says Lilly is addressing the issue of expiring patents by stepping up new drug development activities and acquisitions. But because of those expirations he rates Lilly a hold. He figures the company will post operating earnings of $4.55 a share in 2010, up from an estimated $4.40 in 2009. In 2008, Lilly posted a loss of $1.89 a share.

A lot of hopes are riding on the new drugs. "Lilly's significant mid- to late-stage pipeline should provide material opportunity for solid long-term growth," says analyst Robert Hazlett of BMO Capital Markets, who rates the stock outperform, with a 12-month price target of 43 a share.

The stock's low price-earnings ratio of 7.7, based on his 2009 earnings estimate and robust 5.5% dividend yield, make Lilly attractive, says Hazlett.

"Eli Lilly is an excellent core drug holding," says analyst Jerry W. Gray Jr. of independent investment research outfit Value Line (VALU), "particularly for income-oriented investors." Despite worries about patent expirations, "the stock has above-average appreciation potential to 2012-2014," says Gray.

Meanwhile, the Street's general aversion to Lilly's stock could turn out to be a positive. Only five of the 21 analysts who follow Lilly have a buy recommendation, according to Bloomberg, while six rate it a sell. Ten analysts are neutral. If more positive data emerge from Lilly, many of those analysts may join the bulls.

In the meantime, investors could do worse than to pocket a 5.5% dividend while they wait.
Marcial writes the Inside Wall Street column for BusinessWeek. In 2008, FT Press published the book Gene Marcial's 7 Commandments of Stock Investing.

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