Markets & Finance

Lilly Raised to 'Buy'


Eli Lilly (LLY): Upgraded to 5 STARS (buy) from 3 STARS (hold)

Analyst: Herman Saftlas

The upgrade is based on FDA approvals for two new drugs: Forteo for severe osteoporosis and Strattera for ADHD, ahead of schedule. Forteo is a unique compound with bone-forming capability, and Strattera will not be labeled as a controlled substance, as are rival ADHD drugs. Still pending are Cymbalta anti-depressant, Cialis for erectile dysfunction, and injectable Zyprexa. We see new products with aggregate peak sales potential of over $3 billion. Manufacturing issues may be resolved next year. Lilly's premium multiple to its peers is warranted by its unmatched product pipeline.

Sun Microsystems (SUNW): Reiterates 3 STARS (hold)

Analyst: Megan Graham-Hackett

Sun held its mid December-quarter update with analysts. The company sees revenues up seasonally quarter-over-quarter, in line with the Wall Street consensus of $2.9 billion. The company also sees gross margin down slightly quarter-over-quarter due to competitive pricing pressures. Sun expects its backlog flat compared with the previous quarter and a book to bill ratio near 1. While the environment for server demand is not improving, the company noted it is not getting worse. we have made no change to our loss per share estimate for the quarter of 1 cent. Sun still sees a profit by the second half of fiscal 2003 (ending June). At a price-to-sales multiple of 1, below peer average, the shares are worth holding.

Novellus Systems (NVLS): Reiterates 2 STARS (avoid)

Analyst: Richard Tortoriello

In its mid-quarter update, Novellus reiterated revenue and EPS guidance for the fourth quarter. However, it raised bookings guidance from $180-$200 million to $200-$210 million, or flat to up 4% sequentially, driven by a handful of customers. The company cited improvement in the DRAM and wireless handset markets. With a likely decline in orders from DRAM makers in the 2003 first quarter, it is still not clear that order rates have bottomed. Also, at 6.1 times trailing sales and 5.3 times our 2003 projection, Novellus is priced near historic ratio highs, at a time when we expect a slowdown in long-term industry growth.

Cigna (CI): Still 2 STARS (avoid)

Analyst: Phillip Seligman

The company expects to take a fourth-quarter aftertax charge of $50-$65 million to fund settlement of a lawsuit covering 400,000 physicians and other medical providers over the way it cuts their bills to pay them less. Cigna will disclose payment rules, appoint a third party to review certain claims denied since 1996 and set up a $10 million fund to cover late payments. If the court approves the settlement, investor concern of possible massive physician exits from Cigna's provider networks should be dispelled. Note, though, that this was but one of many overhangs and the settlement does not resolve all claims.


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