LLY Stock Soars as Eli Lilly Diabetes Drug Wows Investors

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Eli Lilly (LLY)  soared even as the broader market tumbled yesterday, and even though LLY stock has pulled back a little on Friday it remains up 3% on the week vs. a 4% decline for the S&P 500.

That just goes to show that although consolidation and rising healthcare spending are great for pharmaceutical stocks, nothing takes the place of a potential new blockbuster drug like Eli Lilly’s potential new blockbuster, Jardiance.

llyThis provides an important lesson for investors in LLY stock and other pharma players like Merck (MRK), Johnson & Johnson (JNJ) and Bristol-Myers (BMY) to remember. Merger and acquisition fever comes and go. Growth driven by healthcare reform and aging baby boomers is probably already priced into shares. But as long as a Eli Lilly research can keep delivering hits like Jardiance, LLY stock will continue to run.

In it’s latest victory, LLY said a massive three-year study showed that its new diabetes drug Jardiance lowered the risk of death from cardiovascular disease.

About half of all deaths in people with type 2 diabetes are caused by heart attack, stroke and related diseases. That means there’s is potentially big demand for LLY’s new drug, known as Jardiance.

Pharma companies are rushing to develop a new class of drugs to address the situation, and based on the latest news, it looks like LLY is in the lead. As Evercore ISI analyst Mark Schoenebaum said in a note to clients:

“Jardiance is the first SGLT-2 [class of drugs] and in fact also the first glucose-lowering agent of any drug class to show a cardiovascular risk reduction in a dedicated cardiovascular outcomes trial, so this is a big deal in our view.”

It also helped LLY stock that there was widespread skepticism regarding the outcome of the trial. The analyst said that only about 50% of investors thought the trial would work, according to a survey conducted by the research firm.

LLY Stock a Standout

Broad bets on the healthcare sector and subsectors like biotechnology stocks and pharma have been winners for years now, thanks to the Affordable Care Act and powerful demographic trends. And yet even by the sector’s lofty standards, Eli Lilly stock has been a standout.

For example, the Healthcare SPDR ETF (XLV) is up a strong 6% for the year-to-date, but LLY stock is up roughly 25%.

In addition to favorable industry fundamentals, the market is rewarding LLY stock for the company’s successful turnaround. Not too long ago, the company was reeling from a spate of patent expirations.

These days, however, it’s research and development process it churning out hits. Cyramza — a treatment for stomach cancers — and diabetes medications Jardiance and Trulicity are just the tip of the spear when it comes to Eli Lilly’s pipeline.

True, LLY stock is no longer cheap — at 24 times forward earnings, it’s both pricier than the broader market, as well as its own five-year average — but that doesn’t mean it can’t have more upside.

Sentiment is high and rising on this name. Eli Lilly is on track to deliver earnings per share growth of 18% this year and Wall Street estimates are likely to rise in wake of the latest news. Its more than reasonable for an investor to pay 24 times earnings for that kind of growth.

With good growth prospects and helpful industry fundamentals, LLY is set for more outperformance ahead.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2015/08/eli-lilly-lly-stock-jardiance/.

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