Eli Lilly and Co: Today’s Plunge in LLY Stock Is NOT a Buying Opportunity

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In retrospect, Credit Suisse is probably wishing that it had held off a day or two before upgrading Eli Lilly and Co (LLY) to an “outperform” and raising its target price on LLY stock.

Nope, Today's Plunge from LLY Stock Isn't a Buying OpportunityAlthough the reasons Credit Suisse cited for optimism don’t entirely hinge on the very drug the pharmaceutical maker decided to stop developing due to lackluster results (evacetrapib), Eli Lilly’s announcement pulled one of the legs out of Credit Suisse’s bullish case.

And, regardless of Credit Suisse’s unfortunately timed revised stance on LLY stock, bad news from the company is still bad news from the company.

Say Goodbye to Evacetrapib

Giving credit where it’s due, cholesterol drug evacetrapib made it fairly deep into the R&D progression, with more than 12,000 cardiac and at-risk patients trying the drug in its phase 3 trial. But it couldn’t seal the deal when it mattered most. The trial’s independent monitoring committee simply didn’t see enough upside in evacetrapib to bother with the expense and wasted time to keep the trial going.

Lilly senior vice president David Ricks said of the decision, “We’re obviously disappointed in this outcome, as we hoped that evacetrapib would offer an advance in treatment for people with high-risk cardiovascular disease.”

The specifics and detailed shortcomings of the drug will be revealed at a later time. The news, though, is taking a toll today. LLY stock was off by more than 8% as of the latest look on Monday.

Given what we know — and what analysts had projected — the size of the plunge can’t be too surprising. Observers had already projected more than $600 million in sales of evacetrapib in 2020, if approved, with one analyst calling for total annual sales of nearly $2.5 billion by 2026. Now those prospective sales are being mentally re-aimed at the likes of Amgen (AMGN) and Regeneron Pharmaceuticals (REGN), both of which are developing their own new cholesterol drugs.

For perspective, Eli Lilly is a $91 billion company that has generated $19.62 billion worth of sales over the past four quarters.

Say Hello to Solanezumab and Jardiance

While evacetrapib ended up being a letdown, Credit Suisse still expected big things for LLY stock on the backs of solanezumab (for the treatment of Alzheimer’s), and Jardiance (as a therapy for type 2 diabetes), along with several other dugs undergoing trials right now.

Although solanezumab produced mixed results when the company reported its trial update in July, some are still calling for the drug to generate as much as $3 billion per year once sales reached full speed. Jardiance is already an approved drug for the treatment of diabetes, and sales of the drug in that capacity along with new uses could generate well over $2 billion in annual sales by 2020.

Point being, there are still ways for Eli Lilly to make money.

Bottom Line for LLY Stock

For what it’s worth, the failure of evacetrapib is going to force Eli Lilly to take a $90 million charge in the fourth quarter ending in December. That translates into a 5-cent reduction of whatever the company was going to earn per-share of LLY stock when it reports those numbers in late January. Analysts had been calling for a profit of 78 cents per share of LLY for the fourth quarter.

In other words, the damage will be noticeable, but not catastrophic. In fact, the impact of the one-time expense may already fully baked into the price of LLY thanks to today’s tumble.

To that end, was the Credit Suisse target of $105 even a reasonable figure for the foreseeable future? Probably not.

Even before today’s setback, LLY stock was trading at a forward-looking price-to-earnings ratio of 23.8, based on 2016’s projected per-share profit $3.61. At a price of $105, Eli Lilly shares would be priced at a P/E of 29 based on the 2016 outlook. That’s not to say this or other pharma stocks haven’t traded at higher values. It is to say, however, it’s unusual to see it happen … and especially for Eli Lilly, which has dished out what seems like an inordinate number of failed high-profile trials in the past few years.

That’s the long way of saying this pullback isn’t apt to the kind that’s going to be recognized as a screaming buying opportunity a few months from now.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2015/10/lly-stock-evacetrapib/.

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