The big comeback rally in the markets hasn’t been much help for Eli Lilly and Co (LLY). For the year so far, the return is a horrible: -15%. In fact, LLY stock hit a 52-week low last week.
So what’s going on here? And is there more downside for Eli Lilly? Or might there be an opportunity?
Well, first of all, it appears that investors have been engaged in a major rotation, moving away from former hot categories — like healthcare — and allocating more money to beaten-down areas, such as value plays. Keep in mind that other major pharma and biotech operators, like Pfizer Inc. (PFE), Bristol-Myers Squibb Co (BMY) and Gilead Sciences, Inc. (GILD), have also lost money for shareholders this year.
But there are also more fundamental concerns with the healthcare industry. For example, the upcoming presidential election could have a major impact, especially on the future of regulatory actions on drug pricing. After all, this has been at the heart of the implosion of Valeant Pharmaceuticals Intl Inc (VRX), which is down nearly 90% during the past six months.
Issues With LLY Stock
But in the case of Eli Lilly, there are some worrisome company-specific issues as well. Of course, there have been some problems with clinical trials on key drugs. One came this weak regarding Solanezumab, which is focused on treating Alzheimer’s. LLY narrowed the endpoints on the Phase 3 trial to only one, cognition. This could hamper the market potential.
Besides, the company is facing tough competition from rivals like Biogen Inc (BIIB).
When it comes to drug development — especially with complex diseases — the process is far from smooth. But the good news is that LLY has a robust pipeline, which should help drive growth for the long haul.
Consider that the company has seven drugs in Phase 3 trials and 19 in Phase 2. Now granted, it’s extremely tough to gauge the eventual revenue impact. But then again, LLY is certainly treating major categories. Just some include non-small-cell lung cancer, migraines, rheumatoid arthritis, diabetes, breast cancer and metastic colorectal cancer. So if even a couple of the Eli Lilly drugs hit the market, it seems likely that there should be a nice bump-up on the top-line.
What’s more, it’s important to realize that the company has a long history of commitment to innovative development. Keep in mind Eli Lilly expects to spend $4.8 billion to $5 billion on R&D for the year, amounting to about 25% of overall revenues.
At the same time, LLY has been aggressive with collaborations and partners. For example, there are wide-ranging alliances with companies like Merck & Co., Inc. (MRK) and Roche. And yes, LLY has been judicious with acquisitions, with the most notable being the deal for animal health unit of Novartis AG (ADR) (NVS). In the latest quarter, this business posted a 28% increase in revenues.
True, the dividend yield of 2.9% is a bit meager, but there is certainly lots of financial heft for future increases. LLY has about $4.45 billion in the bank and only about $8 billion in debt.
Oh, and the valuation is also reasonable, with the forward price-to-earnings ratio at about 18X. This is actually at a discount to the average multiple for the S&P 500, which is at roughly 24X.
So all in all, for investors looking for a pharma play, LLY certainly does look interesting.
More importantly, there could be some nice catalysts from its drug development, which could mean that the growth engine gets back into gear once again.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
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