Here Is Why Eli Lilly Will Continue To Outperform The Market

Here Is Why Eli Lilly Will Continue To Outperform The Market

Eli Lilly has shown resistance to mixed financial and operational news. We explain why we believe that the company will survive against all odds and continue to outperform the market

By Aliya Kaleem on May 21, 2014 at 6:31 am EST

Eli Lilly (LLY) has enjoyed its fair share of the spotlight. The company’s stock price, which has spiked and tumbled quite a few times in the last couple of months, is up 15% so far this year.

Currently, nine of the 23 analysts covering the stock have a Buy rating on it, while 11 recommend investors to hold on to the stock. We believe that the company, which has number of products in its pipeline and recently bought Novartis Animal Health, from Novartis AG (NVS), will come out stronger this year. Here is a recap of some of the major news pertaining to the company.

Eli Lilly In the News So Far

January 30: Eli Lilly Reports Fourth Quarter Earnings

Eli Lilly reported earnings for the fourth quarter of its 2013 fiscal year (4QFY13, ended: December 31, 2013) on January 30, 2014. The company announced that its EPS fell from $1.11 in the previous quarter to 73 cents, in line with analysts’ estimates of 73.2 cents.

Eli Lilly’s revenues, on the other hand, increased sequentially to $5.809 billion, beating analysts’ expectations of $5.47 billion. Nonetheless, revenues were down 2% on a year-over-year (YoY) basis, due to the expiration of Cymbalta’s patent.

The company announced full-year EPS guidance of $2.77-2.85 on expected revenues of $19.2-19.8 billion. Analysts, on the other hand, are expecting earnings to come out to $2.81 per share on revenues of $19.6 billion.

Experimental Drug for Type-2 Diabetes Yields Positive Results

Eli Lilly announced on February 25 that its experimental drug for type-2 diabetes yielded positive results in its “sixth AWARD (Assessment of Weekly AdministRation of LY2189265 in Diabetes)” trial. The drug, which isbeing studied for its efficacy for type-2 diabetes, is now awaiting approval from the Food and Drug Administration (FDA).

April 21: FDA approves ramucirumab

Ramucirumab got approved for use as a single agent for the treatment of advanced gastric cancer.

Credit Suisse analysts project that the potential market for ramucirumab could cross $800 million per year by 2020, equaling 4% of Eli Lilly’s overall sales.

April 22: Eli Lilly Announces That It Is Buying Novartis Animal Health

Eli Lilly announced on April 22 that it has closed a $5.4 billion all-cash transaction with Novartis, which will give Eli Lilly full control over Novartis Animal Healthby the end of the first quarter of next year. The company funded the transaction by using $3.4 billion of its cash-on-hand, while the remainder was paid off by taking on debt.

The division, as per the company’s earnings release, will strengthen Lilly’s own animal health business, Elanco. The acquisition has made Elanco the second-largest animal health company based on revenues. The acquisition is also expected to expand Elanco's product portfolio and manufacturing capabilities.

The acquisition has expanded Elanco's presence in the equine and vaccines areas, and has created potential for entry into the aquaculture market. In its earnings release announcement, the company said that it will establish Elanco as a global poultry leader going forward.

Eli Lilly expects cost savings of about $200 million per year within three years of closing the deal. It also expects the purchase to add to its profit on a cash basis from 2016, excluding integration costs.

April 24: Eli Lilly Reports 1QFY14 Earnings

Eli Lilly announced dismal financial and operational results for 1QFY14 on April 24, before markets opened. The company posted EPS of 69.8 cents, slightly lower than analysts’ estimates of 70.4 cents. Revenues for the quarter came out to $4.68 billion, about 2.4% below estimates of $4.978 billion. Revenues fell 16% YoY due to an 8% decline in sales volume. Volumetric sales declined due the expiry of Cymbalta’s patent. Eli Lilly also lost patents for Evista, a drug used to treat osteoporosis in women.

The company repurchased shares worth $55 million under its $5 billion share repurchase program, and has $4.4 billion remaining for repurchases.

April 30: Eli Lilly Suffers In Court

The office of the US Trade Representative fought back mounting pressure from Congress scrutinize Canada's intellectual property rights enforcement. This was a blow to Eli Lilly, which is currently involved in legal proceedings in Canada regarding patents.

May 9: Eli Lilly Fined in Brazilian Court

Eli Lilly was also found guilty of negligence in Brazil. The company was slapped with a fine of $451.2 million after blood tests on former factory workers revealed heavy metals poisoning. Three of the 80 former Eli Lilly employees submitted blood tests, and according to the prosecuting attorney, they did not show signs of metal poisoning, which was substantial evidence to prove that the company was guilty.

The court also demanded that Eli Lilly pay for the medical treatment of all current and former employees, including contract workers, who served more than six months at Eli Lilly's plant in Brazil.

May 12: Tests Indicate Eli Lilly Insulin Is Better than Other Competitor’s Drugs

Eli Lilly said on May 12 that its experimental drug “basal insulin peglispro” which is used to cut blood sugar levels for patients suffering from Type 2 Diabetes turned out to be more effective than Sanofi’s (SNY) blockbuster drug Lantus.

Eli Lilly further said that the main goal of the trials was to test the efficacy of the drug as a substitute that would work just as effectively as leading products in the market. However, results of the tests indicated that Eli Lilly’s drug actually reduced blood-sugar levels in diabetic patients significantly more than Lantus did.

Eli Lilly’s Pipeline

Eli Lilly expects some of its products in pipeline research products to be commercialized soon, which will help offset some of the decline in revenues. The company recently revealed that the FDA had accepted its new drug application for the “combination tablet of empagliflozin and linagliptin for the treatment of type 2 diabetes.”

The company also reported statistically significant results for the Phase 3 trials of ramucirumab when used alongside chemotherapy to treat non-small cell lung cancer.


Eli Lilly’s current stock price is 15.9 times the company’s expected earnings, largely in line with the peer average price-to-earnings (P/E) multiple of 15.6x.

The stock is trading at a discount to two of its competitors; Johnson & Johnson (JNJ) is trading at a P/E multiple of 17.8x while Merck & Co., Inc. (MRK) is trading at a P/E multiple of 16.2x. Pfizer Inc. (PFE), on the other hand, is trading at a P/E multiple of 12.54x.

Eli Lilly has a dividend yield of 3.34%, in line with Pfizer’s dividend yield of 3.35%. Johnson & Johnson and Merck’s dividend yields are 2.62% and 3.09%, respectively.

Earnings And Sales Estimates – Beat or Miss?

Eli Lilly registered a negative surprise of 2.4% for its sales for 1QFY14. Earnings estimates were missed by 0.57% in the same quarter. This was the first miss after five consecutive quarters in which the company beat estimates.

Johnson & Johnson continuously surpassed sales and earnings estimates in the same time frame. In contrast, Merck missed earnings estimates in 4QFY13, and sales estimates in 1QFY13.

Stock Price Performance

Eli Lilly has risen  15% so far this year, outperforming  all of its competitors. Merck is up 12% in the same period, while Johnson & Johnson  edged up  9%. Pfizer, on the other hand, has declined 5%. Eli Lilly also outperformed the SPDR S&P Pharmaceuticals ETF, which is up 8% during the same time frame.

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