Challenging Days Await Eli Lilly

| About: Eli Lilly (LLY)

By Sheena Lee

Facing patent expiration pressures and pipeline setbacks, drug giant Eli Lilly (NYSE:LLY) is struggling to impress analysts. The company just announced an acquisition and received good news last week when its antidepressant drug Cymbalta was approved for extended use by the US Food and Drug Administration, but analysts say the move may only have limited positive impact.

The median price based on the the thirteen most recent targets tracked by Alacra Pulse is $36, unchanged from a month ago. and very close to Tuesday’s closing price of $35.77. The mean target of these analysts has dropped slightly to $36.14 from $36.85.

Current 12-month price targets of selected sell-side and independent analysts. Click image to enlarge.

Of these 13 analysts, only Robert Hazlett at BMO Capital Markets is positive on Lilly. He has an Outperform rating and a $43 target. Three have a negative rating and 9 are neutral.

The company isn’t faring too well on the credit side either. Moody’s this week lowered Lilly’s long-term debt ratings to A2 from A1. “Recent pipeline disappointments and patent challenge setbacks compound Lilly’s challenges related to upcoming patent expirations,” said Michael Levesque, a Moody’s senior vice president. The ratings agency said the company still has a strong balance sheet and that Lilly’s credit outlook is stable.

Credit Suisse analyst Catherine Arnold lowered her price target on shares of Eli Lilly to $34 from $35 in a research note to investors, citing the impact from the delay of much anticipated diabetes drug Bydureon. The analyst reiterated her Neutral rating on the stock.

Citi analyst John Boris downgraded the bank’s rating on Lilly to Hold from Buy and dropped his price target to $38 from $41. ”The next major catalyst for Eli Lilly was FDA action on Bydureon…without which, we see few catalysts to move the stock higher until 2012 when multiple phase III trials complete….”

Bernstein’s Tim Anderson, who has a Market-Perform rating on Lilly, lowered his price target to $35 from $37. Anderson wrote in a research note last month that Lilly posted overall a reasonable quarter, “…yet for many investors it is the longer-term financial outlook that matters more, and here Lilly still looks challenged,” he said.

Independent analyst Richard Purkiss of Atlantic Equities also cut Lilly’s rating to Underweight from Neutral and adjusted the company’s price target lower to $32 from $32.70.

JP Morgan’s Chris Schott rates Eli Lilly at Underweight with a $36 price target, after a recent meeting with company’s management. ”Overall, Lilly has several interesting late phase II/early phase III pipeline assets, but these assets remain several years from market, which in our view likely results in a prolonged period of depressed earnings in the 2012-2016 timeframe.”

UBS analyst Marc Goodman said the bank maintained their Neutral rating and $36 price target for Ely Lilly despite teplizumab not meeting its primary endpoint in a phase III trial: “The diabetes franchise is Lilly’s bread and butter and this is clearly another major setback for the company.”

On the extended approval for Cymbalta, the approval may provide only a small reprieve because the medicine’s patent expires in three years and it is already being prescribed as a painkiller, said Seamus Fernandez, an analyst at Leerink Swann & Co. “Half of that market opportunity could already be potentially accounted for,” said Fernandez, who estimates annual sales of Cymbalta may increase by $500 million.

Deutsche Bank analyst Barbara Ryan, who has a Hold rating and $38.50 price target, said Lilly has to look beyond just making small acquisitions or licensing agreements. She said such deals won’t give investors much confidence. “A lot of those companies will just be adding to the pipeline and they’re not going to be something that the market will accrue much value to on Lilly,” Ryan said.

But unlike other big pharma companies, Lilly says it is staying away from big M&A deals.

“It’s a very strange position they’re taking, considering what they’re facing,” said Standard and Poor’s analyst Herman Saftlas, who has cut his target to $38 from $40. “They have to do something, or the patent cliff will kill them. How are they going to support their dividend?”

“The value of the industry has been decimated, and Lilly is perhaps at the bottom of the pile,” added Viren Mehta, of Mehta Partners, a pharmaceuticals advisory group. “As with the industry, the question is how much lower Lilly’s valuation can go.”

(Sources: American Banking News, MarketWatch, SmarTrend, StreetInsider, Bloomberg BusinessWeek, IndyStar, Reuters, Benzinga)