In the season of earnings release, Eli Lilly and Company (NYSE:LLY) has also joined the list by announcing its second quarter results. The company's performance can be assessed by analyzing the patents that it currently holds and how it aims to replace the expiring ones. In my article, I will analyze the company's recent performance and its future prospects.
Recent Performance At A Glance
Source: Q2 2014 Earnings Presentation
Patent expiries have strangled Eli Lilly and Company's quarterly performance this time. This had a grave impact on the company's top line which plunged by 17%. The decline was majorly contributed by lower sales volume being sold. The sales of its major blockbuster drug Cymbalta, followed by Evista, have experienced a sharp dip during its second quarter of 2014. Following its loss of exclusivity in December, revenue from Cymbalta experienced a nose dive. Similarly, Evista also lost its patent protection in March this year which contributed to the fall in revenue. Generic competition has hit the company quite hard. Eliminating the impact of Cymbalta and Evista in the US, the company's revenue grew by 6% on the back of higher volume sold.
Apart from the top line decrease trickling down to the bottom line, net margin has also shrinked by 5.5% in the second quarter of 2014 compared to the corresponding period last year. This was mainly due to the lower than proportionate decrease of 4.5%, 1.8% and 2.2% in cost of sales, research and development expense and marketing, selling and administration expense, respectively. The company also had to pay higher tax due to the lapse of R&D tax credit.
The company is trying to trim down its expenses by reducing its headcount and cutting down on the bonuses.
The company had received the authorization for Cyramza for the treatment of patients with advanced or metastatic gastric cancer or gastroesophageal junction "GEJ" adenocarcinoma with disease progression on or after prior fluoropyrimidine- or platinum-containing chemotherapy. This is the only treatment approved by the US FDA for patients in this indication. The drug has been given the Orphan drug status by the regulatory body and therefore, I believe that this drug upholds the potential to partly cover up for the negative growth brought in by the patent expiries.
Source: Lilly Diabetes Pipeline Update
Moreover, the company has also received a positive opinion from European Medicines Agency "EMA" for its insulin glargine, Abasria, for the treatment of diabetes.
Analyzing the company's diabetes pipeline reveals that the company's increased focus and spending on its research and development activity is finally bearing some fruit. Currently, it has three diabetes medicines under FDA's review. By 2016, the company is expected to be marketing seven types of insulin catering to the needs of different diabetic patients. This will help the company replace its expiring patents and further elevate the top and bottom line.
Additionally, the company has also partnered with Immunocare Limited for developing T-cell immunotheraperies. Working in a joint venture has the advantage of pooling the proficiency of both parties and also cuts down on the timing and costs of research compared to doing it on a standalone basis.
Source: Thomson Reuters
Based on the recent approvals granted, burgeoning research pipeline and active collaborations, the company seems to be dealing with the patent expirations in a sensible way. These factors can help the company in re-rising as the star in the drug manufacturing industry.
Employing the comparable multiples approach, the scrip is undervalued based on all metrics and upholds the potential to provide positive returns to the investor. It is also a recommended stock for income seeking investors as it has a dividend yield of 3.2% in an industry where 1.5% is the custom.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.