Eli Lilly and Company discovers, develops, manufactures and sells products in one business segment, pharmaceutical products. It also has an animal health business segment. The Company manufactures and distributes its products through facilities in the United States, Puerto Rico, and 17 other countries. Its products are sold in approximately 125 countries. s products include neuroscience products, endocrinology products, oncology products, cardiovascular products, animal health products and other pharmaceuticals. In the United States, Eli Lilly and Company distributes pharmaceutical products principally through independent wholesale distributors, with some sales directly to pharmacies. During the year ended December 31, 2010, it acquired Alnara Pharmaceuticals, Inc. and Avid Radiopharmaceuticals, Inc. On May 28, 2010, it acquired the European marketing rights to several animal health product lines divested by Pfizer Inc. (PFE), as part of its acquisition of Wyeth, Inc.
Lilly faces one of the steepest patent cliffs in the pharmaceutical industry between 2011 and 2013, with more than 40% of its current sales encountering generic competition. This bleak future is, we believe, factored into Lilly’s current market price. As the data below shows, the market price of its competitors may not fully reflect the same trends that will affect them all.
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Lilly has shown a 52-week price change about half of that experienced by Novartis (NVS), Pfizer or GlaxoSmithKline (GSK), but way ahead of Johnson & Johnson (JNJ) and about even with Merck (MRK). At 5.00%, Lilly provides the highest dividend yield of the group, though GlaxoSmithKline is close behind.
By most comparative valuation measures, Lilly is selling at a substantial discount to its peers and to the major drug industry, as defined by our sources for this data, Reuters Research, Inc. and I/B/E/S, Inc. Whereas Lilly is selling for 8.9X trailing earnings, the industry median 19.9X and the average is 27.77X. On a Price-to-Sales basis, Lilly is selling at a multiple that is 71% of the industry median. On a Price-to Book value basis, at 3.11X, Lilly sells at a multiple higher than the industry median and its peers, with the exception of GSK. GlaxoSmithKline is selling at 7.54X book value. Lilly’s discount is very pronounced when we look at Enterprise Value to EBITDA. In this case, Lilly’s is selling at about 47% of the industry median. We also see a discount when looking at EV/Sales.
Lilly reported first quarter 2011 results on April 18. 1Q11 earnings per share came in at $0.95 (GAAP) compared with $1.13 in 1Q10. For the trailing 12 months, earnings per share (GAAP) totaled $4.40 as compared with $3.88 in the year-ago period. Sales for 1Q11 were $5,839.2 million or 6.4% higher than 1Q10 when sales were $5,485.5 million. Trailing 12 month sales were $23,429.7 or 5.2% higher than the year-ago sales of $22,274.5 million.
Lilly provided guidance for the remainder of this year. The estimate sales will grow at a low, single-digit rate and that GAAP earnings will be in the range of $3.86 to $4.01 per share. Analysts are estimating FY 11 earnings per share to fall into the range of $4.21 to $4.36 and the consensus is $4.272. For FY12, the consensus estimate is $3.947 with a range of $3.25 to $4.17. FY13 earnings estimates range from $3.00 to $4.37. As we can see, Lilly is expected to see earnings declines whereas the other companies are expected to see earnings growth.
Lilly will have a difficult time during the current fiscal year as it deals with the patent expiration of Zyprexa and the continued erosion of sales from Gemzar. Lilly depends on patent-protected products for most of its revenues, cash flows, and earnings, and it will lose effective intellectual property protection for many of them in the next several years. Eight significant products, which together comprised 74 percent of Lilly’s worldwide revenue in 2010, have lost or will lose their most significant remaining U.S. patent protection and data-based exclusivity, as well as their intellectual property-based exclusivity in most countries outside the U.S., in the next several years:
However, there are positives. The diabetes business is showing strong performance and sales from Effient are growing. The company is also seeing benefits from the ImClone acquisition. Lilly is also pursuing small acquisitions and licensing deals to boost its pipeline. Further, the animal health business is developing. Lilly has made an offer to purchase Janssen Pharmaceutica NV, a J&J company. Previously, Lilly purchased European marketing rights to several animal health products divested by Pfizer. The company is also acquiring a manufacturing facility in Ireland, which is used to the production of animal vaccines.
Eli Lilly still has a number of major products generating billions in sales:
- 2011 TRADJENTA (linagliptin) tablets for the treatment of type 2 diabetes (in collaboration with Boehringer Ingelheim Pharmaceuticals, Inc.).
- 2011 Axiron (testosterone) topical solution CIII for replacement therapy in males for conditions associated with the deficiency or absence of endogenous testosterone.
- 2010 Livalo (pitavastatin) is indicated for adults as an adjunctive therapy to diet for the treatment of primary hyperlipidemia or mixed dyslipidemia. (in collaboration with Kowa Pharmaceuticals America, Inc.).
- 2009 Adcirca (tadalafil) for pulmonary arterial hypertension (Canada) (EU) (U.S.) (outlicensed for US sales and marketing to United Therapeutics (UTHR)) (Japan) (marketed and sold by Nippon Shinyaku (NPNKF.PK)).
- 2009 Efient (prasugrel) for the prevention of atherothrombotic events in patients with ACS undergoing percutaneous coronary intervention (Europe) (in collaboration with Daiichi Sankyo Company, Ltd. (DSKYF.PK). Effient (prasugrel) for the reduction of thrombotic cardiovascular events (including stent thrombosis) in patients with acute coronary syndromes to be managed with an artery-opening procedure known as percutaneous coronary intervention. (U.S.) (in collaboration with Daiichi Sankyo, Inc.).
Lilly generated $5,882.3 million in free cash flow over the trailing 12 months. Cashflow Return on Investment is a very strong 46.82%. This return is twice as high as the industry median as superior to the returns experienced by the competition. The company’s return on Equity also reflects the company’s ability to return value to shareholders. By several measures, long-term debt is at very manageable levels. The company declared a $0.49 dividend for the second quarter of 2011. The annualized dividend rate is $1.96.
Big Pharma is reinventing itself by creating R&D units that are more independent and flexible and have increased partnering with biotech firms, universities and contract research/manufacturing organizations. In product development, their focus has shifted toward specialized therapeutics. Eli Lilly is participating in this trend. If this new business model succeeds, then Lilly will greatly benefit. We believe the company’s current market price does not take these changes into adequate consideration. The focus is on the near term loss of patent protection which all of these companies face. If we apply the industry median PE of 20X to the low FY13 EPS estimate of $3.00, Lilly would have a share price of about $60.00, about 50% higher than the current share price.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in LLY over the next 72 hours.
