By James Allen
Eli Lilly and Company (LLY) is heavily focused on expanding its portfolio and market share in the diabetes and insulin industry. Growth and earnings in the near- and long-term future are heavily centered on its ability to get products approved from its pipeline, forming productive partnerships, and responsible fiscal management on one-time expenses incurred as a result of new partnerships.
The above-mentioned operations of Eli Lilly are in response to an expiring patent on one of its most lucrative products. Shareholders and investors should expect growth and earnings from this new focus to come into fruition around 2013 to the end of 2014. In the light of its healthy dividend, shareholders should hold and new investors should add this is a defensive asset to their portfolio.
Sales growth for Eli Lilly decreased by over 4 percent in the previous year and decreased by over 7 percent in the previous quarter. The price to earnings ratio increased over the past year. The current estimate is over 12 times earnings, while the trailing 12 months price is over 10 times earnings. Eli Lilly's beta is around .5, while the current PEG ratio is below -3.5. Return on equity, operating margin and net margin have all been decreasing for the past three quarters. The current ratio is around 2, while the quick ratio I around 1.5; these ratios have been increasing over the past three quarters.
Eli Lilly's debt to equity ratio has been fluctuated over the past three quarters between .4 and 0.36. The trailing price to earnings ratio is a slightly less than the industry average. Eli Lilly's projected growth rate for the next year is nearly double the industry average. Both gross margin and institutional ownership exceed 74 percent. Eli Lilly's dividend yield is nearly 1 percent greater than the industry average. Return on equity is significantly above the industry average, while the trailing net profit margin is right on par with the industry average. With dividends that yield almost $2 annually, shareholders and investors are safe in treating this as a defensive asset for a long-term investment.
In the Q1 2012 earnings call, management focused on responding to the decrease in revenue in various markets due to the expiration of its Zyprexa patent. Eli Lilly and Company has been facing increasing generic competition internationally and experienced a decrease in market size in the US, Europe and emerging markets as well. Outside of Japan, most markets are showing a decline in Zyprexa market share. Most of the generic competition is coming from countries like Brazil and Mexico, while China showed a strong growth increase of 41 percent.
Management noted that Japan has approved the use of Zyprexa to treat depression from bi-polar disorder. Horizontal expansion and new products in the pipeline are expected to offset some of these reductions in revenue. Management is mainly focused on prudent fiscal operations and increasing production of diabetes molecules from its pipeline to foster revenue growth through 2014.
Eli Lilly's new partnership with Boehringer Ingelheim to increase diabetes treatments in its pipeline is currently the most promising venture in its portfolio. Eli Lilly claims to have one of the most broad and abundant diabetes pipelines in the industry. There are a number of molecules in phase III of its pipeline. Eli Lilly currently expects to have four submissions of molecules concerning diabetes for regulatory approval within the next two years. The partnership with Boehringer Ingelheim has produced three of these new molecules.
Eli Lilly's partnership also produced Trajenta, which is currently available in 20 markets around the world. Eli Lilly and Company currently has 12 molecules in Phase III of its pipeline; eight of these are large molecules, resulting from its expertise in biotech. The 12 molecules in Phase III are potential treatments for diabetes, cancer, autoimmune diseases and Alzheimer's as well. Eli Lilly and Company is expecting most of its growth to develop after 2014.
Eli Lilly and Company is focused on improving its presence in emerging markets like India. The current focus on developing diabetes and insulin treatments will help Eli Lilly compete in India as a significant portion of the populace suffers from this ailment. Eli Lilly and Company currently plans to release at least four products to help treat the diabetes population in India. Eli Lilly is also focused on improving its market share in China as well. Eli Lilly is working with Novast Laboratories in China to increase production of high-quality generic treatments. Eli Lilly will be helping to improve the quality of available generic treatments in the country along with increasing the distribution of products from its own pipeline.
Eli Lilly has already produced basal insulin molecules superior to competing treatments like Sanofi's (SNY) Lantus and Merck's (MRK) Januvia. As part of a joint venture, Bristol-Myers (BMY) is currently developing a diabetes type 2 treatment as well. Each of these pharmaceuticals is vying to retain or gain a leading position in this enormous market. Eli Lilly is now poised to pass Sanofi as the second leading pharmaceutical manufacturer serving the diabetes market.
Aside from Januvia, Merck does not have a significant stake in the diabetes market. Eli Lilly's competition in the diabetes type 1 sector is primarily from Novo Nordisk (NVO). Novo Nordisk has a number of developments in its pipeline and waiting FDA approval as it has recently partnered with JDRF to focus on diabetes type 1 treatments. To further bolster its position in the industry, Eli Lilly plans to invest around $30 million in research and education concerning diabetes in Brazil, Mexico, India and South Africa as well.
Aside from the primary focus on diabetes treatments, Eli Lilly and Company is also making headway in the arthritis sector as well. Eli Lilly has been working with Incyte (INCY) to develop a treatment for rheumatoid arthritis. The new drug, Baricitinib has shown promise in recent Phase II trials. The final stages of trials have not been completed as of yet, but so far the new drug has proved to be statistically effective against the placebo. The arthritis market does not have the potential upside of the diabetes treatments, but competition here is also less fierce. It is also reassuring to see that Eli Lilly is having success in divergent ventures.
Shareholders and investors should plan to hold on to Eli Lilly's stock into 2015 in order to see significant growth and returns from this large capital pharmaceutical asset.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.