Eli Lilly Worth Long-Term Risk Investment

Oct.16.12 | About: Eli Lilly (LLY)

Current shareholders should hold Eli Lilly (NYSE:LLY) long-term; interested investors should consider late October as an opportune entry point. Eli Lilly recently had the most successful clinical trials to date for an Alzheimer's treatment. Despite the overall shortcomings of the trials, the recent results create hope for the stock if FDA approves or offers a positive review of the treatment for mild Alzheimer's. Eli Lilly needs this hope as its revenues and earnings are being negatively impacted by the recent patent expiration of Zyprexa. Eli Lilly has also had relatively successful trials regarding treatments for lung cancer, two different treatments for diabetes, and an expansion for Cialis in Europe. Washington University recently chose Eli Lilly's product for a long-term study to gauge experimental drugs' efficacy on people with genetic predispositions for Alzheimer's.

Pfizer (NYSE:PFE), GlaxoSmithKline (NYSE:GSK), AstraZeneca (NYSE:AZN) and Bristol-Myers & Squibb (NYSE:BMY) are most comparable to Eli Lilly due to mutual interests or similar market cap size. Eli Lilly's price is around 14 times earnings, Pfizer's price is around 22 times earnings, and AstraZeneca's price is around 7.3 times earnings. Eli Lilly's $3.61 EPS is second-highest to AstraZeneca's $6.24 EPS, Pfizer's $1.15 EPS is the lowest among these pharmas. Eli Lilly's 14.8% EPS decline in 2012 is the worst among the firms; its 11.5% projected EPS growth for 2013 is the highest among the firms. GlaxoSmithKline's 223% EPS growth for 2012 is the highest among these firms.

Eli Lilly's 1.76% float short and 2.5 short ratio are only lower than Bristol-Myers 2.29% float short and 3.5 short ratio. Eli Lilly's ROE is 28.2%, its operating margin is around 21.6% and its profit margin is around 17.2%. Eli Lilly's beta score is usually over 0.5 and under 1.0, it's the highest among these firms. The stock's 26.1% increase YTD and 8.7% increase in the past month are also the highest amongst these firms. Its average volume is around 8 million; both AstraZeneca and GlaxoSmithKline's average volumes are under 2 million. Eli Lilly's annualized dividend is around $1.96; the stock has increased around 14.5% since its last earnings release.

On Eli Lilly's quarterly earnings report, second quarter revenue totaled $5.60 billion, declining 10%, YOY. Second quarter costs totaled $4.41 billion, declining from $4.72 billion, YOY; R&D expenses increased to $1.32 billion from $1.26 billion, YOY. Net income decreased to $923.6 million from $1.19 billion, YOY. Eli Lilly's long-term debt increased to $5.5 billion from $5.46 billion, YOY. Eli Lilly finished the first half 2012 with $4.34 billion in cash and cash equivalents, declining from $6.11 billion, YOY. The decline in revenue, net income and EPS is mainly attributable to the loss of patent exclusivity for Zyprexa in most markets outside of Japan. The loss was partially offset by increased sales in the animal health portfolio, Cymbalta, Cialis, and few other Eli Lilly products.

Animal Health revenue increased to $512.2 million from $389.5 million, YOY. Neuroscience revenue declined to $1.82 billion from $2.65 billion, YOY. Endocrinology revenue increased to $1.7 billion from $1.68 billion, YOY. Cymbalta second quarter revenue totaled $1.22 billion, increasing 22%, YOY; US Cymbalta second quarter revenue totaled $955 million. Cialis revenue totaled $512.2 million, increasing 33%, YOY. The increase in Cymbalta and Cialis was due to the combination of higher prices and higher demand. Zyprexa second quarter revenue totaled $379.5 million, decreasing 73%, YOY; US Zyprexa revenue totaled $29.8 million. US second quarter revenue totaled $3.01 billion while revenue from outside the US totaled $2.58 billion. Eli Lilly currently has 12 products in phase iii clinical trial testing. Four of these drugs treat diabetes; three come from the collaboration with Boehringer Ingelheim.

Eli Lilly announced promising results for solanezumab by combining two phase iii EXPEDITION studies; combined results from these studies indicated a 34% reduction in cognitive decline for Alzheimer's patients. The patients in the EXPEDITION 1 realized a 42% reduction in cognitive decline at the end of 18 months; patients in EXPEDITION 2 experienced a 20% reduction in cognitive decline. This news was enough to cause an uptick in Eli Lilly's stock but not enough for a consensus projection regarding FDA approval down the line. In the least, it suggests Eli Lilly is on the right path while Pfizer and Johnson & Johnson recently discontinued studies for bapineuzumab IV after it failed in phase iii trials.

Roche (OTCQX:RHHBY) has a candidate in phase ii that's not expected to apply for approval until 2016. Washington University recently chose the treatments from Roche and Eli Lilly for a long-term Alzheimer's disease prevention study. The study will test 160 people that have a genetic mutation that will cause them to develop Alzheimer's as early as 30 years old. Washington University's study is focused on preventing Alzheimer's symptoms from ever occurring. Both of the treatments target the beta amyloid, the protein that is believed to cause the degenerative disease. The trials will test these drugs on early-onset Alzheimer's patients as early as 2013.

Eli Lilly and Boehringer Ingelheim recently announced phase iib trial results for empagliflozin and phase ii data for LY2605541, both are drugs to treat diabetes. LY2605541 showed a statistically significant reduction in nocturnal hypoglycemia while empagliflozin reduced systolic blood pressure levels in adults with diabetes type 2. Eli Lilly plans to file for approval on empagliflozin in the US and Europe during 2013. At the end of September, the EMA's CHMP recently provided a positive opinion of Cialis treating the signs and symptoms of benign prostatic hyperplasia (BPH). The EC should provide a response for the expansion in the region two months from now, Cialis is already approved to treat BPH in the US. More recently, Eli Lilly unveiled new data from phase ii clinical trials for ramucirumab, a treatment for non-small cell lung cancer. The adequate dividend, potential uptick from Alzheimer's tailwinds and balanced approach for offsetting patent expirations makes Eli Lilly worth holding long-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.