Lilly: The Worst Play In Big Pharma?

| About: Eli Lilly (LLY)
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I believe that Eli Lilly (NYSE:LLY) will be the worst play in pharmaceuticals in 2013, primarily because it is facing increasing competition from other drug makers. Furthermore, its competitors have a much better forward earnings multiple than it does. I also believe Eli Lilly is facing a bleak financial future due to patent expirations.

Based on recent reports, I believe Eli Lilly is poised for a fall after reports on its latest Alzheimer drug. Eli Lilly has seen its stock increase in value by almost 20 percent since late August 2012. Its stock soared after the stock market reacted exuberantly to Eli Lilly's report on the phase 3 drug trial tests for its Alzheimer drug solanezumab. It is thought that a drug maker that can make an effective drug to treat Alzheimer's disease could earn anywhere from $10 to $20 billion on that drug. According to the same website, investor analyst James E. Brumley believes the phase 3 trials are all hype because, while some say the drug treats Alzheimer's itself, he only sees solanezumab treating the symptoms of Alzheimer's disease, and not the disease itself.

Along with mixed investor sentiment on Eli Lilly's future performance, these same reports show Eli Lilly is facing stiff competition for prescription drugs to treat Alzheimer's disease. I believe Johnson & Johnson's (NYSE:JNJ) Bapineuzumab is better targeted to treat Alzheimer's. Scientific studies have shown that Johnson & Johnson's drug reduces brain plaque, the root cause of Alzheimers, by 9%. Even though it failed to meet technical and scientific thresholds for efficacy, it is further along the drug pipeline, and will likely be given approval sooner.

Comparing the price-to-earnings multiples and cash flow statements of Eli Lilly and Sanofi (NYSE:SNY), it is clear that Sanofi has a much greater upside potential for profitability compared to Eli Lilly. Looking at the multiples, Sanofi's 14.91 ratio compared to Eli Lilly's 13.23 ratio show that investors believe Sanofi has greater earning potential. Cash flow statements also show that Sanofi is in a much better position than Eli Lilly. Sanofi's capital expenditures figure is - $2,313,000 and its other cash flows from investing activities figure is - $17,176,000. In contrast, Eli Lilly's figures for the same categories are - $182,000 and $1,159,800, respectively.

According to recent reports, the pharmaceutical industry is facing a large number of patent expirations in 2013. While this event may seem bad for the entire industry, it is worse for Eli Lilly. While pharmaceutical giant Novartis (NYSE:NVS) is going to have its patent for its osteoporosis drug Reclast expire in 2013, analysts only see it losing at most $612 million per year; this is based on its highest selling years. Similarly, looking at Temodar, a brain cancer treatment prescription drug developed by Merck (NYSE:MRK). It is expected to lose up to $882 million, which is based on its 2012 global sales.

Eli Lilly's drug Cymbalta, which also happens to be one of the highest grossing drugs in quite some time, will cost Eli Lilly as much as $4.9 billion annually going forward. Comparing the cost of patent expirations, Eli Lilly is projected to lose as much as six times as much as its next lowest competitor. According to the same report, the next lowest grossing prescription drug, Avonex, grosses $2.9 billion as of 2012. Therefore, projecting a $2 billion dollar loss for Eli Lilly on a single drug shows that it will likely have a hard time rebounding from this patent loss.

Eli Lilly is currently falling from a price of around $46.47. I anticipate Eli Lilly will slowly sink in the next few quarters. A pullback from its recent highs in August due to investor overreaction of its phase 3 drug trial tests for its Alzheimer drug solanezumab, coupled with the coming expiration of its patent for Cymbalta in June of 2013, will push this stock lower. I believe investors should steer clear of Eli Lilly until it comes up with a real solution to replace the losses it is facing in the coming quarters.

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.