Eli Lilly and Company (NYSE:LLY) continues to be one of our favorite major American pharmaceutical investments. In recent years, there have been many headlines regarding the "patent cliffs" faced by the major pharmaceutical companies. No company has faced a greater patent cliff than LLY. The most significant portions of LLY's patent cliff issues have taken place in 2014. With the company steadily recovering from a severe patent cliff, we believe now is the time to start thinking of LLY as a potential dividend growth stock once again.
Regardless of the headlines, LLY shares have almost doubled since 2010. LLY has a history of being a dividend growth stock, but that growth faded into the background in 2009 as the company prudently held its dividend at a constant rate from then until now. With earnings projected to rise once again in 2015 and earnings estimates for the year clearly covering LLY's current payout, we believe dividend growth will commence in late 2015 with a modest increase to keep the company's dividend yield competitive with other major U.S. pharmaceutical companies. LLY shares should be a definite add to any investor's watch list, with a mind to pick up shares during an overall market pullback. We believe LLY's shares will continue to reward shareholders with share price appreciation and an almost 3 percent dividend yield that is likely to rise once again in the near term.
LLY discovers, develops, manufactures and sells pharmaceutical products worldwide. The company operates in two divisions: human pharmaceutical products and animal health products. LLY offers endocrinology products to treat diabetes, osteoporosis in post-menopausal women, and human growth hormone deficiency. The company's neuroscience products treat major depressive disorder, generalized anxiety disorder, schizophrenia, acute mixed or manic episodes associated with bipolar I disorder; attention-deficit hyperactivity disorder; depressive disorder, obsessive compulsive disorder, bulimia nervosa and panic disorder; and brain imaging of beta-amyloid neuritic plaques. The company's oncology products treat pancreatic, metastatic breast, non-small cell lung, ovarian, bladder, colorectal and more; and cardiovascular products are used to treat erectile dysfunction and benign prostatic hyperplasia and pulmonary arterial hypertension. In addition, LLY sells animal health products, including cattle feed additives; antibiotics to treat respiratory and other diseases in cattle, swine and poultry; and products that prevent flea infestations on dogs, kills fleas, prevent heartworm disease and control intestinal parasite infections.
Third quarter 2014 earnings
In October 2014, LLY announced adjusted earnings per share of 66 cents, a 41 percent decrease from the year-ago quarter. Revenues for the quarter decreased 16 percent to $4.876 billion, reflecting generic competition for Cymbalta and Evista in the U.S. Reported earnings (including special items) declined 58 percent to 47 cents per share in the third quarter of 2014. Third-quarter revenues decreased 16 percent due to, for the most part, lower volume as a result of the December 2013 genericization of Cymbalta in the U.S. and the March 2014 patent expiry of Evista in the U.S.
U.S. revenues decreased 33 percent to $2.218 billion, reflecting lower volume resulting from the loss of patent protection on Cymbalta and Evista. Revenues from outside of the U.S. increased 8 percent to $2.658 billion due to higher volume. Zyprexa revenues decreased 8 percent to $257.4 million. Cymbalta sales decreased 73 percent to $368 million as U.S. sales decreased 94 percent to $69.4 million due to the loss of patent exclusivity in December 2013. Evista sales decreased 65 percent to $89.5 million as U.S. sales decreased 82 percent to $34.8 million due to the loss of exclusivity in March 2014.
Products that recorded growth in the third quarter included: 1) Alimta (up 5 percent to $723.4 million); 2) Humulin (up 9% to $335.9 million); 3) Humalog (up 15% to $706.1 million); 3) Cialis (up 8% to $568.4 million); 4) Forteo (up 8% to $332.2 million); and 5) Strattera (up 11% to $191.9 million). LLY's animal health division posted $584.7 million in revenues (up 10 percent from the year-ago quarter). LLY expects its acquisition of Novartis' (NYSE:NVS) animal health business to be completed in the first quarter of 2015.
LLY reiterated its 2014 earnings guidance of $2.72 to $2.80 per share. However, revenues are expected to be in the range of $19.4 billion and $19.8 billion (previous guidance: $19.4 billion-$20.0 billion).
LLY management has been consistent in their planning to support and grow revenues through multiple initiatives. Some of the most recent initiatives that will contribute to the revenue stream in the coming years include: 1) the U.S. FDA approved Jardiance (empagliflozin) tablets as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes; 2) the FDA approved Trulicity (dulaglutide) as an adjunct to diet and exercise to improve glycemic control in adults with type 2 diabetes; 3) the FDA granted tentative approval for Basaglar (insulin glargine injection), a basal insulin product being developed in collaboration with Boehringer Ingelheim. (which is subject to an automatic stay of up to 30 months as a result of litigation filed by Sanofi, claiming patent infringement; 4) an announcement that their investigational medicine ixekizumab was statistically superior to etanercept and placebo on all skin clearance measures in Phase III studies in moderate-to-severe plaque psoriasis; 5) an announcement that their investigational basal insulin peglispro demonstrated a statistically significant lower hemoglobin A1c compared with insulin glargine at 26 weeks and 52 weeks, respectively, in Phase III clinical trials in patients with type 1 diabetes; 6) an announcement a Phase III study of Cyramza in combination with chemotherapy in patients with metastatic colorectal cancer met its primary endpoint of overall survival; 7) the submission of Cyramza to the FDA as a treatment for second-line non-small cell lung cancer. The company expects regulatory action by the end of 2014; 8) an announcment of an agreement with AstraZeneca to co-develop and commercialize AZD3293, an oral beta secretase cleaving enzyme (BACE) inhibitor currently in development as a potential treatment for Alzheimer's disease.
Ready to return to dividend growth in 2015?
There was a time when LLY was a dividend growth stock, raising its dividend on a yearly basis. The company's dividend rose from about .16 per quarter in 1995 to .49 per quarter in 2009. From 2009 to the present, LLY has held its quarterly dividend to .49 per quarter and at an annual payout of $1.96. The company held its dividend rate constant for several years in anticipation of several of its largest drugs going off patent over a multi-year period and the need to reinvest in developing and acquiring new drug candidates to bring to market. 2014 is the most difficult year for LLY with respect to its drugs going off patent, and the company is experiencing steep declines in revenues and earnings. In 2014, earnings are estimated to be $2.78. In 2015, earnings are expected to increase again to $3.19. We should note, earnings estimates for 2015 have been rising for the last 3 months.
With LLY's earnings set to rise again in 2015 and the company's share price rising in anticipation of such rise, dividend growth may once again occur in late 2015. We see a dividend increase as likely given that earnings estimates for 2015 will show an increase from 2014, and estimates easily cover the company's current $1.96 dividend. We also see a modest dividend increase as likely in late 2015 given that LLY's dramatic share price increase in recent years has brought the company's dividend yield to below 3 percent, which is a yield that is below that of many U.S. pharmaceutical company dividend yields.
Patent expirations for LLY's best-selling drugs Cymbalta and Evista were expected to adversely affect third-quarter results. 2014 is seen as a transitional challenging year given the dramatic sales decline for the two LLY best-sellers. Products such as Humalog, Trajenta, Cialis, Forteo and Alimta and the animal health business, however, should help partially offset the impact of the dramatic sales decline of two important drugs. LLY's product pipeline is experiencing progress, where it has several compounds in late-stage trials. China revenue is expected to experience strong growth, while Japan revenue will be weaker due to currency fluctuation. LLY is expected to return to revenue growth in 2015.
We believe that LLY is an excellent long-term investment for any investor. LLY's 2014 earnings represent an earnings trough due to its major patent cliff, and earnings are expected to rise again in 2015. LLY's earnings are expected to be $3.19 in 2015, giving the shares a price-to-earnings ratio of 27.25 based on the current price. Given that the overall markets have hit all-time highs recently, we would prefer that investors interested in purchasing LLY shares wait until the share price is within the $57.50 to $61 price range (with a price-to-earnings ratio of 18.0 to 19.10) before establishing a full position. Although LLY shares have almost doubled since their depressed 2010 share price, we believe that LLY shareholders will continue to be rewarded by an almost 3 percent dividend and share price appreciation. A $1 million purchase of LLY shares by a LLY insider at about $59 a share earlier in 2014 gives us greater confidence that LLY investors will continue to be rewarded.
Disclosure: The author is long LLY.
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