Will This Pharmaceutical Rally in 2012?
Lior is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The high stakes competition in the pharmaceutical industry is very rewarding to some companies, including Eli Lilly & Co. (NYSE: LLY). But with these rewards also come high expectations. The company’s stock hasn’t performed well during the year despite the positive results in the first half of the year that beat analysts’ expectations (for Q2) and the decision of the Supreme Court to rule in favor of Eli Lilly. What are the main pitfalls that the company will face during 2012? And could the company’s stock pull it around in the second part of the year?
One factor to consider before comparing the company to the S&P500 is that Eli Lilly is paying a relatively (to the rest of the market) high dividend of a $1.96, which is a nearly 4.4% yield.
The chart below shows the normalized prices of Eli Lilly and the S&P500 during 2012. As seen, the company’s stock performed almost as the S&P500 index did.
Further, the linear correlation between Eli Lilly stock and the S&P500 during 2012 reached 0.6. This means that nearly 44% of the stock's volatility (under certain conditions) could be explained by the movement of the S&P500. In other words, the economic slowdown in the U.S is one of the reasons for the slow growth of the company's stock during the year.
But the main concerns for investors are not only the general economic climate, but also the future growth of Eli Lilly.
According to the second quarter reports of Eli Lilly, the company continues to perform well in terms of earnings, but its sales and profitability have declined. This trend may continue unless the company makes a breakthrough in experimental drugs. For now it seems the company has a long way to go before making any a significant progress in developing a treatment for Alzheimer's.
According to the financial results of Eli Lilly, there was a sharp decline in the worldwide revenues, which was driven by the expiration of the Zyprexa patent; the economic slowdown didn’t help sales growth; the silver lining in these reports was that the company had an increase in pharma sales in China and Japan by 28% and 15%, respectively.
Eli Lilly’s decline in sales was curbed by the rise in sales in Cymbalta, rising by 22% during the second quarter. But this will change by December 2013 when Cymbalta will face, much like Zyprexa, generic competition.
During recent quarters, the company was in the middle of the pack in terms of profitability; as seen in the chart below, Eli Lilly’s profitability was higher than the profitability of Pfizer Inc. (NYSE: PFE) but lower than that of Johnson & Johnson (NYSE: JNJ) in the past couple of quarters.
In terms of dividends among the three, Eli Lilly is offering the highest yield at 4.4% compared with 3.7% for Pfizer and 3.5% for Johnson & Johnson.
In regards to net profitability, Eli Lilly’s profitability declined from 19.1% in Q2 2011 to 16.5%. This decline may continue as long as the company’s sales keep falling in the U.S.
One of the main treatments that all these companies are working on is an Alzheimer's drug. Eli Lilly will present some results during this quarter. There are analysts who claim Eli Lilly’s Alzheimer treatment will fail late stage testing. On the other hand, JNJ and Pfizer have failed to improve symptoms of Alzheimer's patients in their first out of four studies testing their drugs. Thus, for now all three companies aren’t showing any positive results in tackling a treatment for Alzheimer's.
There were also reports that the Eli Lilly's stomach cancer treatment failed late trial. So for now, none of these companies has presented any major breakthroughs.
The Foolish bottom line
Eli Lilly is still very strong and presents good results and solid profit margins compared to its competitors. It also offers high dividends. But the future of Eli Lilly isn’t clear and some pessimists might even say not so bright. For 2012, the company may continue to perform well and might even outperform the S&P500. In 2013 when Cymbalta will face generic competition, the company's sales growth might further decline. Finally, if the company won’t make a breakthrough in an experimental drug, if the economic slowdown in the U.S progresses, and if the company's sales from Zyprexa continue to dwindle then this could also jeopardize the company’s growth in the years to come.
liorc has no positions in the stocks mentioned above. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services recommend Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.