Will This Pharmaceutical Rise in 2013?

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Shares of Eli Lilly & Co. (NYSE: LLY) have rallied in recent weeks, but will the company's stock continue to rise? Its sales are expected to further fall in the upcoming quarterly report as the company had lost its exclusivity in Zyprexa; the company's sales fell in the third quarter by 68% compared to the same quarter in 2011. Besides this issue, what else could affect its stock in the months to follow?

During 2012, shares of Eli Lilly increased by 20.7%. In comparison, the S&P 500 index rose by 13% during the year. The chart below shows the normalized rates of Eli Lilly and the S&P 500 during 2012 (prices normalized to the beginning of January). As seen, the company’s stock has outperformed the S&P 500.

<img src="/media/images/user_12845/eli-lilly-snp500-dec_large.jpg" />

Eli Lilly's Repurchase Program

The company plans to buy back nearly $1.5 billion worth of shares in 2013. In its previous program, which was recently commenced in 2000, the company repurchased $3 billion shares. At the current price of $49 per share, this could result in nearly 30.6 million shares repurchased. The total amount of Eli Lilly shares is 1.16 billion. This means the company could buy back nearly 3% of its total shares in the market. This program is likely to keep the company's stock from falling in 2013.  

Profitability

Based of the third quarter report, Eli Lilly is still performing well in terms of its operating earnings despite the company's fall in revenues. Part of the rise in profitability is due to special income from Bristol-Myers Squibb for purchasing Amylin Pharmaceuticals. Amylin Pharmaceuticals paid Eli Lilly $1.259 billion with respect to a revenue sharing obligation. As a result of this transaction, Eli Lilly recognized in the third quarter a $787.8 million revenue sharing payment.

In comparison, other big Pharma companies such as Pfizer (NYSE: PFE) and Merck (NYSE: MRK) had a slightly lower operating profitability rate in the third quarter (but again the operating profitability of Eli Lilly rose due to a special income): The operating profitability of Pfizer reached in the third quarter 21%; Merck reached 19.6%. The chart below shows a comparison of the operating profitabilities of these companies in recent quarters.

<img src="/media/images/user_12845/eli-lilly-profit-margin-jnj-and-pfe-dec_large.jpg" />

As seen, in most of the previous quarters Eli Lilly has had a higher operating profitability than Pfizer or Merck.  

Moreover, of the three companies Eli Lilly has the highest estimated forward P/E at 13.36. This could suggest the market expects that Eli Lilly will show the highest growth in 2013 (of the three companies). 

Unfavorable foreign exchange rates

One factor that adversely affected the company's growth in revenues in recent quarters was unfavorable foreign exchange rates. The company's revenues declined in the third quarter by 3% due to this factor. The unfavorable foreign exchange rates could continue pulling down the company's sales in the fourth quarter. 

Dividend

In terms of dividend yield, Eli Lilly is in the middle of the pack among big pharma companies; the company recently announced a divided payment of $0.49 in the first quarter of 2013. This represents a nearly 4% annual yield. In comparison, Pfizer is offering an annual dividend yield of 3.82% and Merck is providing an annual dividend yield of 4.12%. Thus, all of these pharmaceutical companies offer very similar dividend yields. This might adversely affect their stock price, as it could pull out U.S investors if the Bush tax cuts aren't renewed (these tax cuts included a low 15% tax on dividends; without them the tax on dividend will increase to a rate as high as 43%).

So what's up ahead for Eli Lilly?

My guess, the company isn't expected to show growth in revenues in the near future. Even though Eli Lilly's operating profitability and dividend yield are still high for its industry, it could take time until the company manages to produce growth. The company still has treatments in the works, such as solanezumab, a treatment for patients with mild Alzheimer's disease, even though this treatment might only be released in 2016. But the company's stock might slightly rise in the months to follow, partly on account of the company's repurchase program, and perhaps on the expectations that the company will be able to come up with a new treatment in the near future.

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