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Eli Lilly's slumbering stock finally shows signs of life

May 14, 2011

Lilly chartEli Lilly and Co. shares have languished in the $30s for more than two years. Even though the stock is trading for barely one-third of its 2000 high, many investors are just relieved it hasn’t fallen further.

Propping up the stock during this period of historic uncertainty for Indiana’s most important public company is Lilly’s rich dividend, which provides an annual yield topping 5 percent.

But is it finally time to get some growth again out of a stock that since its debut on the public market 59 years ago has minted thousands of millionaires?

To be sure, bearish analysts believe there are ample reasons to answer no. They note the company’s research labs so far have failed to come up with replacements for a stable of blockbusters that will go off patent over the next four years, starting with Zyprexa this fall.

As Credit Suisse analyst Catherine Arnold wrote after the company reported better-than-expected first-quarter profit last month, “Solid quarter does not meaningfully improve longer-term outlook.”

But the stock has drifted up as the overall market surged this year. Lilly shares on May 10 closed at $38.72—up 15 percent since December and its highest close since late 2008.

And Robert Hazlett, an analyst with BMO Capital Markets, believes there may be more stock appreciation in the offing. He noted in a recent report that Lilly shares were trading at about eight times projected 2011 earnings per share—a substantial discount to the 10-times multiple for the overall pharmaceutical industry.

While Hazlett acknowledges Lilly should be trading at a discount, given the uncertainty over whether the company can replace the sales and profit it will lose when drugs go off patent, he believes the discount will shrink as the company’s future comes into focus.

Hazlett said the company is doing the right things to provide that clarity, including buying New York-based cancer drugmaker ImClone Systems for $6.5 billion in 2008 and negotiating a deal this year with Germany-based Boehringer Ingelheim to co-develop four diabetes drugs.

“Over time, as investors better realize the improved stability provided by the ImClone transaction and the potential growth due to the Boehringer Ingelheim diabetes deal, and as its pipeline matures, we believe modest multiple expansion over the next 12 months could occur,” potentially pushing the stock to $43, Hazlett said in a report.

That’s not exactly the kind of endorsement that gets the adrenaline flowing—or induces investors to write a big check to buy Lilly shares. And while Hazlett has an “outperform” rating on Lilly shares, many other analysts have more cautious “hold” or underweight” ratings.

Still, analysts agree that Lilly’s pipeline drugs do hold promise and could alter the treatment of some of the world’s most vexing diseases—if the company can demonstrate they’re effective and usher them through the regulatory-approval process.

At the top of the list is the Alzheimer’s medicine solanezumab, now in phase three trials. The drug is designed to block formation of amyloid plaque, a suspected cause of the memory-destroying disease.

“In our view, it is the pipeline asset with the greatest potential to change the outlook for the company,” J.P. Morgan analyst Chris Schott said in a report.

“That said ... we put the asset in the category of (very) high-risk/(very) high reward.”

Banks see better times

Hoosier bankers have been relatively subdued on first-quarter earnings conference calls, even as they report sharply improved results from a year ago.

But much of the good news stems from cost controls and steps to manage their portfolios of soured loans. The bankers reported that loan demand remains lackluster.

Typical was Michael Rechin, CEO of First Merchants Corp.

“The effects of the recession are still evident in all our markets,” he said on the call.

First Merchants nonetheless eked out first-quarter profit of $4.5 million, up from $136,000 in the same period a year earlier.

Meanwhile, The National Bank of Indianapolis Corp. earned $1.6 million, up from $622,000, and Evansville-based Old National Bancorp posted profit of $16.4 million, up from $10.1 million.

Old National CEO Bob Jones told analysts that while Old National had made substantial progress controlling costs, that’s no substitute for the growth it will need to generate as the economy improves.

“The winners in this next cycle will be those banks that can grow their top line,” he said.•

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