Investors are becoming infatuated again with big pharma.
The rush back to pharmaceutical stocks is helping to lift the share prices of drugmakers, including Eli Lilly and Co., as they begin to report first-quarter earnings this week.
Shares of U.S. pharmaceutical companies are trading at prices that are more than 17 times their most recent annual profits, according to a research note from Barclays Capital analyst Tony Butler. Just two years ago, drug stocks were generally trading at about 10 times their expected earnings.
Pharma stocks rose nearly twice as fast in value last year as did the Standard & Poor's 500 Index, and they have been rising faster than the overall market this year as well. New drug launches by New York-based Pfizer Inc., New York-based Bristol-Myers Squibb Co., and New Jersey-based Johnson & Johnson have all helped boost investors' feelings toward drugmakers.
Lilly has experienced one of the most dramatic turnarounds, as investors have started to believe the company can actually bring new drugs to market—in spite of a terrible drought of big-time successes that dates all the way back to 2005.
On April 19, 2011, shares of Lilly stock traded for $35.70—which was less than eight times higher than the company’s 2010 earnings per share.
But on April 19, 2013, Lilly’s shares closed at $57.42—which equaled nearly 16 times the company’s 2012 earnings per share.
Lilly has launched a couple of new drugs, including the diabetes drug Tradjenta with its partner Boehringer Ingelheim GmbH and the testosterone supplement Axiron. And Lilly has produced strong sales from its existing products, even as some of its blockbusters have begun to lose their patent protection.
But most of the 61-percent rise in Lilly’s stock price the past two years has stemmed from the firm's ability to get encouraging clinical trial results from a handful of drugs, including the Alzheimer’s agent solanezumab, diabetes drugs dulaglutide and empagliflozin, and the cancer drug ramucriumab.
A rise in pipeline expectations is the big factor driving higher prices across the industry, Butler said.
“While multiple factors have led to this increase, including improving macroeconomic conditions and special situations, an increase in pipeline productivity has been a major contributor,” he wrote in an April 15 research note. “We expect this trend to continue.”
Of Lilly, specifically, Butler wrote, “Eli Lilly & Co. continues to boast one of the strongest pipelines across its peer group, in our view.”
Butler was among a handful of analysts who recently raised the prices they expect pharmaceutical companies to reach in the stock market.
Others raising their price expectations this month were Morgan Stanley analyst David Risinger, UBS Securities analyst Marc Goodman, and Jeffries analyst Jeffrey Holford.
Holford is bullish on many drugmakers, but not on Lilly. He expects the stock to tumble soon, to just $44 per share—although that was higher than his previous estimate of a fall to $43 per share.
Holford noted that Lilly could face generic competition for its lung cancer drug Alimta as early as 2016—although other analysts believe the drug will remain patent-protected for another five years beyond that date.
He also said that Lilly’s clinical trial results on solanezumab and other drugs still fell short of what is needed to launch them onto the market.
“We point to Eli Lilly and GlaxoSmithKline as least preferred names,” Holford write in an April 10 research note.