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Lilly shares primed for rebound?: Stock analysts say 2006 may yield a rise in price out of the $50 range

February 27, 2006

Higher new-product sales, an influx of Medicare money, and improved market conditions might be just what the doctor ordered to bump Eli Lilly and Co. stock out of the funk it settled into last spring.

However, as the Indianapolis company strives to meet 2006 earnings projections, analysts still see plenty to fret about, including declining sales of the company's top-selling drug, the antipsychotic Zyprexa.

Lilly shares dipped below $60 last May and spent the rest of 2005 oscillating beneath that price. They even descended below $50 briefly in November, a far cry from the $76.26 they fetched in May 2004.

The stock on Feb. 21 closed at $55.50-a bargain, according to analyst Douglas A. Christopher.

"We think the shares should be trading in the $60 area now," said Christopher, with Los Angeles-based Crowell Weedon & Co. "They've got a good, stable portfolio serving vital markets, and they've got a strong financial situation."

The company has no drug nearing patent expiration, unlike rivals Pfizer Inc. and Merck & Co. Christopher also noted Lilly maintains a strong balance sheet.

The Indianapolis company reported 2005 profit of $2 billion, a 9-percent increase from a year earlier. Earnings per share were $2.87. In December, Lilly forecast earnings per share will rise this year to $3.10 to $3.20, spurred by an increase in new-product sales.

Christopher also cites the Lilly pipeline-which produced nine new products in four years-as another positive.

"The company has been delivering on what they said they'd deliver," he said. "The stock has, I think, very low risk."

Lilly also should benefit this year from developments in Washington. The new Medicare prescription-drug benefit should fuel sales, said Tony Butler, an analyst for New York-based Lehman Brothers Inc.

As a result of the program, Lilly will now receive government reimbursement for some drugs, like the osteoporosis treatment Forteo, that it used to dole out to seniors free under its Lilly Answers program.

Drug companies also should get a lift as some patients eligible for both Medicaid and Medicare switch to the latter government program, which provides better reimbursement.

"I think, given a reasonably ebullient market, Lilly can creep over the $60 level," Butler said.

The strength of the overall market this year will be a key variable, analysts say. Butler noted that Lilly shares "won't behave in a vacuum," and drug stocks have been stuck in a trough they may not escape until 2007.

Numerous issues have weighed down drug-stock prices in recent years, including patent challenges and government investigations into drug safety. At the same time, many drugmakers' new-product pipelines have yielded disappointing results.

However, better times may lie ahead, according to Herman Saftlas, an analyst for New York-based Standard & Poor's. He recently upgraded his big pharmaceutical group outlook to positive from neutral.

Saftlas said in a Feb. 13 report that he expects a modest increase in industry profit.

Not everyone shares his sunny outlook.

Lilly last year had sales of $14.6 billion, a 6-percent increase from a year earlier. That revenue growth was "weaker than expected," Jami Rubin, a New York-based analyst for Morgan Stanley, said in a Jan. 26 report.

Jon LeCroy, a New York-based analyst for Natexis Bleichroeder Inc., said in a Jan. 26 report that the fair value of Lilly stock over the next 12 months is only $51. He thinks the company has a weak pipeline, with only two product launches likely over the next four years.

Sluggish sales for established drugs like Zyprexa and the ADHD treatment Strattera will offset sales increases from newer products this year, according to David Moskowitz, an analyst for Arlington, Va.-based Friedman Billings Ramsey.

Zyprexa sales shrank 5 percent in 2005, and Strattera dropped 17 percent.

Declines like those will blunt gains from newer products like the antidepressant Cymbalta, leading to "growth rates that do not justify a higher valuation," Moskowitz wrote in a Jan. 27 report.
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