Contrarians think it's new day for Lilly

December 1, 2010

The trouble-free market approval obtained by Eli Lilly and Co. for a new underarm testosterone treatment brightened the company’s outlook—at least for one of the few optimistic analysts covering the company.

Bert Hazlett of New York-based BMO Capital Markets Corp. viewed the approval of Axiron as a sign of good things to come—especially since Indianapolis-based Lilly has been struggling to bring new products to market. It is working to replace the revenue that will be lost to generic competitors in the next four years as patents expire on a string of blockbuster drugs.

“The Axiron first-cycle approval is a positive for Lilly and should help address concerns around mid-decade patent expirations,” Hazlett wrote in a Nov. 24 note to investors. Hazlett predicts Axiron, which Lilly licensed in March from Australia-based Acrux, could bring the company more than $300 million by 2015.

That’s not nearly enough, by itself, to replace the more than $9 billion Lilly likely will lose as generic versions of Gemzar, Zyprexa, Cymbalta and Strattera hit the market in the United States and Europe. But Hazlett said the Axiron approval shows Lilly can do those deals, and he expects to see more of them in the future.

Lilly executives have promised as much.

Hazlett is one of only two of 22 Wall Street analysts covering Lilly who recommend that investors buy its shares. Unlike his peers, Hazlett believes that eventually Lilly’s pipeline of 68 experimental drugs will put products on the market.

In 2009 and 2010, Lilly had a string of experimental drugs fail in late stages of human testing. Axiron is only the third drug for which Lilly has won approval since 2004—and all three of those were developed by outside companies.

Still, Hazlett noted, Lilly’s shares trade for a marked discount to other pharmaceutical companies. Lilly shares have recently been hovering around $34 apiece, but Hazlett predicts they’ll rise to $43 in the next year.

A few contrarian investors have been making the same case recently, including Matt Koppenheffer, who writes about stocks at the Motley Fool website.

“The market seems to be anticipating that Eli Lilly will shrink around 6 percent per year for the next half-decade and then never grow again. Ever,” he wrote in a Nov. 26 article, in which he admits to already owning some Lilly shares.

“Yes,” he added, “the future is cloudy and there are significant risks ahead, but the market has priced Lilly's stock at a significant discount to much of the rest of the pharmaceutical industry. At the same time, the market's assumptions for Lilly's future seem pretty bleak, considering this is a company that more than quadrupled its sales between 1990 and 2009.”

Read Koppenheffer’s article here.


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