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Lilly Is Starting To Bloom

Big pharma has been in the doldrums for years, ravaged by generic rivals, class actions, and trickling product pipelines. But some pockets are perking up. Eli Lilly (LLY), the global prescription drug giant, has risen more than 8% in the past six months despite wariness among analysts. Some pros say the recent lawsuits against Lilly's top-seller, Zyprexa, a treatment for schizophrenia and bipolar disorder, are already fully priced into the stock. And Lilly's new products, they say, are impressive. They predict analysts will have to raise their earnings estimates next year. "Upside forecasts are more likely [than downside ones]," argues Catherine Arnold of Credit Suisse (CSR), which has done banking for Lilly. Her earnings estimates of $3.18 a share in 2006 and $3.46 in 2007 exceed analysts' consensus forecasts of $3.14 and $3.41. Lilly earned $2.87 in 2005. It is one of the few drugmakers free of patent worry until 2011, notes Arnold -- unlike Pfizer (PFE) and Merck (MRK), whose big-selling anti-cholesterol products face patent expiration. Arnold points out that Lilly is developing a reformulation of Zyprexa. Another potential winner: Byetta, co-developed with Amylin Pharmaceuticals (AMLN), which the Food & Drug Administration approved last May as a treatment for Type 2 diabetes. It could generate $1.2 billion a year for Lilly, says Arnold. Herman Saftlas of Standard & Poor's (MHP), who rates Lilly a strong buy, says its growth products and pipeline make it one of the most attractive big-cap drugmakers. He predicts the stock, now at 57, will hit 65 in 12 months.

Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

By Gene G. Marcial

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