Is Eli Lilly & Co. (LLY) Being Wise About YZ?

Lilly’s international growth outside of developed nations isn’t as strong. The company reported zero volume growth in these regions in 2012 with a 5% decline in total sales. However, Lilly expects solid growth in 2013, particularly in China.

The biggest success story has been animal health. Total revenue in 2012 was up 21% — helped by the acquisition from Janssen. Lilly sees continued double-digit growth for the coming years. The company has no plans to spin off the unit as Pfizer recently did with Zoetis Inc (NYSE:ZTS).

Innovation
Much of Lechleiter’s 2011 speech focused on innovation and the company’s pipeline. He voiced confidence that Lilly’s continued innovation would help it overcome the difficulties of the YZ years.

The company certainly has plenty of drugs in the pipeline, with 13 candidates in late-stage trials and 49 drugs in phases 1 and 2. Some drugs approved over the past couple of years appear to have good revenue potential, particularly Tradjenta for patients with diabetes.

However, Lilly has also experienced setbacks. In December, the company discontinued one of three late-stage studies of experimental rheumatoid arthritis drug tabalumab due to disappointing efficacy results. A few months earlier, Lilly announced that solanezumab failed to meet primary endpoints in a phase 3 study targeting treatment of Alzheimer’s disease. However, the company is moving forward with another late-stage study of the drug in treating patients with a mild form of the disease.

Getting there?
The theme for Lilly’s 2010 annual report and its CEO’s early 2011 speech was “Getting There.” Can the company legitimately claim to be getting there now that it is halfway through the YZ period?

If we only look at the stock performance, we would probably answer affirmatively. Lilly’s shares have done well so far. However, I don’t think the company’s YZ strategy will be enough over the next couple of years as it loses patent protection for Cymbalta and Humalog in 2013 and Evista in 2014. The three drugs combined for sales of $8.4 billion last year.

Lilly’s pipeline could pay off, but not quickly enough to cushion the blow of these coming losses. My view is that the company needs to modify its stance on acquisitions somewhat. I don’t think Lilly needs a megadeal, but spending some of its $6.9 billion in cash to buy a smaller company seems to make a lot of sense. That would be a wiser approach for the remaining years YZ in my opinion. And it would be fairly “EZ,” too.

The article Is Eli Lilly Being Wise About YZ? originally appeared on Fool.com and is written by Keith Speights.

Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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