Not Much Downside for Eli Lilly

Eli Lilly and Co. (LLY) is entering a challenging period, brought about by recent pipeline disappointments, most notably uncertainty surrounding its antiplatelet drug, Prasugrel. Although we believe the underlying fundamentals of the company remain solid, pipeline setbacks and lack of clarity on prasugrel will likely limit the upside to the stock. We also believe that sales of Zyprexa, for schizophrenia and bipolar disorder, will begin to decline in 2008 as generic Risperdal eats into market share.

Underlying value should continue to be supported by growth of antidepressant Cymbalta in 2008. Zyprexa will continue to be a mega-blockbuster, but sales should start to slip due to international generics and the imminent launch of a generic Risperdal in the U.S. With prasugrel removed from our model, earnings growth beginning in 2009 is significantly negatively affected. For 2008, we look for earnings of $3.92. Management remains optimistic that prasugrel will make it to market although we think this is unlikely without significantly more data to support the net benefits of the drug.

Although earnings growth through 2008 should keep the shares afloat over the next 12 months, we expect the impending contraction in Zyprexa sales to be the beginning of a significant decline in the rate of EPS growth. We model EPS to grow just above 10% in both 2008 and 2009 but then expect that rate to fall to 6 percent and 2 percent in 2010 and 2011, respectively.

We currently model EPS to be flat from 2011 to 2012. Earnings should consistently outpace sales as the company implements further cost-saving measures such as the recently announced headcount reduction at its Indianapolis manufacturing facility.

Based on the stock trading at a slight discount to industry peers and the fact that key drugs continue to post solid growth we do not believe there is much downside risk to holding the name. On the other hand, recent pipeline disappointments and our reservations regarding the potential for prasugrel to make a near-term impact have us believing that there s also limited upside potential. We rate the stock a Hold with a $50 price target, representing 12.8x our 2008 EPS estimate of $3.92.

Lower Berkshire Hathaway Ests

We maintain our Hold recommendation on the shares of Berkshire Hathaway-A (BRK.A). We expect Berkshire's core revenue and earnings growth trends to experience momentum pressure, based on softness from the insurance cycle and a moderation of investment income growth and the weight of a large low-interest earning cash position.

Although the stock is trading at the lower end of its ten-year average price-to-book range, we anticipate additional multiple compression, albeit slight, as we think book value growth will continue to stall and return on equity will remain in the low to mid-single-digits range.

Based on the first-quarter results, we have moderated our 2008 and 2009 earnings expectation to $5,497 per share and $6,000 per share respectfully, from $6,950 per share and $6,400 per share, previously. At the current price level, the shares of BRK.A trade at 1.68x its 1Q08 book value of $77,072 per share and 2.34x our estimated 1Q08 tangible book value of $55,415 per share.