Eli Lilly with Pipeline Issues
Eli Lilly and Co. (LLY) is entering a challenging period, brought about by recent pipeline disappointments, most notably uncertainty surrounding antiplatelet drug, Prasugrel. We also believe that sales of schizophrenia drug Zyprexa will begin to decline in 2008 as generic Risperdal eats into market share. We see little movement in the stock until the above issues are addressed and rate the shares a Hold.
Although we remain encouraged by the strength of antidepressant Cymbalta and believe it will continue to capture sizable market share, we don't believe Prasugrel has much chance of receiving approval without more trial data and look forward to hearing back from the Food and Drug Administration towards the end of the third quarter. While the recent data on Byetta LAR for diabetes was encouraging, this bit of good news isn't enough to make up for the persistent pipeline problems.
Earnings growth through 2008 should keep the shares afloat over the next 12 months, but 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 about 11 percent in 2008 but then expect the rate of growth to steadily contract through 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. The company's relatively weak late-stage pipeline will continue to hang over the stock and limit the upside to the shares. Based on the stock trading at a discount to industry peers and the fact that key drugs continue to post solid growth we do not believe there's much downside risk to holding the name. Our $52 price target represents 13.2x our 2008 EPS estimate of $3.94.
MWI Vet Supply Industry Healthy
With a growing sales force and ability to establish strong and expanding relationships with veterinarians and vendors, MWI Veterinary Supply, Inc. (MWIV) is poised to continue benefiting from the positive industry dynamics of the animal health products market. The company has been completing more acquisitions to help maintain its strong growth outlook.
Positive industry dynamics support higher animal health product sales in the U.S. Most of the growth is driven by the expansion of the companion animal health products market. Although organic growth is still strong as the company penetrates new markets and further into existing markets, the company has been making additional acquisitions to help maintain its strong long-term growth outlook. Its latest acquisition was AAHA MARKETLink on July 15.
The growth in selling, general & administrative expenses can place some downward pressure on earnings growth.
