Founded in 1876, Indianapolis-based Eli Lilly and Company (LLY) is a global pharmaceutical giant with $23 billion in annual revenues, 34,000 employees and sales in 120 countries, notes growth and income expert Tom Hutchinson, editor of Cabot Dividend Investor.
It stands out from the rest of the large pharmaceutical companies in that it invests much more heavily in research and development and its new drugs and pipeline reflect that fact.
The stock has been in the news lately for having one of the leading Covid-19 drug candidates. The drug, for both treatment and prevention of Covid-19, is in late-stage trials and is the very first candidate to be tested for the National Institute for Health study. But that’s not why I’m buying it.
I have no idea what will happen with this Covid drug. And I learned long ago with these companies never to bet on the fortunes of one potential drug. That’s why I like Lilly. It’s got lots and lots of potential new drugs.
The company spends 25% of sales on R&D every year. The segment employs 23% of the company’s workforce and spends $5.5 to $6.0 billion annually.
That’s a significantly larger commitment than its peers. But the pipeline is the key to this business. New drugs are how these companies succeed and grow. And Lilly has been spectacular.
I actually purchased the stock before, back in 2012. It was selling at a depressed price ahead of a huge patent cliff in 2014 (when a large number of existing drugs would lose patent protection and would see falling revenues as generic competitors took market share).
But I had faith that Lilly’s R&D and pipeline could make up for the lost revenue. It did. Now over 60% of revenues are generated from drugs launched since 2014. The stock has also returned about 400% since my purchase.
Lilly specializes in developing drugs and treatments for unmet medial indications, where there is a higher chance of FDA approval and higher market share and profit margins.
The drug company has a very strong presence in diabetes (Trulicity, Basaglar, Jardiance), Oncology (Alimta, Cyramza, Vezenio) and new drugs in immunology (Taltz and Olumiant).
Retevmo recently received FDA approval for treatment of lung cancer but also reported very positive Phase 3 results in preventing the recurrence of breast cancer — a huge problem that could make the drug a blockbuster if it succeeds. The stock popped over 15% on news of the Phase 3 study.
However, the market was disappointed with second-quarter earnings as revenues fell 2.4% from last year’s quarter. The lower sales resulted from the pandemic as stockpiling in the first quarter as well as reduced doctor and hospital visits reduced drug sales. The stock fell about 5% after the report.
But those sales will come right back as lockdowns ease. Lilly also beat earnings forecasts with 26% growth over last year’s quarter and raised 2020 guidance by 11% to reflect anticipated 21% earnings growth over 2019.
The dividend still yields a measly 1.93%. But there are no significant patent expirations in the years ahead and the company will be able to focus on growing the dividend from here. Lilly is the best of its peers.
