Will New Drugs Gild Lilly?

• Email
• Share
• Print

One way or another, drug development will cost you. If you want to stay in the business of pharmaceuticals, you pretty much have to throw a lot of money into basic R&D, or else spend a lot of money on acquiring/licensing other companies and compounds. Either way, it's going to take money and time.

Time is something of a mixed blessing for Eli Lilly (NYSE: LLY) right now, as the company tries to balance a weak late-stage pipeline with increasing contributions from newer approved drugs. For the fourth quarter, Lilly's revenue rose 6% (on a 7% increase in volume), with newer drugs making up 20% of that total -- up from 18% in the third quarter.

While sales were once again led by Zyprexa (which was down 5%), newer compounds such as Cymbalta, Alimta, and Forteo had the more impressive growth, though of course from a much smaller base. Diabetes care was also an important source of revenue once again, with sales here up 11% on decent growth from Humalog and good growth from Byetta.

Profitability, though, was a bit more mixed, depending on which numbers you choose to include or exclude. For example, adding back impairment and acquired R&D charges results in virtually no operating income growth, while adding back an unusual tax item and an accounting change leads to adjusted EPS growth of about 7%. Go one step further, adding pro forma options expense in the year-ago period, and the EPS growth jumps to 16%.

Financial gymnastics aside, it was a mediocre result for what I consider a mediocre pharmaceutical investment option. Sure, inhaled insulin (in partnership with Alkermes (Nasdaq: ALKS)) has potential, and maybe the pipeline can outperform expectations. Maybe Cymbalta sales will really accelerate. And maybe the company will buy its partner Amylin (Nasdaq: AMLN) and/or other biotech or small pharmaceutical companies.

There are hundreds of "maybes" that you can play in the investment game. I'd rather spend my time finding better, less maybe-reliant ideas.

For more pharmaceutical Foolishness:

• Pfizer: Less Bad Is Good Enough
• Novartis Marches On
• Lilly Steady As She Goes

Fool contributor Stephen Simpson owns shares of Amylin Pharmaceuticals but has no financial interest in any other stocks mentioned (that means he's neither long nor short the shares).