Why Eli Lilly Might Keep Pulling Back

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Eli Lilly (NYSE: LLY  ) slipped 1.5% this morning after Goldman Sachs downgraded the drugmaker from "neutral" to "sell."

So what: Along with the downgrade, analyst Jami Rubin lowered his price target to $48 (from $52), representing about 5% worth of downside to Friday's close. While contrarians might be attracted to the stock's sluggish action in 2013, Rubin believes that Eli's upside remains limited given its lackluster pipeline and still-lofty valuation.

Now what: Goldman sees Eli's risk/reward trade-off as rather unattractive at this point.

"[W]e see a lack of differentiation for key pipeline products in LLY's diabetes and oncology portfolios which comprise the majority of LLY's new products," Goldman noted. "Despite flat EPS prospects from 2013-2018, which assumes Alimta's 2022 patent prevails, and limited potential for structural or new pipeline optionality (we see Sola's prospects as dim), the stock's premium valuation (19X 2014E and 16x 2015 versus ABBV's P/E of 15x) creates more risk to the downside relative to other names in our sector."

Given those seemingly reasonable pipeline and valuation concerns, I'd wait for a wider margin of safety in Eli shares before jumping in. 

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