Better Buy: Eli Lilly & Co. or AstraZeneca plc?

Eli Lilly and AstraZeneca are leaders in diabetes treatment. Both are seeing sales fall as blockbuster drugs lose patent protection, but is one of these companies a better buy than the other?

Mar 24, 2014 at 6:30PM

The market for treating diabetes is becoming getting increasingly competitive as drug developers innovate new, longer-lasting therapies to address the growing patient population. Over the coming two decades, the number of people diagnosed with diabetes is expected to climb from 366 million in 2011 to 552 million in 2030. That means there will be three new cases of diabetes diagnosed every 10 seconds.

The business of treating diabetes is already big. Among the leaders are Eli Lilly (NYSE:LLY) and AstraZeneca (NYSE:AZN). Both offer short and long-term insulin therapies generating billions in annual revenue, but both are also facing short-term headwinds tied to high-profile patent expirations. Since sales are likely to slump, is one of these companies a better buy than the other?

LLY Chart

LLY data by YCharts.

Debating earnings
Lilly lost patent exclusivity for its $5 billion a year depression treatment Cymbalta in December. That expiration means generic versions of the drug will likely shave away 70%-90% of Cymbalta's sales this year. AstraZeneca faces a similarly stiff challenge when its $3.8 billion a year Nexium goes off-patent in May.

In January, the loss of Cymbalta forced Lilly to lower its revenue guidance for 2014 from $20 billion to $19.2 billion -- $19.8 billion. Meanwhile, AstraZeneca in February predicted its sales would drop by low-to-mid single digits in 2014, and wouldn't return to 2013 levels until 2017.

The companies' sales slides will similarly drive earnings lower. Lilly expects earnings per share to come in between $2.77 and $2.85 in 2014, and AstraZeneca thinks earnings will fall from 2013 by a midteens rate this year. That has industry analysts expecting $2.81 per share for Lilly and $4.26 per share for Astra this year.

The earnings drop appears to have been more expected at Lilly, as analysts have actually improved their current year outlook from $2.78 per share over the past 90 days. Estimates at AstraZeneca, however, were $4.71 per share 90 days ago. The boost at Lilly may suggest analyst pessimism has bottomed -- at least for now.

It also suggests investors interested in owning shares in either company based on earnings will need cost savings initiatives to kick in more quickly than expected. If they do, Lilly and Astra could outpace their tepid outlooks.

Lilly hopes to shave up to $1 billion in costs by reducing its research and development spending. And AstraZeneca has announced moves geared toward eliminating $1.1 billion in annual expenses.

Debating valuation
Since revenue and earnings growth appear likely to elude both companies over the coming year, investors may want to focus more on valuation.

Unfortunately, neither company is overly cheap. Lilly's shares are trading at 14 times last year's earnings, but 18 times estimated earnings next year. AstraZeneca's shares have a current and future P/E of 31 and 15 times, respectively. Of course, those ratios could move dramatically if either company can more quickly reap the benefit of accountants' sharpened pencils.

The price-to-sales ratio for each company is also frothy. That shouldn't be surprising given the expected patent-driven hits to revenue. At Lilly, the price-to-sales ratio is 2.7 times, while it's 3.17 at AstraZeneca.

Since neither appears particularly inexpensive, investors should also consider the strength of their dividend. Lilly's forward dividend yield is 3.3% and AstraZeneca's is 5.7%. Those are both compelling given the anemic rates investors are receiving in fixed income investments. However, those rates will only remain compelling if cash flow stays strong enough to support their payouts going forward. 

Since earnings can be volatile due to one-time charges, investors should look at the cash dividend payout ratio, which looks at operating cash in relation to dividend payments. That can be a better gauge of whether these companies' businesses are delivering enough cash from operations to handle their dividend commitments. At both companies, the ratio appears fine based on the past 12 months. However, since cash flow will likely shrink this year, investors will want to watch this measure closely to see if it spikes.

LLY Cash Dividend Payout Ratio (TTM) Chart

LLY Cash Dividend Payout Ratio (TTM) data by YCharts.

Both companies also have solid cash cushions they can lean on. Lilly has more than $5 in cash per share on hand, and levered free cash flow totaled $3.06 billion over the past 12 months. AstraZeneca has $10 billion in cash, or $8 per share, and produced $7 billion in free cash flow in the past year.

Fool-worthy final thoughts
Both companies are in the middle of important restructurings. That could make each leaner and better able to translate future sales into shareholder-friendly profit. Of course, the ability to return to growth and really leverage their cost-conscious footprint will come from ushering new drugs through their pipeline to market.

At Lilly, a lot of that pipeline potential rests on dulaglutide, a GLP-1 diabetes therapy under review by the FDA. During trials, the once-weekly therapy was as effective as Novo Nordisk's blockbuster once-daily drug Victoza. That dosing advantage has analysts thinking dulaglutide may see peak sales of more than $1.5 billion per year. 

Over at AstraZeneca, investors should be watching olaparib, a drug for BRCA mutated ovarian cancer that could get EU approval this year, and brodalumab, a drug that is being co-developed with Amgen and is in phase 3 trials for psoriasis.

Since neither of these companies are growing sales or earnings, and neither appears cheap, they are likely both better buys for speculatively oriented dividend investors willing to bet that restructuring and pipelines will pan out, or long-term investors believing the diabetes market opportunity trumps any short-term headaches. 

Here are 9 dividend stocks with fewer question marks.
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers