5 Things Eli Lilly and Co's Management Wants You to Know

At a critical time for the company, Eli Lilly's management has laid out its plans to return to growth and gave us a good look at what the future holds.

Aug 20, 2014 at 5:59PM

By most financial metrics Eli Lilly (NYSE:LLY) had a painful second quarter, with revenue falling 17% year over year and earnings per share down 39%. But given that the stock has rallied 18% year-to-date, let's dig in further and try to understand why optimism around the stock continues.

We knew this was coming
CEO John Lechleiter discussed Lilly's challenges and opportunities during the company's second-quarter earnings call:

Even as we feel the full brunt of our patent expiries, we continue to execute our strategy. Our performance is in line with our expectations and we are on track to meet the goals we have shared with you for the year. And the steady advance of our pipeline only strengthens our confidence in our innovation-based strategy.

The best part of a patent cliff, if there is one, is that you can see it coming from a mile away. Under Lechleiter's leadership, Lilly wasn't caught off-guard by the revenue and earnings slump when Zyprexa, Cymbalta, and Evista lost patent protection. It set goals to dampen the blow. According to Lechleiter, that strategy has been working.

But what about the future? Softening the fall is one thing; reigniting growth is another. Will Lilly look to grow internally or follow its Big Pharma peers with blockbuster M&A?

M&A madness

As it relates to M&A activity, our stance and strategy has not changed in this space. We continue to be very interested in looking for those opportunities that can augment our current organic footprint, both commercially as well as scientifically. And that really lies in the space that you have seen us play in historically, looking for in licensing deals and sometimes it's easier to do small M&A transactions to get access to those technologies. We continue also to be not interested in doing the large-scale M&A.

The unambiguous statement from CFO Derica Rice sets Lilly's strategy apart from peers engaged in a flurry of tax-inverting, growth-stimulating acquisitions. Prompted by another question, Rice indicated that a $20 billion deal "is a pretty large number," putting a ceiling on potential future deals, including those large enough to enable tax inversion (moving a company's corporate home to another country to reap a lower tax rate).

With the gauntlet thrown, Lilly must now deliver on internal innovation. Let's look at which programs Lilly's management is most excited about.

Diabetes leads the way
Diabetes is likely the greatest driver of Lilly's immediate potential revenue growth. Anchored by strong Humalog sales, new drugs dulaglutide and empagliflozin have the potential to turn Lilly into a strong diabetes play. Here's Lechleiter on dulaglutide's competitive advantage.

If approved, dulaglutide will be the only GLP-1 receptor agonist that is both once-weekly and ready-to-use. We believe it could provide patients and physicians an important new treatment option for Type 2 diabetes.

Senior Vice President Enrique Conterno also referred to dulaglutide as a "significant value proposition" when compared to Novo Nordisk's Victoza and GlaxoSmithKline's Tanzeum. Despite the reduced price of Tanzeum, Lilly's management seems to think its drug's premium profile deserves a premium price and market share.

Oncology, with caution
From Lechleiter:

I think the fact that we had three potential cancer drugs that fell out of Phase 2 is somewhat a factor of just the abundance of cancer opportunities that we have in Phase 2. It reflects the ongoing nature of the business decision making related to data that we have gathered and other priorities that we have set. I think going forward, you are going to see Lilly much more focused on the clinical progression of the molecules where we believe we have a competitive lead and that we believe offer the greatest opportunity for Lilly.

If Lilly is truly committed to growing primarily by internal innovation, its approach will have to be extremely disciplined. Ushering drugs from conception through preclinical and clinical studies to regulatory filing and marketing requires constant analysis of research and development investments and potential returns. In dropping drugs during Phase 2 development, Lilly is signaling a willingness to cut its losses and refocus capital toward drugs promising the greatest returns.

In addition to cutting costs by strategically pursuing only the most promising pipeline assets, Lilly will look to enhance operational efficiency to further accelerate earnings growth. Rice provided some guidance on what we can expect from future operating margins:

What we said is that, no later than 2019 or by 2019 we will achieve a total operating expense as a percent of sales somewhere in the 48% to 50% range. Getting back to the historical levels of profitability that you have seen from Lilly pre-patent expiration. We still expect to at least meet that timeline.

The numbers for the quarter suggest that Lilly has a long way to go in the next five years. For second quarter 2014, operating margin was 18%, a sizable decline from the 26% captured in the same quarter a year ago.

The big picture
This conference call quite clearly laid out Lilly's strategy moving forward. In contrast to its acquisition-crazed industry peers, management has committed to growth by internal innovation and expense control. With executives expressing no doubts surrounding the strategy, the question for investors will be, "Can management pull it off?" In future coverage, we'll dissect the good and the bad in Lilly's pipeline to see if it has the juice to jump-start growth.

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns you will need The Motley Fool's new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Seth Robey has no position in any stocks 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers