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Will Eli Lilly Outperform in 2020?

By Amar Khatri - Jan 30, 2020 at 7:30AM

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Recent progress in its drug pipeline and a focus on dealmaking offer strong value for shareholders.

Eli Lilly and Company (LLY 4.39%) offers an attractive opportunity for shareholders in 2020. The more than 140-year-old drug company has a few compelling metrics that demonstrate significant value for investors, including a strong return on equity (ROE), a modest dividend payout ratio, and continued profitability when compared with peers including GlaxoSmithKline (GSK 2.20%) and Pfizer (PFE 3.59%).

Management at Eli Lilly is looking to expand its dealmaking activity through 2020 to create new growth opportunities and long-term value for shareholders. The company is facing some favorable catalysts in the near term from its Phase 3 clinical trials, as well as potential regulatory actions that should offset some near-term patent expirations and boost potential revenue streams.

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Armed with cash and ready to deal

CFO John Smiley remarked at the recent J.P. Morgan Healthcare Conference that the company intends to focus on dealmaking in 2020, aiming to announce roughly one agreement every quarter. This includes licensing agreements, acquisitions, and other structures.

Eli Lilly already made headlines earlier this year with its acquisition of Dermira, a biopharma working on therapies for chronic skin conditions. The acquisition expands the company's portfolio of Phase 3 clinical trial drugs, as well as one already-approved medicated cloth to treat excessive armpit sweat. All of this should mean long-term value, new revenue streams, and backup for its drugs that are nearing patent expiration.

Progress in the portfolio

One of Eli Lilly's drugs, Trijardy XR, was approved by the FDA this week, and top-line results were announced from a Phase 3 clinical trial for another. Trijardy XR combines three type 2 diabetes medications into one pill that, combined with diet and exercise, lowers blood-sugar levels in adults. This combination of different diabetes medications marks an important advancement in the treatment of the disease.

On the clinical-trial front, Eli Lilly and Incyte (INCY 0.73%) announced promising top-line results from a Phase 3 clinical trial in patients with the common, chronic inflammatory skin disease called moderate to severe atopic dermatitis (AD), better known as eczema. Next, the company plans to apply for expanded approval for a drug that currently treats rheumatoid arthritis to be used for eczema as well. This treatment is currently approved in the European Union, and Eli Lilly expects to submit applications in the United States and Japan this year.

Strong shareholder value

Eli Lilly's forward price-to-earnings (P/E) ratio, a measure of share price relative to per-share earnings, is 20.5. Compared with peers including Pfizer (13.15) and GlaxoSmithKline (15), Eli Lilly looks poised for higher earnings in the future. A higher forward P/E implies that the market thinks the company is likely to see growth.

For example, Eli Lilly anticipates revenue this year to be between $23.6 billion and $24.1 billion, driven by volume growth in key products including Tulicity, Jardiance, and many others. In the prior year, Eli Lilly's financial guidance called for revenue of $22 billion to $22.5 billion. This shows that management is clearly optimistic that they will meet or exceed their 7% revenue compound annual growth rate (CAGR) target. (CAGR is a useful metric for investors who want to see the average annual growth rate of their returns over a period of time.)

Investors will want to note that 7% revenue CAGR target and keep an eye on management's strategies for getting there, including high-volume growth in their key products, promising results in their development pipeline, and a focus on acquiring new assets every quarter. Success on all these fronts will allow Eli Lilly to achieve the forward P/E ratio expected by the market -- and provide shareholder value.

The dividend yield is also worth watching. Currently, Eli Lilly's forward annual dividend yield is 2.13%, with the trailing dividend yield at 1.80%. That increase of 0.33% shows some optimism is already priced in. The dividend payout ratio, which measures the sustainability of a company's dividend stream, is 55.1% -- against peers such as Pfizer (49.7%) and GSK (87.1%), this implies that the dividend may have room to grow. With dividend payments dating back to 1973, this company may be appealing to investors who want to receive dividends in good times and bad.

Eli Lilly also offers strong shareholder value in the form of its return on equity (ROE), which reached 49.3% over the trailing 12 months -- higher than GlaxoSmithKline's 46.4% and Pfizer's 23.7%. ROE is a compelling metric because it reveals whether management is capable of making more profit with less capital. By this metric, Eli Lilly is clearly doing a better job than its peers at creating profits while effectively managing investments. 

A profitable diagnosis for 2020

Eli Lilly offers an attractive investment for healthcare investors seeking long-term value. Management's focus on acquiring companies and broadening the portfolio has paid off, and the market expects a great year ahead for Eli Lilly. 

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Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
$298.85 (4.39%) $12.58
Pfizer Inc. Stock Quote
Pfizer Inc.
$52.47 (3.59%) $1.82
GlaxoSmithKline plc Stock Quote
GlaxoSmithKline plc
$44.52 (2.20%) $0.96
Incyte Corporation Stock Quote
Incyte Corporation
$74.88 (0.73%) $0.54

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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