Pharmaceutical giant Ely Lilly (NYSE:LLY) spends close to 20% of sales on researching and developing new drugs. This is among the highest percentages in the industry, and a primary reason for Lilly's strong pipeline. But does the current stock valuation already reflect the company's appealing prospects?

On Tuesday morning, Lilly reported first-quarter results that demonstrate robust total sales growth. The firm racked up a 14% gain for the quarter as sales of its largest drug, Zyprexa for schizophrenia and bipolar disorders, grew a respectable 10%. Lilly now expects full-year top-line growth in the low double digits -- up slightly from what it projected earlier.

Earnings results are harder to discern because Lilly acquired biotech firm ICOS last year. As a result, it will be taking asset impairment and other restructuring charges throughout the year. Excluding the charges, earnings for the first quarter grew 9%, and according to management should grow up to 7% for 2007.

Based on current projections, Lilly is trading at about 17 times earnings. Fellow Fool Brian Lawler recently pointed out that Lilly was one of the more expensive pharmaceutical firms based on trailing earnings multiples. Let's check the numbers for this fiscal year.  

Forward P/E

Dividend Yield

Pfizer

12

4.4%

GlaxoSmithKline

15

3.9%

Sanofi-Aventis

13

2.6%

Merck

19

3.4%

Lilly

17

3%
Source: Capital IQ, a division of Standard and Poor's.

Looks like Lilly is again more richly valued, and it also has one of the industry's the lowest dividend yields -- a still-respectable 3%. Pfizer (NYSE:PFE) has been the arguable value play in the space, while Merck (NYSE:MRK) has experienced a nice run thanks to improved potential in its pipeline.

European firms such as GlaxoSmithKline (NYSE:GSK), Sanofi-Aventis (NYSE:SNY), and even Novartis (NYSE:NVS) have looked appealing because of a nice combination of solid sales, bright new drug prospects, and moderate valuations.

Lilly remains stuck in the middle. It's definitely a solid investment option, what with its outlook and current sales stability. But with uncertainty comes opportunity; shareholders in Merck have nearly doubled their money since Vioxx litigation and other concerns torpedoed the stock a couple of years ago. A number of us, including analyst Philip Durell at Inside Value, are betting on a similar recovery at Pfizer. It also looks like firms with prospects similar to Lilly's can be had at more reasonable valuations.             

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Eli Lilly and GlaxoSmithKline are Income Investor recommendations, while Pfizer is an Inside Value selection. Try any of our Foolish newsletters free for 30 days.

Fool contributor Ryan Fuhrmann is long shares of Pfizer but has no financial interest in any other company mentioned. The Fool has an ironclad disclosure policy. Feel free to email him with feedback or to discuss any companies mentioned further.