Brian Lawler, my Dueling Fool counterpart, pointed out a number of valid concerns that are likely to drive Eli Lilly's
No doubt, Lilly has some risks. There are generic rivals such as Teva Pharmaceutical
My contention is that Lilly is one of the more stable pharmaceutical giants, and I take its slightly higher valuation as proof that the market is less worried about its current drug portfolio or pipeline prospects. Plus, on a forward basis, Lilly's valuation is more in line with its peers. At 18 times earnings fiscal 2007, Lilly's earnings multiple is below that of Merck, with J&J and Pfizer less of a stretch at 15.5 times and 13.4 times, respectively, as compared to Brian's trailing cash flow figures.
The best approach may be to establish a position in a number of pharma firms, because, in all fairness, it is extremely difficult to predict which drugs will fall to generic competition or be hit with efficacy concerns and increased FDA, consumer, and doctor scrutiny. In fact, one might be tempted to place them in the "too hard" pile as investments that are just too difficult to figure out.
As it turns out, Berkshire Hathaway, which epitomizes the "too hard" philosophy of eliminating investment candidates, has been increasingly venturing into the space, with positions in J&J and Sanofi-Aventis
As with any industry, finding the most compelling opportunity is key. I'm still looking for further proof that Lilly's valuation premium to its peers is fully warranted, but if current trends are any indication, its growth prognosis could lead the industry and qualify as another of my health-care holdings.
Fool contributor Ryan Fuhrmann is long shares of Pfizer and J&J 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.