Eli Lilly's (NYSE:LLY) shares have grown by more than 20% in the last 12 months -- but will this stock continue to exceed expectations in 2013? What do investors need to watch before they decide on their next move with this big pharma stock?
In order to help you answer this question, our senior biotech analyst has composed a brand-new premium research report that explains Eli Lilly's market opportunity, risks, and reasons to both buy and sell today. The following excerpt from the report takes an in-depth look at just one area investors must pay attention to.
Eli Lilly's CEO John Lechleiter has made it very clear that he sees no need for a large acquisition, which seems prudent given that the return on major acquisitions in the pharma space hasn't exactly been stellar.
But Eli Lilly is sitting on $6.9 billion in cash and short-term investments. That nest egg -- let's call it a war chest -- could fund quite a few smaller acquisitions and licensing deals. The cash certainly isn't doing investors any good sitting in the bank earning paltry interest at the rates currently available.
For acquisitions, I'd like to see Eli Lilly buy companies with drugs already on the market. Companies with one drug are run very inefficiently because fixed costs have to be spread over revenue from a single source. Investors are ultimately interested in profits, not revenue, so they discount the valuation of one-hit-wonders more than a pharma company might, because it can cut costs and turn a (larger) profit. That disparity leads to pharmas being able to make acquisitions at a substantial premium to what investors were willing to pay.
Eli Lilly has a decent pipeline, but there's always room for a few more. I've never seen a drug company with too many drugs in their pipeline. The earlier the clinical stage, the more a licensing deal makes sense over an acquisition. The earlier-stage compounds are clearly more risky, but licensing deals allow Eli Lilly to keep the bulk of the risk with the biotech licensing the drug by structuring the deal so payments are tied to development, regulatory, and sales milestones. If the drug fails, Eli Lilly isn't on the hook for the payment and, if it does work, the company shouldn't be all that upset about forking over the cash.
Brian Orelli 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.