LLY Chart

What: Shares of big pharmaceutical giant Eli Lilly (NYSE:LLY) trounced its peers and vaulted higher by 10% in May, based on data from S&P Capital IQ, after the company announced an exciting new collaboration and prepared investors for a potentially significant catalyst coming up in just one week.

So what: Looking back on Eli Lilly's moves during the month of May, you'll find that the striking upward momentum didn't occur until the final two trading days of the month.

Last Thursday, Eli Lilly announced that it and development partner Incyte (NASDAQ:INCY) would be presenting data from two of its late-stage studies involving baricitinib as a treatment for rheumatoid arthritis on June 11. Specifically, the two will be discussing data from the RA-BEACON and RA-BUILD studies at the EULAR Congress in Italy.

As a quick refresher, Incyte and Lilly announced positive top-line results from the RA-BEACON study in December, noting that it met its primary endpoint of improved ARC20 response relative to the placebo. Estimates on peak sales potential of this oral JAK1/JAK2 inhibitor range wildly, from the low $1 billion's to as high as $3 billion.

The other major catalyst, announced last Friday, was that Eli Lilly was partnering with AstraZeneca (NYSE:AZN) to test its anti-PD-L1 checkpoint inhibitor in solid tumors. The press release notes that AstraZeneca's MEDI4736 will be tested in combination with Lilly's VEGF receptor 2 antiangiogenic drug Cyramza in patients with advanced solid tumors. Although no financial terms or solid tumor targets were discussed, the simple fact that Lilly has an opportunity to take advantage of the checkpoint inhibitor craze is great news. 

Source: AstraZeneca.

Now what: Amazingly enough, Friday's closing price marked a 13-year high for Eli Lilly, which seems mind-boggling considering just how much of its portfolio has been in flux due to patent exclusivity losses. If there is good news to be had here, it's that Eli Lilly is finally past the bulk of its patent woes and, through hefty cost-cutting, can actually get back to reasonable EPS growth.

But, there's another side to this story too. Lilly's sales have fallen off by close to 20% over the last three fiscal years, to $19.6 billion from $24.3 billion. Lilly has been repurchasing shares and paying an above-average dividend in the meantime, but its outlook through 2018 only calls for revenue growth to average about 3% per year. That's not much considering that Lilly is boasting a forward P/E of 22. Even giving the company the benefit of the doubt, it's still trading at a lofty 18 times its 2018 EPS estimates with a growth rate of roughly 3% per year.

Put plainly, Eli Lilly seems as if it's already fully valued, or perhaps even valued higher than it should be considering its growth prospects. If Eli Lilly can turn its collaborations into something special this could be worth taking a closer look at, but from a fundamental perspective I would suggest keeping your distance from Eli Lilly.