Like biotechnology, successfully investing in pharmaceuticals often requires investors to look ahead and make decisions based on what will happen instead of what has happened. Lilly
Revenue growth for the fourth quarter was rather modest at 5%, and sales of the company's top product, Zyprexa, were down. Sales in the diabetes business, the company's second-largest segment, were also down to the tune of 5%. Yet the stock was trading higher in early trading and carries a robust valuation. What's going on here?
What's going on is that Wall Street didn't expect much in the way of growth for the fourth quarter, and the company's near-term pipeline is very strong.
In particular, the company has three major new products that should hit the market in the next 18-24 months. Exenatide, being co-marketed with AmylinPharmaceuticals
While it's clear that Lilly has a world-class pipeline, it's equally clear that Lilly absolutely needs these drugs to come through for it. While Zyprexa sales were down, they still represented almost 30% of total revenue. Not only does that represent an enormous reliance on a single product, but also ongoing patent litigation raises the specter that Lilly could lose it.
Lilly's valuation suggests that Wall Street has faith that those new drugs will come through. Despite modest growth and industry-average margins, Lilly trades at a premium to its battered pharmaceutical brethren. While Lilly's pipeline is strong and the company does not face the same litigation risk as peers like Pfizer
Fool contributor Stephen Simpson holds a CFA. He owns shares of Amylin Pharmaceuticals.