Shares bogged down, as pipeline and guidance disappoint.
Restructuring is unlikely to turn sentiment, so a lot is riding on mid-’07 Prasurgel data.
The risks to the recovery story have increased, with more modest upside expected for the stock.
Position: No position.
A lot has transpired in the Eli Lilly (LLY - commentary - Cramer's Take) recovery story since my bullish article on Nov. 7. The company has come under attack from The New York Times for its Zyprexa safety data, lost an important oncology pipeline opportunity, raised its bid for Icos (ICOS - commentary - Cramer's Take) and tempered '07 guidance. Management has disputed the claims by The Times and taken additional restructuring action to right-size its current cost base, but the outlook has undoubtedly deteriorated over the past few weeks.
I still believe Lilly has a good chance to improve market sentiment through better core business performance and pipeline successes. The technical damage to the stock is likely to take a while to repair, as recent pipeline setbacks continue to overhang investor sentiment. I expect LLY shares to outperform the Big Pharma group, but I envision more modest upside to the $58 level for the stock.
Negative News Flow
The overwhelming Democratic victory in November was the beginning of recent troubles for Big Pharma. This news, coupled with a sector rotation that had largely run its course, supported my targeted call within the group on an out-of-favor stock like Lilly. Since then, the company has not helped itself with generally negative corporate and pipeline developments.
At the company's highly anticipated analyst meeting, management talked down '06 sales-growth expectations to the low end of its prior range of 7% to 9% and cut '07 EPS forecasts on higher-than-expected dilution from the Icos deal. This reduced earnings forecasts for next year by about 10 cents a share to a range of $3.25 to $3.35 a share. The company maintained a constructive high-single-digit to low-double-digit top-line growth outlook for '07 and expects the Icos deal to be accretive by '08. The caution expressed for '06 is likely to keep investors concerned over the health of the core business in the short term, though.
At the time of publication, Latwis had no positions in the stocks mentioned, although positions may change at any time.
Michael Latwis has directed health care content at TheStreet.com Professional Products. He also has worked at Barclays Wealth management division and was previously associated with Lazard Freres and Fiduciary Trust. Latwis covered companies in the pharmaceutical and specialty pharmaceutical sectors as well as biotech, medical technology, healthcare services, retail and media stocks. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Latwis appreciates your feedback; click here to send him an email.
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