Lilly Deserves a Gilding
November 08, 2006

Shares of drugmaker Eli Lilly (LLY - commentary - Cramer's Take) have largely sat out this year's big pharma rally. The Amex Pharmaceutical Index (DRG) has advanced about 9%, led by double-digit gains in Merck (MRK - commentary - Cramer's Take) and Pfizer (PFE - commentary - Cramer's Take). In fact, Lilly is the only one of the major pharma players to have a negative year-to-date return.

But the performance of the entire group has downshifted over the past month during the broader market rally and as caution develops toward the general industry ahead of this week's midterm elections. I expect short-term election concerns to fade quickly, but believe the best gains from sector rotation are largely behind the group.

Eli Lilly shares have been held back by earnings concerns generated by weakness in its large Zyprexa franchise and a few recent pipeline setbacks. Investors also have been underwhelmed by the recently announced $2.1 billion acquisition of its Cialis marketing partner, Icos. As a result, I believe Lilly has the best opportunity among the major pharma players to improve investor sentiment over the next few months.

In third-quarter results, the company showed an improvement in its key Zyprexa franchise with 5% growth overall and a 3% gain in the U.S. Many critics continued to downplay these gains, which were largely driven by price increases. In my opinion, this represents a healthy turnaround from the negative trends in recent quarters, as pricing is a viable driver for many large and mature pharmaceutical franchises.

In addition, Lilly appears to have another strong driver, antidepressant Cymbalta, back on track. The line is showing 91% growth and $349 million in quarterly sales. This product line is benefiting from a less competitive antidepressant environment, with generics cutting into Pfizer's Zoloft and Wyeth's Effexor XR franchises. Lilly was also successful in driving growth through its own direct-to-consumer ad campaign last quarter.