Key Analyst Sees Solid Upside in Eli Lilly

Argus has a Buy rating for Eli Lilly with an increased price target of $92, up from $80. The independent research firm believes that the earnings and revenue deltas have started to improve for the company, which is beginning to move beyond its patent cliff period of 2012 to 2014. Argus expects Eli Lilly to resume an earnings growth path this year and attract investors who have been scared off by the loss of patent protection for blockbuster anti-depressant and schizophrenia drugs, among others.

However, in preparation for these losses, Eli Lilly has been developing new drugs, and it currently boasts a clinical pipeline that includes three recent product launches and several product candidates in Phase 3 trials. The company’s focus is on treatments for diabetes and cancer.

Overall, Argus remains positive about the company’s long-term outlook, and it views the nonfundamental sell-offs as buying opportunities. Not to mention, Eli Lilly has another investment attraction with a solid and sustainable 2.4% dividend yield.

Recently the company presented new data on Trulicity for type 2 diabetes. The data showed that Trulicity was more effective than Sanofi’s Lantus in reducing and controlling blood sugar.

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Also Eli Lilly announced the results of two Phase 3 trials for its investigative drug ixekizumab, which is being developed for the treatment of moderate to severe plaque psoriasis. The Phase 3 trials showed that ixekizumab performed significantly better than Enbrel and a placebo after 12 weeks of treatment under two different dosing regimens. Approximately 90% of patients treated with ixekizumab achieved at least a 75% reduction in plaque psoriasis, and about 40% achieved complete skin clearance.

Argus maintained its 2015 earnings per share (EPS) estimate of $3.15, at the midpoint of management’s guidance range and up 13% from $2.78 in 2014. The firm also maintained its 2016 EPS estimate of $3.65, which assumes another year of double-digit growth, driven by sales of new products.

Considering that the company has moved beyond its patent cliff period, Argus expects earnings to grow at a 7% rate over the next five years.

In the report Argus outlined some of the risks associated with Eli Lilly:

Investors in the Eli Lilly shares face numerous risks. Drug development is inherently risky: products in the pipeline may not progress for technical or commercial reasons, and pipeline disappointments are likely to impact the share price.

In addition to organic growth, Lilly also grows via acquisition, including two recent animal health deals. Management has expressed interest in acquiring other assets, though its potential targets are likely to be more bolt-on than transformative in nature. There are risks that any significant acquisition may be dilutive and that anticipated synergies may not be realized.

Patent expirations for Lilly’s top products represent a significant challenge for management — and a risk for investors.

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Shares of Eli Lilly were relatively flat at $83.53 late Thursday morning. The stock has a consensus analyst price target of $79.71 and a 52-week trading range of $59.65 to $87.24.

The stock has shown strong momentum in recent weeks. It has gained 13.5% in the past quarter, compared to a 0.5% increase in the S&P 500. Over the past year, the shares have appreciated 39.5%, while the broader market has risen 7%.