Some could look at Eli Lilly and Company's (NYSE: LLY) stock gain of 15% in 2017 and think it was disappointing. After all, the S&P 500 index jumped 19% last year. Some of Lilly's peers performed even better than that. Others might be happy with Lilly's 2017 return, noting that it was much better than the stock's loss in 2016 of 13%.
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Probably the best perspective is the one that only looks ahead. It asks, "Is Lilly a buy in 2018?" The answer to that question, though, is somewhat complicated.
Let's first look at the reasons to consider buying Lilly. The big pharma company has quite a few positives going for it. Put Trulicity at the top of that list. Lilly launched the type 2 diabetes drug in late 2014. Trulicity is on pace to approach $2 billion in sales for 2017.
The product with the fastest-growing sales for Lilly is Taltz. Lilly won FDA approval for the drug in treating plaque psoriasis in March 2016 and in treating psoriatic arthritis in December 2017. Sales skyrocketed for Taltz in 2017 and should easily top $500 million when Lilly reports its full-year results.
While Trulicity and Taltz are Lilly's top growth drivers, the company has several other drugs with solid growth. Sales for diabetes drugs Forteo and Trajenta increased by 15% and 23%, respectively, in the first three quarters of 2017 compared with the prior-year period. Cancer drug Cyramza saw sales jump nearly 27% year over year during the same period.
Then there's what Lilly CEO Dave Ricks referred to at the recent J.P. Morgan Healthcare Conference as the company's "next chapter of growth." Ricks was talking about Lilly's experimental pain drugs. The farthest along is galcanezumab, which could win FDA approval for treating migraine later this year. Next up is another migraine drug -- lasmiditan. Lilly expects to submit the drug for FDA approval in the second half of this year. Phase 3 results for a third candidate targeting treatment of migraine, tanezumab, should be announced by Lilly and partner Pfizer (NYSE: PFE) later in 2018 as well.
One business segment that didn't generate sales growth for Lilly in 2017 could still become a positive for the company. Lilly is considering selling or spinning off its animal health unit, Elanco. Pfizer's move to spin off its animal health business into a separate entity a few years ago was an overwhelming success. Lilly shareholders could benefit from a similar move in 2018.
And we can't leave out Lilly's dividend. The yield currently stands at 2.59%. Lilly has steadily increased the dividend over the past few years, although the hikes have been modest.
It's easy to identify Lilly's positives, but it's also no challenge to spot the company's negatives. Sales for the company's top-selling product, Humalog, were up in 2017, but only by a single-digit percentage. The bigger problem is that Humalog has already lost patent exclusivity. Lilly anticipates some loss of market share in the future to generic rivals.
Sales are already declining for Lilly's No. 2 product, Cialis, which lost compound patent protection in the U.S. and in Europe. That's also the case for the company's third best-selling product, cancer drug Alimta.
The problems extend to several other drugs in Lilly's lineup. Chemotherapy drug Erbitux is losing market share. So is Lilly's anticoagulant Effient. And sales are slipping for all three of the company's leading neuroscience drugs: Cymbalta, Strattera, and Zyprexa.
As if all of that isn't enough, one of the Lilly's biggest winners could have a tough fight on its hands in 2018. Novo Nordisk (NYSE: NVO) won FDA approval in December for Ozempic (semaglutide). Market research firm EvaluatePharma ranked Ozempic as the No. 2 top new drug of 2018. Late-stage clinical study results showed that Novo's drug reduced blood sugar more than Trulicity and helped patients lose more weight than Lilly's blockbuster.
Do Lilly's positives outweigh the negatives, making the stock a buy in 2018? Or is the opposite true? My view is that Lilly will grow revenue and earnings over the next few years despite its challenges. I think the stock will also climb somewhat.
However, I think the biggest drawback to buying Lilly stock is that there are too many other better choices. Yes, Lilly could perform better in the future than it has in the past. But there are plenty of other stocks that should perform much better. That's what happened in 2017. I expect a similar story this year.
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