Time for Lilly to Go Shopping

There’s no question that Eli Lilly (LLY) is a cheap stock based on its earnings. The problem, however, isn’t past earnings but future earnings. The company is running out of new drugs and they need to get on the stick very soon.

Lilly has repeatedly said that they have a lot of products in development. But everyone, including me, expects them to open their wallet to make an acquisition.

The bad news is that Lilly just got slammed by Byetta (though not as badly as Amylin was hurt). The good news is that this may further spur them to make an acquisition. The talk now is that Lilly will buy either Cephalon (CEPH) or Endo Pharmaceuticals (ENDP).

By 2013, Lilly loses patents on medicines responsible for almost half its revenue. The Bydureon rejection, which stalled a new revenue source for at least two years, was compounded Oct. 20 when the company halted tests on a second experimental diabetes medicine because it wasn’t effective. Lilly Chief Executive Officer John Lechleiter yesterday ruled out “large- scale combinations” while expressing interest in smaller deals.

“An outright acquisition of Amylin certainly could make sense” if Lilly thinks Bydureon will be approved, Fernandez said in a telephone interview from Boston. Amylin, based in San Diego, lost half its market value on Oct. 20 after the Food and Drug Administration requested a study of Bydureon’s effect on heart rhythm.

Eli Lilly currently has over $5 billion cash on hand — and it ain’t earning much interest in the bank.

“Our fundamental strategy remains intact,” Lechleiter (that’s LLY’s CEO – Eddy) said during a conference call yesterday. “We’re not interested in large-scale combinations (yeah, right). I think there are many other opportunities that I think we could consider along the lines of several that we have done this year.”

Lechleiter’s plan to stick to small purchases or licensing deals won’t give investors much confidence, said Barbara Ryan, an analyst with Deutsche Bank in New York, in a telephone interview.

“A lot of those companies will just be adding to the pipeline and they’re not going to be something that the market will accrue much value to on Lilly,” Ryan said.

United Therapeutics Corp. may also be a good fit because Lilly has an 11 percent stake and the two companies are partnered on Adcirca, a lung treatment made from the ingredient in Lilly’s impotence pill Cialis, according to Fernandez. Forest Laboratories Inc. (no, gag!) would be another option to complement Lilly’s research in antidepressants and arthritis medicines, he said.

Posted by on October 22nd, 2010 at 10:53 am


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