Why we like Eli Lilly today

The undervalued pharmaceutical giant is cutting costs and has a strong pipeline, says Damien Conover.

Damien Conover, CFA 11 October, 2017 | 5:00PM
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Damien Conover: In the current environment within healthcare, a lot of stocks have appreciated in value. We've seen less concern about the pricing of drugs and with that less concern, a lot of stock prices increasing. As we look at the big pharmaceutical industry, there's only a couple of names now that we are really recommending for investors.

One of those names is Eli Lilly. Eli Lilly has a very strong pipeline of next-generation molecules that we think will do very, very well. We'd highlight some of the new drugs in immunology. Taltz is a new drug for psoriasis. Looks like it has major blockbuster potential based on better efficacy and better safety. We anticipate this drug to really drive Eli Lilly's earnings over the next several years. Also, a drug called Baricitinib looks very well positioned in rheumatoid arthritis. Again, very strong in efficacy, good side effects.

In the backdrop of a lot of new drugs launching, Eli Lilly is also cutting costs. Not only are we expecting very steady improvement in the top-line, but we anticipate strong growth in the bottom-line as well. One thing we've noticed over the years in covering healthcare stocks, and particularly big pharmaceutical stocks is, a lot of times the investment community can get the top-line right, but a lot of times misses the bottom-line. And as Eli Lilly cuts costs and launches these new molecules, it's important to note that these new molecules have very strong margins. The net result is growth in the top-line but an amplified growth in the bottom-line.

In the current setting, where stock prices are starting to get a little bit more elevated, Eli Lilly is a name we really like for its growth in earnings as well as a very strong dividend yield that we think is very steady and will also support the stock price over the next few years.

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Damien Conover, CFA

Damien Conover, CFA  Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.

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