Eli Lilly: Hope for Recovery?

The elixir that the pharmaceutical companies have so far failed to come up with: One to cure ailing stock prices. Darlings of the 1980s and 1990s, these stocks have been sick puppies since the market's peak in early 2000.

Indianapolis-based Eli Lilly (LLY) certainly hasn't found the remedy. But it boasts more new and highly profitable medicines than its competitors, as well as one of the industry's most formidable drug pipelines, says Zacks Investment Research. "New products should drive above industry average growth over the next few years," Zacks analyst Jason Napodano says in a note to clients. "We think investors should establish positions in the shares before what we believe will be a very positive 2006."

The company has introduced several new drugs, all with big potential, in the past couple of years. They include Byetta for diabetes; Cialis, the long-lasting drug for erectile dysfunction; antidepressant Cymbalta; and Strattera for attention-deficit disorder.

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The company's strategy is clear: It tries to attract the industry's best scientists, and it spends roughly 20% of sales annually on research and development. That's more than most competitors spend.

Napodano is particularly enthusiastic about Cymbalta, which shows promise against treatment-resistant depression and anxiety. He thinks the drug will be "a major driver of growth over the next several years." Another mental health medication, antipsychotic Zyprexa, which accounted for 30% of sales last year, has been experiencing increasing competition from newer drugs. Napodano expects sales to continue to decline, but at a much slower rate than last year.

As new Lilly drugs experience higher sales, Napodano estimates that earnings will increase more than 10% a year over the next four years. That's after years of mostly single-digit earnings growth. Analysts surveyed by Zacks expect the company to earn $3.15 per share this year and $3.41 next year. That gives the stock, recently $59, a price-earnings ratio of 19 on this year's earnings estimate. It yields an above-average 2.7%.

--Steven Goldberg