Slumbering giant Lilly to cut more jobs, take a $1.2-billion hit to bolster R&D pipeline.

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The News:

Eli Lilly & Co. (Indianapolis IN) last week said it would lay off about 8% of its employees as the drugmaker, which has suffered setbacks over the past year in the development of two potential blockbuster drugs, works to cut costs.

Lilly will cut about 3,500 positions around the world, resulting in yearly savings of about $500 million, beginning in 2018. The company expects most of the cuts to come from a voluntary early-retirement program it is offering in the US. It is also closing a plant in Iowa and research and development offices in New Jersey and China.

Lilly’s operating margins have lagged those of the company’s rivals, according to Morningstar analyst Damien Conover.

“Lilly’s R&D as a percentage of sales has trended a bit high over the last couple of years,” Conover said. “Part of this is to try to get its operating margins more in alignment with the overall group.” Lilly expects charges of about $1.2 billion before tax, or $0.80 per share after tax.

In July, Lilly outlined a likely multi-year delay for its experimental rheumatoid arthritis drug baricitinib, after the US Food and Drug Administration declined to approve it, calling for an additional clinical study, according to Reuters. That delay followed the failure of a trial in November of Lilly’s experimental Alzheimer’s treatment solanezumab, which the company had hoped would be the first medicine approved to slow progression of the disease.

The company said it has the potential to launch two new medicines by the end of 2018–a breast-cancer drug and a treatment for migraines. The FDA is currently reviewing abemaciclib to treat advanced breast cancer. Lilly shares closed the week up 4% at $82.92.

Steve’s Take:

In recent years, Lilly has cut thousands of jobs as some of its biggest drugs have gone off patent. Last year, it eliminated 500 positions following the failure of an experimental Alzheimer’s disease drug. It has also trimmed its sales force as some of its biggest drugs have lost patent protection.

The company says that half of the $500 million in savings would be plowed into R&D. The remainder will help Lilly keep its promise to investors to lower operating expenses to 50% of revenue or less by next year, says newly minted CEO, Dave Ricks.

Yes, Lilly overall has been having a pretty tough go of it in recent years. The days of two FDA approvals a year, as forecast in 2010 by their prior CEO, John Lechleiter, have never quite materialized, notes Derek Lowe at Seeking Alpha.

The company still has a chance for an Alzheimer’s breakthrough, especially with great news back in July. Scientists led by Dr. Michel Goedert, from Cambridge University, used an advanced type of electron microscope to zoom in on samples taken from the brain of a 74-year-old woman with confirmed Alzheimer’s.

Writing in the journal Nature, the scientists provided a detailed description of distinct helical and straight strands of the protein in the neurons.

Dr. James Pickett, head of research at the Alzheimer’s Society, said: “Tau protein, one of the hallmarks of Alzheimer’s disease, has never been seen in this level of detail before. Many drugs work like a key in a lock, and this discovery shows us the inner workings of the tau protein ‘lock.’ This study could take us into a new era of drug design.”

Meanwhile, Lilly’s stock jumped 4% on its latest restructuring announcement since layoffs are a direct refresher to the bottom line. And getting rid of longtime employees who might know where a few skeletons are hidden is a good thing from the investor’s point of view.

So, let’s look at what a couple of institutional investors have done recently to modify their holdings of LLY.

Colossus fund BlackRock Inc. lifted its holdings in Eli Lilly by an eye-watering 2,628.5% in the 1st quarter. BlackRock now owns 62,260,488 shares of the company’s stock worth $5,236,731,000, according to Ledger Gazette.

And Winslow Capital Management LLC lifted its holdings in shares of Lilly by 79.7% in the 1st quarter. Winslow now owns 3,875,968 shares of the company’s stock worth $326,008,000.

Such move are reflect some pretty aggressive buying strategies that signal conviction Lilly detractors are out to lunch.

What does the analyst crowd think? They’re a lot more optimistic than I expected.

As of Sept. 8, 2017, the consensus forecast among 25 polled analysts covering Eli Lilly advises that the company will Outperform the market, according to the Financial Times. This has been the consensus forecast since the sentiment improved on April 8, 2014. The previous consensus forecast advised investors to Hold their position in Lilly.

Recommendations 1yr ago Latest
Buy 10 6
Outperform 8 9
Hold 6 8
Underperform 0 1
Sell 0 0

Share price forecast

The 21 analysts offering 12-month price targets for Eli Lilly have a median target of $91.00, with a high estimate of $105.00 and a low estimate of $71.00. The median estimate represents a 10.40% increase from the last price of $82.43 at close Wednesday, Sept. 13.

But wait, there’s good news today.

Back in 2015, Germany’s Boehringer Ingelheim and Eli Lilly were the first drugmakers to show that a diabetes med could cut the risk of cardiovascular death, and they’ve been working ever since to capitalize on that advantage.

Tuesday at the European Association for the Study of Diabetes (EASD) annual meeting, the companies published a subanalysis (part of a larger one) of the game-changing Empa-reg Outcome study showing that the death-risk reduction held true for patients regardless of what their blood sugar was when they enrolled in the study, FiercePharma reports.

A separate subanalysis showed that the benefit stayed consistent with that of the overall trial population in patients who were already taking metformin or sulfonylurea, two drugs that have traditionally been used as first-line therapies.

Boehringer and Lilly have been analyzing the data ever since Jardiance showed it could reduce the combined rate of heart attack, stroke and cardiovascular death among high-risk type 2 diabetes patients–and most significantly for shareholders, that it could cut the risk of cardiovascular death by a whopping 38%. They’ve also commenced trials of the treatment in both heart failure and kidney disease.

Bottom Line:

Lilly has a big-time market cap of $90.47 billion and a soothing beta of 0.3232. And analysts say the upside in 12-month share price is just under 12%. That comes after a modest 4.74% lift in the last year. Not too shabby.

Steve's Take: What’s wrong with @Lillypad? Actually, nothing. I recommend buying it. Click To Tweet

With this latest round of restructuring maneuvers and good news for Jardiance, the answer to the naysayers’ question: What’s wrong with Lilly? Actually, nothing. The reward profile clearly outweighs the risk for this name (and there’s always plenty where drug pipelines are concerned). For the more defensive portfolio, I recommend buying it.

Steve Walker has no position in any stocks mentioned. MedContent Inc. has no position in any stocks mentioned. MondayMorning.com has a disclosure policy.