There are no safe havens in the stock market. Every stock carries risk. But some less than others. This column features stocks that have shown one or more of the following characteristics: less volatility, better earnings, larger market caps, safe and increasing dividends. In these times of turmoil, our goal is to show readers better opportunities for investing with fewer risks.

October 26, 2009 - Lilly (Eli) and Co. (LLY-NYSE) develops, manufactures, and sells pharmaceutical products worldwide. It offers neuroscience products to treat schizophrenia, manic episodes, and bipolar maintenance; depression and diabetic peripheral neuropathic pain; attention-deficit hyperactivity disorder in children, adolescents, and adults; depression, bulimia nervosa, and obsessive-compulsive disorders; and bipolar depression.

In addition, the company offers animal health products, such as cattle feed additives; antibiotics used to treat respiratory diseases and other diseases in cattle, swine, and poultry; protein supplements to improve milk productivity in dairy cows; anticoccidial agents for use in poultry; antibiotics used to control enteric infections in calves and swine; parasiticides for use on cattle and premises; and products that prevent flea infestations on dogs, as well as other pharmaceutical products to treat staphylococcal infections and bacterial infections.

Eli Lilly distributes principally through independent wholesale distributors, as well as directly to pharmacies. It has a strategic alliance with MacroGenics, Inc.; and licensing and development agreements with TransPharma Medical Ltd. and BioMS Medical Corp. The company was founded in 1876 and is based in Indianapolis, Indiana.

Because several of Lilly's best selling drugs will lose patent protection between 2012 and 2014, drugs like Zyprexa and Cymbalta. Zyprexa treats schizophrenia, and Cymbalta is an antidepressant. Once patent protection goes away, generic drugs quickly take market share. So investors know that revenues will go down in a few years.

Unless new drugs are discovered to take their place. Currently, Lilly has 66 new chemical entities in clinical development. Analysts believe 15 to 20 of these will reach the market as first-in-class medicines over the next 5 to 10 years. Management has already announced there will be 2 new launches per year of high-value medicines by 2013. Backing up that statement is the fact that LLY has so much cash ($3.5 billion) it can buy other companies developing new drugs if its own R&D department doesn't produce.

Recent approval of Effient, a treatment for acute coronary syndrome, should create $200 million of new sales in 2010 with a target of $600 million by 2012-2014. Additionally, LLY bought Imclone last year for Erbitux, a cancer drug. LLY has applied to the FDA for approval to treat head and neck cancer with Erbitux which may be approved by the end of this year. If it passes, this one treatment should add $1 billion in revenues in 2010.

Earnings keep growing at LLY. Every year since 2002, they've improved on the $2.50 of that year, going to $2.58, $2.82, $2.88, $3.18, $3.54, and $4.02 last year. This year, consensus from 19 analysts is for $4.29, then $4.65 next year. Quarterly earnings were just announced on October 21. They were better than expected, $1.20 when certain one time charges were excluded vs. analysts' expectations of $1.02. In the fourth quarter, look for 97 cents a share, down from $1.07 last year in the fourth.

More numbers: Forward P/E is 7.64. Price to sales is 1.91. Price to book is 4.62. Book value is $7.45. Operating margin for the last 12 months was 30.37%. Profit margin was hurt by the Imclone purchase and was negative 7.82%. Return on Equity was negative 13.93%. Cash per share is $3.04. Total debt is $7.72 billion. Current ratio is 1.57. There are 1.15 billion shares outstanding with a float of 1.01 billion. Institutions own 78.20%. The dividend is $1.96 for a yield of 5.7%.

Lilly would make a good addition to almost any portfolio looking for a drug stock but especially conservative investors. It has an above average yield which is well covered by earnings. Also, the dividend has been raised every year for more than 10 years in a row. The company can buy new drugs if its internal pipeline falters. However, there is the overhanging spectre of patent expiration which could drive many investors to sell until there is proof of FDA approval for new drugs with blockbuster potential. Like Erbitux. If approved, look for the stock to move to higher ground.

Company Website: www.lilly.com  

Ted Allrich