Has Eli Lilly & Co. (NYSE: LLY) Turned the Corner?

For the year, the stock price of Eli Lilly & Co. (NYSE: LLY) is up about 32 percent, strongly outpacing both the Dow and the DRG, a market-capitalization index representing a cross section of widely held, high capitalized pharmaceutical industry companies.

What’s odd is that this healthy gain in share price occurred during what company CEO John C. Lechleiter called the toughest year in the Indianapolis-based drug maker’s 138-year history. Lilly’s year might have been filled with problems, but they did nothing to dull interest in the company’sshares.

The biggest challenge Lilly faced in 2014 was declining revenues due to generic competition. Several of Lilly’s top-selling drugs have been pounded by patent expirations, including the antidepressant Cymbalta. The impact of losing patent protection for many of the company’s leading drugs was clearly reflected in Lilly’s third-quarter results.

Net income fell 58 percent to $500.6 million, or 47 cents per share. Excluding one-time items Lilly said its profit totaled 66 cents per share. Revenue declined 16 percent to $4.88 billion.

The company cut its 2014 revenue expectations, saying the patent expirations for Cymbalta and its osteoporosis drug Evista have led to a sharp decline in sales. The company said its business is also being hurt by the stronger U.S. dollar and competition in the U.S. animal health market.

It is now forecasting $19.4 billion to $19.8 billion in annual revenue, down from its previous estimate of $19.4 billion to $20 billion. Lilly said it still expects to report a profit of $2.72 to $2.80 per share in 2014 excluding one-time items.

Based on the steep gains in the company’s share price, investors must think Lilly has turned the corner and that more prosperous days lie ahead. Among the most optimistic investors is the company itself. During the third quarter, Lilly repurchased shares worth $300 million under its $5 billion share repurchase program. Since authorizing the program in October of 2013, the company has repurchased $1 billion worth of its shares. Combined with its dividend in the last year, Lilly has distributed $3 billion to shareholders.

Is the company turning the corner? Maybe. Despite weak financial results, investors can take heart in the fact that during the third-quarter three new Lilly drugs got marketing OK from the FDA and several others being tested posted positive data. If the company can successfully launch its new drugs and keep its pipeline full of promising candidates, better days may lie ahead.

Perhaps the run-up in Lilly shares this year is due to takeover speculation. After all, the company’s market capitalization of $72 billion pales next to Big Pharma brethren Merck & Co., Inc. (NYSE:MRK), which is valued at $170 billion, and Pfizer Inc. (NYSE: PFE), which comes in at $191 billion.

Despite the fact that Lilly might be the most digestible of the big drug makers, a takeover is highly unlikely. The primary reason is an Indiana law known as the Indiana Control Shares Acquisition Statute (aka the Control Shares Act), which substantially complicates hostile takeovers of Indiana-based corporations. The law puts the interests of the state, which wants to keep big businesses based within its borders, above those of shareholders. Since 1988, no hostile transactions have occurred in Indiana.