Well, I guess we bought into the bear thesis a little too much this quarter.
The day before Eli Lilly’s Q2 earnings report last Thursday, the stock was just a few percentage points shy of blowing past our initial price target a whole quarter early.
And this recent 8% drop is more the market being skittish around Lilly’s current portfolio than the potential surrounding their future growth.
Right now, LLY is getting punished by the market for not having as robust a pipeline as possible to replace a large portion of it’s products getting priced out by the generic market, along with reduced revenue now that their half-priced insulin has been on the market for a full year—as well as surprisingly-low demand for COVID-19 treatments this quarter.
The sell-off here is more a bunch of very small stumbles adding up to more noise-than-signal.
Lilly has made all the right moves as the rest of the pharmaceutical industry is being selectively flushed with capital from investors seeking more defensive plays outside of tech and media.
Not only is LLY on track to get its blockbuster diabetes drug Mounjaro approved for weight loss treatments after a successful approval for type-2 diabetes (with a growing cohort of physicians using coupons to prescribe Mounjaro off-label as a weight loss treatment) but the firm is also in the exact right place in its research cycle to replace all it’s blockbuster medication.
With a bunch of big approvals set for the next two quarters — we’re confident to ride with Lilly as they gear up to completely revolutionize how we take care of diabetes, obesity and other metabolic dysfunctions.
We only see one small storm cloud brewing with Lilly’s approvals pipeline—but Lilly’s exposure to negative outcomes is negligible compared to the size of their overall portfolio and the amount of exposure Lilly’s competitors have. But we’ll need a second to explain that bit.
There’s a lot more to discuss, so let’s just get into it below👇
Eli Lilly Overview:
Eli Lilly has been around since the late 1800's. Their current slate of products is currently focused on cancer and diabetes, and the team has managed to provide solid revenue growth with those and COVID-19 antibody treatments.
Of course, they’ve been flying recently on the approval of their type II diabetes drug Mounjaro. Feel free to read why this drug is becoming such a blockbuster here.
Eli’s earnings call last week gave us really strong initial sales numbers for Mounjaro, but the line we’re looking for is the off-label purchases of the drug, which we only have anecdotal reports on right now. Those reports are encouraging, but without better data we can’t really gauge the usefulness of that data. Regardless, this is an excessively strong forward-looking indicator to see so many physicians pile on to this new class of medicine.
Furthermore, LLY is wrapping up stage III of trials to get Mounjaro fully approved for obesity treatment. Shortly after that, stage III trials of utilizing Mounjaro for sleep apnea should also finish. This is a common strategy for pharma companies—building as many regulatory pipelines to get their drug prescribed as possible.
But one thing that’s driving an even more overweight sentiment is a new drug in its very early stages of development. It's so new it doesn’t have a brand name yet -- LLY developed a drug that hits the same dual-pathway as Mounjaro, but with more effectiveness.
This is really important because even though Mounjaro’s mechanism of action beats out competitors like Novo Nordisk, the receptors these drugs target can be managed a lot of different ways — which means there will be a LOT of competition in this space.
Long-term returns in pharma depend not just on you making breakthroughs, but on ensuring that you have the next breakthrough loaded up and ready to take over once your patent runs out and generics flood the space.
Mounjaro wasn’t really the highlight from Eli Lilly’s earnings today. The market is focusing on what’s currently not there.
Which is revenue growth.
Why Eli Lilly is Down this Quarter:
Pharma is a churn-heavy business. No matter how big a new drug is—you only have a few years in which your patent is valid before generics can come in and undercut your margins.
This is the biggest source of revenue declines for Eli Lilly—as brands like Cialis and one of their cancer drugs get pushed back due to generic pressure and deals where these drugs lose exclusivity in certain markets. By itself, this shouldn’t have brought LLY down and with Mounjaro and other big-deal drugs coming out in the next 18 months, is not a lasting headwind.
Meanwhile, while the decrease was minimal—there was a surprising reduction in revenue from COVID 19 antibody treatments. The market anticipated a reduction in revenue here, but this came a little faster than anticipated. As we move into later Q3 and Q4, those numbers should push back up as we enter into another peak in COVID cases.
Long story short, the market would have preferred to see higher revenue from newer drugs and a less-sharp reduction in revenue from Lilly’s core products. But this mismatch is more cyclical in nature and therefore more of a short-term headwind than an indication Lilly is getting muscled out here. Indeed, there’s only one small blot on this earnings call that we feel like we should point out:
There is a Storm Brewing in Alzheimer’s Research:
Okay, this hasn’t hit the mainstream press as much we figured it should have — but (and man oh man are we ever shaving a LOT of details off of this story here) 15 years ago, a pair of scientists put out research that—on paper—pretty conclusively proved that a very specific protein causes plaques in the brain that eventually cause Alzheimer's.
These findings were kind of a holy grail because if your disease has a single protein causing part of the problem, then it’s simple enough to design a drug that treats that single protein.
So a huge segment of the scientific community (and pharmaceutical industry) got to work developing treatments for this single protein.
Fast-forward 15 years and there have been a LOT of drugs that have gotten approved that kind of treat this protein but have fuzzy results treating the actual symptoms of Alzheimer’s.
The next class of drugs treating this are in trials now — and Eli Lilly was developing a drug in really early stage trials that seemed really promising.
But now there is mounting evidence that the initial research fabricated a critically important piece of data — a piece of data that’s really hard to replicate and therefore wasn’t reproduced.
These are just allegations right now — but the fact that major Alzheimer’s treatment producers Biogen and Roche are addressing it and trying to temper investor expectations is really alarming. If these allegations turn out to have any veracity, it means an immense amount of development —whole careers in biochemistry — has been wasted treating a biomarker correlated with Alzheimer’s instead of finding and fixing the underlying cause of Alzheimer’s.
So like, why are we mentioning this in a report that’s ostensibly painting Eli Lilly in a positive light?
Because Eli Lilly has a drug that just received an accelerated approval pipeline that was developed to help treat this bogus protein.
Which sounds bad.
Until we look at the actual trial data. Doctors conducting this research didn’t measure the efficacy of LLY’s new drug based on how well they cleaned up this protein—the primary variable being tested was how well patient’s cognition improved. I.E.—how well the drug actually treated Alzheimer’s. A secondary set of tests looked to see how well Eli Lilly’s new drug cleaned this new protein and the results were inconclusive.
TLDR: Sure, this drug was designed to clean up a protein that potentially doesn’t FULLY cause Alzheimer’s, but it ended up alleviating symptoms anyway. Which is something that isn’t THAT uncommon in chemistry.
Meanwhile, major competitors to LLY—Biogen and Roche—are in a really difficult position because a lot of their current portfolio is getting eaten into by generics, with a lot of their projected revenue growth tied up in the success of drugs that were doing a SPECTACULAR job of treating this Alzheimer's protein.
Only time will tell here, but this news will put sell pressure on these companies and potentially paint LLY in a comparatively positive light.
Please note that our other major pharma pick—Merck—bailed on their drug that treated this Alzheimer’s protein a few years back, so they're safe from the fallout from this if it gathers any steam.
Eli Lilly Outlook:
Eli Lilly’s core portfolio experienced moderately better-than-expected growth during this call too.
The next big thing we’re looking for is an FDA response to Lilly’s request to have Mounjaro fast-track-approved for weight loss.
Meanwhile, Lilly has also managed to dodge a huge blow hitting a sizable chunk of the pharma industry right now.
That’s half the game in pharma—it’s about developing as much as possible so that your current portfolio of drugs is better than anyone else’s portfolio.
Lilly has been brilliantly managed, and that brilliance is being compounded by a strong dose of luck.
Price Target: $388 (28% upside)
Current Price: $303
Target Date: Q3 2023
Rating: Overweight
Risk / Reward: Medium / Medium
Ticker: LLY
Market Cap: $274B
Dividend Yield: 1.36%