What the Market Misses About Eli Lilly

Damien Conover: Looking at the drug industry, there are certain therapeutic areas that are particularly important. Immunology is an area that covers rheumatoid arthritis, psoriasis, Crohn's. The drugs that sell into this space are close to $60 billion annually. And there is an old class of drugs--these are the TNF class. These are drugs like Humira, Remicade. They work reasonably well, but the challenge here is they are going to be losing patent exclusivity and biosimilars. They won't destroy those drugs as quickly as small molecule drugs, but nevertheless cause these drugs to fade off.

But what the investment community doesn't fully appreciate in our view is the next class of drugs. These are classes like IL-17, this is also JAK inhibitors. And these drugs are better than TNFs on efficacy, side effect, and dosing. We really anticipate this next wave of drugs to really supplant the TNF in time.

When we think about which companies are really well positioned for these shifting trends, Eli Lilly is one that comes to the top of our list. We think it's undervalued, and part of it is an underappreciation for its immunology franchise. Most notably, it doesn't have a current TNF, so it doesn't have to worry about those sales coming off, and it does have an IL-17, and it does have a JAK inhibitor. Now, both of these drugs are very well positioned to take market share and really drive Eli Lilly's earnings growth. We think the investment community hasn't fully thought through the potential of this next generation of drugs that should bode very, very well for Eli Lilly.