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Stock Analyst Update

Strong Results for Undervalued Eli Lilly

The wide-moat firm was buoyed by new drugs and expense controls, but we're not changing our fair value estimate.

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 Eli Lilly (LLY) posted strong first-quarter results, ahead of both our expectations and those of consensus, but we don’t expect a major shift in our fair value estimate based on the minor outperformance. We continue to see Lilly as undervalued, with the investment community not fully appreciating the company’s new product launches and the projected long-term margin improvements. Also, the company’s strong recent drug launches continue to support our wide moat rating for the firm.

On the top line, total sales increased operationally by 5%, driven by several new drug launches, which should continue to drive sales over the next three years despite upcoming patent losses on older drugs. With products launched since 2014 now representing over a fourth of total sales and growing close to 80% year over year, the company is in good position to grow the top line despite patent losses of erectile dysfunction drug Cialis, neuroscience drug Strattera and cardiovascular drug Effient over the next two years. We remain bullish on recently launched immunology drug Taltz, and despite inventory destocking in the quarter leading to lower sales than we projected, we continue to expect the drug to develop into a major blockbuster based on superior efficacy and a better side effect profile versus older TNF drugs. Additionally, GLP-1 drug Trulicity continues to post strong growth (up 82%) and while we expect growth will slow significantly over the next two years as competitor Novo Nordisk launches a slightly better drug (Ozempic), we don’t expect Trulicity will lose much market share to well-controlled diabetes patients already on Trulicity. We expect Novo to largely target new patient starts with Ozempic based on the large potential of the GLP-1 class. Lastly, while we expect immunology drug Olumiant to develop into a blockbuster, the recent U.S. Food and Drug Administration panel’s concerns over cardiovascular side effects leads to a slight decrease in our projections for the drug.

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Damien Conover does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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