Eli Lilly Is Well Positioned for Long Term Despite Weak Quarter

Eli Lilly (LLY) reported weak second-quarter results slightly below our projections, but we do not expect any major changes to our fair value estimate based on the minor shortfall. Importantly, older drugs drove most of the weakness, while most of the key recently launched drugs continue to post steady gains. These next-generation drugs are the most important factor supporting Lilly’s wide moat. While these newer drugs are posting strong gains, we continue to view the stock as moderately overvalued, with the market expecting near-perfect launches and excellent late-stage development (especially from phase 3 Alzheimer’s drug donanemab).

In the quarter, sales fell 1% operationally, largely due to increased generic competition for cancer drug Alimta, partially offset by new drug growth. We expect this trend to continue throughout the year, followed by a strong acceleration of growth in 2023 and 2024 with the annualization of the Alimta patent loss and several new drug launches.

Lilly’s new drugs are posting strong gains. While not the newest one, diabetes treatment Trulicity represents the firm’s biggest drug by far; it is continuing to post solid gains (up 25%) and should not face generic competition for at least five years. Even though Trulicity’s growth will probably slow as the market saturates, Lilly’s next-generation cardiometabolic drug Mounjaro (approved for diabetes treatment in the quarter) looks superior to Trulicity and should significantly extend this core platform. Also, Verzenio’s recent approval in adjuvant breast cancer is helping to propel another new drug (up 72%).

In the pipeline, all eyes are on Alzheimer’s drug donanemab. The drug was filed with the Food and Drug Administration in the quarter, but the phase 3 confirmatory data (expected in 2023) is critical for its commercial success. While Alzheimer’s disease drug development is notoriously difficult, early-stage data for the drug looks encouraging, and we project peak annual sales of over $5 billion.