Lilly Looks Slightly Undervalued

In tandem with

We continue to view the stock as undervalued, and we view a stock pull back on the baricitinib delay as an opportunity. The company remains on solid footing with its wide moat, supported by a robust pipeline and diverse patent protected portfolio.

Lilly signaled a slight imbalance of thromboembolic events in baricitinib studies, causing the FDA to request additional data, but we expect the drug to reach the U.S. market based on strong efficacy and low side effects. The thromboembolic events for baricitinib were 0.46 per 100 years, which appear reasonable as the typical range for the patient group is 0.3-0.8. We are surprised by the FDA request given the drug’s safe profile and prior European and Japanese approvals. We expect additional clinical data and real-world use outside the U.S. will lead to eventual U.S. approval by 2019.

Turning to the quarter, buoyed by robust sales from diabetes drugs Trulicity and Jardiance as well as immunology drug Taltz, Lilly drove solid top-line (up 8%) and bottom-line (up 29%) growth, a trend we expect will continue over the next five years but at a decelerating rate. With operating expenses largely stable, top-line growth should continue to have an amplified impact on the bottom line. While Lilly remains well positioned, we expect upcoming head-to-head data from Novo’s semaglutide versus Lilly’s Trulicity will point to slightly better efficacy on blood sugar and weight levels for semaglutide with some risk of retinopathy, likely leading to Trulicity’s deceleration. Additionally, animal health sales declines in the quarter were surprising, but we project the division’s return to growth given the strong competitive dynamics of the industry.

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