Lilly Posts Solid Q2 Led by Top Drug Trulicity

Eli Lilly LLY reported second-quarter results largely in line with our expectations, and we don’t expect any major changes to our fair value estimate. Lilly is operating exceptionally well and warrants an industry-leading valuation multiple, but we are moderately concerned that the current valuation is a bit stretched even when considering the strength of the current portfolio and very strong late-stage pipeline, two key elements supporting the firm’s wide moat. In the quarter, total sales increased 20% operationally, but COVID-19 stocking trends/antibodies and business development drove almost half of the growth. Nevertheless, the strong underlying growth in the quarter should continue based on further traction with several key drugs. Diabetes drug Trulicity (up 25%, representing over 20% of sales) looks poised for further gains based on a leading efficacy and safety profile and a still relatively underpenetrated diabetes market. Immunology drug Taltz had a surprisingly strong quarter (up 44%, representing almost 10% of sales), but we expect growth to moderate as the psoriasis class becomes increasingly competitive. Lilly’s current portfolio looks well positioned to grow through the upcoming patent loss on cancer drug Alimta (almost 10% of sales) starting later in the year. Longer term, Lilly is developing a best-in-class pipeline. Diabetes drug tirzepatide and Alzheimer’s drug donanemab should both gain approval in 2022 and reach peak sales of close to $5 billion and $10 billion, respectively. While drug development in Alzheimer’s is very risky given the lower level of disease understanding, Food and Drug Administration approval of Biogen’s Aduhelm significantly derisks donanemab, which we believe looks just as good and potentially better than Aduhelm based on early-stage data (particularly in the biomarker of plaque clearance). An important confirmatory donanemab study should complete in 2023, but we don’t expect the FDA will wait for this data to approve the drug.

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