Eli Lilly Provides Strong Outlook and Positive Updates

Eli Lilly LLY provided 2021 guidance and updated pipeline information that exceeded our expectations, and we are increasing our fair value estimate to $169 from $154 largely based on an improving pipeline. We increased our projections for cancer drug Loxo-305 and diabetes drug tirzepatide based on strong clinical data and Lilly’s solid commitment to developing the drugs in phase 3. Additionally, we increased our near-term projections for coronavirus treatments bamlanivimab and etesevimab, but these projections only supported a slight valuation increase as we don’t expect long-term demand for these drugs due to COVID-19 vaccine launches that will likely significantly reduce COVID-19 treatment demand. Overall, Eli Lilly continues to show significant innovation (in the quick development of COVID-19 treatments and steady development of longer-term assets like tirzepatide), which helps support the firm’s wide moat.

Eli Lilly highlighted several phase 3 study starts expected in 2021, backed up by strong early stage clinical data. The company expects to start four phase 3 studies with Loxo-305 in blood cancers MCL and CLL, including a head-to-head study versus the market leader Imbruvica. While the head to head is risky given the strong efficacy of Imbruvica, we still expect heavy utilization of Loxo-305 in the refractory patient population. Additionally, Lilly’s phase 3 starts of tirzepatide in obesity and preserved ejection fraction heart failure add to an already robust diabetes program. We expect these new drugs to add to a strong lineup of recently launched drugs and other pipeline assets that should not only drive steady revenue growth, but also support increased margin expansion. Lastly, in 2021, the firm should have midstage data readouts for donanemab and zagotenemab in early Alzheimer’s disease that could offer significant upside, as we model only minor sales for these drugs due to the high risk of failure in this therapeutic area.

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