Recent Drug Launches Support Strong Quarter for Lilly

Eli Lilly LLY posted strong fourth-quarter results ahead of our expectations, and we have raised our fair value estimate to $135 (from $121) based on an improving outlook. Lilly is moving into a period of strong growth following heavy research and development investments over the past five years. The influx of new drugs from Lilly helps support growth and reinforces the company’s wide moat.

The 9% operational sales growth in the quarter should continue over the next two years as generic competition fades and new products continue to gain traction. The last of the heavy near-term generic pressure with erectile dysfunction drug Cialis should taper off in early 2020. The declining generic pressure combined with new products reaching critical mass should drive operating margin expansion of over 300 basis points in 2020.

Looking at recently launched drugs, Lilly is leading in areas of diabetes, immunology, and oncology. In diabetes, Trulicity is maintaining its leadership position in the U.S. despite increasing competition from Novo. We expect label expansion with higher doses and favorable cardiovascular outcomes data will further strengthen Trulicity’s positioning. Immunology drug Taltz continues to post excellent growth and new indications in axial spa should drive additional growth. Oncology drug Verzenio continues to gain share in metastatic breast cancer and should post data in an earlier patient setting in 2021, similar timing as the market leader Pfizer, leveling the playing field for Lilly in this large indication.

In the pipeline, Lilly is making strides to backfill successful approvals. We remain most bullish on diabetes drug tirzepatide (targets GLP1/GIP), which has shown superior Phase II data versus Trulicity. The first Phase III data should report out in early 2020, and we expect approval by 2022. Importantly, Lilly launched a cardiovascular outcomes study of tirzepatide versus Trulicity, which is a strong comparator and shows confidence in tirzepatide.

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