Description
Eli Lilly and Company discovers, develops, manufactures, and sells pharmaceutical products for humans and animals. Eli Lilly products include neuroscience, endocrine, anti-infectives, cardiovascular agents, oncology, and animal health products1
Investment Rationale
Robust growth in core product categories (endocrinology and immunology) and favourable late-stage drug pipeline will ensure strong margin growth for LLY.
Reasons for Buying
Diabetic drugs remain the key driver for LLY. The diabetes drugs (Trulicity and Jardiance) of LLY continue to perform well despite an increasingly crowded market. It is able to defend its market share of ~45% in the GLP-12 market despite the Ozempic launch. LLY continues to see robust revenue growth for both Trulicity and Jardiance (more than 100% YoY growth for the past 8 quarters), indicating the significance of the GLP-1 usage growth. Although the recent cardiovascular (CV) treatment outcome for Trulicity Rewind was average amidst high expectations, (13% reduction in risk but was not statistically significant), we see the data confirming CV benefit and strong support for Trulicity uptake.
LLY’s diabetic drug Jardiance has also maintained its tremendous growth for the past 3 quarters. Revenue growth YoY has increased from 132% in Q2 2018 to 139% in Q1 2019. Although the Jardiance CV outcome (EMPA-REG) surprised to the downside, the strong uptake is driven by SGLT-23 category growth as well as re-inclusion of the product on the CVS formulary in 2019. We believe Trulicity and Jardiance (accounts for 20% of total revenue in Q1 2019) will be the key blockbuster drugs for LLY.
Beyond diabetes, LLY has also seen strong growth in its immunology drugs. Revenue for Taltz has increased by more than 150% YoY for the past 4 quarters. There is an acceleration in uptake for Taltz in psoriasis and psoriatic arthritis. We do not expect significant price erosion as lower negotiated prices are offset by less free products in patient access programs4.
Healthy late-stage pipelines will provide more opportunities for LLY. We are encouraged by various late-stage drug pipeline that have shown positive outcomes, especially for diabetes. The tirzepatide data showed a significant drop in patient discontinuations (0-3.6% discontinuation rate vs 24% previous). Although side-effects such as nausea (36-39%) and vomiting (18%) remains rather high, we believe the rates will be reduced as the drug progressed through phase 3.
RECOMMENDATION
We maintain our POSITIVE rating for LLY. We feel that the LLY has one of the best upside potential among US pharmaceuticals due to its strong volume uptake for blockbuster drugs. We also see meaningful late-stage drug pipeline results that may translate into revenue drivers for LLY after the U.S. Food and Drug Administration approval. Based on our analysis, we think valuations for LLY is reasonable compared to its peers, given its robust revenue growth and earnings power. LLY is currently trading at 22.4x earnings, which is lower than the historical average of 24.3x earnings. Based on our analysis, we think valuations for LLY is reasonable compared to its peers, given its robust revenue growth and earnings power. LLY is currently trading at 22.4x earnings, which is lower than the historical average of 24.3x earnings.
Support 1: 102.91 Resistance 1: 132.13
Support 2: 89.15
Based on the Elliott Wave Theory, LLY is currently in the 4th minor wave. The formation of the falling wedge since March 2019 gives us a clue that the stock may be heading towards a rebound. The bullish trend is confirmed by the stochastic oscillator, which shows a cross of the “K” and “D” lines at the oversold region.
The strong bearish candle this week may indicate a false breakdown. Prices may head towards the minor support at 106.28, after which there may be a strong rebound upwards.
The classic Elliott wave pattern, indicates that prices must not cross below 50% of the Fibonacci level (102.91) for the bullish trend to be sustained. Take note that if the threshold is broken, prices may head towards support 2 at 89.15.
CHART LEGENDS
———- 200 periods MA
———- 50 periods MA
———- 22 periods MA
Stochastic Oscillators
———- 14-period %K
———- 3-period D%
Overbought line = above 80
Oversold Line = below 20
[1] Source: Bloomberg
[2] GLP-1 is a new group of drugs to treat Type II diabetes
[3] SGLT-2 are a class of medications that are used to lower blood sugar in the treatment of type II diabetes.
[4] Uninsured individuals and those who need financial assistance may receive heavily subsidised or free medications from pharmaceuticals
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