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Point/Counterpoint: The Case for Eli Lilly

Stock MarketsOct 31, 2020 09:29AM ET
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By Christiana Sciaudone and Geoffrey Smith -- Eli Lilly disappointed investors with its third-quarter earnings report on Tuesday but despite that it may be worth it for long-term investors to consider buying shares of the drugmaker, particularly at current levels.'s Christiana Sciaudone argues the bull case for Eli Lilly, while Geoffrey Smith explains why there are better value stocks to buy now. This is Point/Counterpoint.

The Bull Case

Don't let this week's earnings dissuade you from buying Eli Lilly (NYSE:LLY). 

Guidance did take a hit for 2020. It was lowered to be in the range of $6.20 to $6.40 on a reported basis from $6.48 to $6.68. And, yes, third quarter earnings did miss estimates, with earnings per share of $1.54 comparing to the estimated $1.71 on sales of $5.74 billion, versus the expected $5.87 billion.

But as JPMorgan points out, most of the factors contributing to that disappointment are one-offs, like operating expenses that increased 9%, driven by higher marketing and research and development investments, including $125 million to develop potential Covid-19 therapies.

“Our favorable view on LLY’s fundamental business remains largely unchanged and we continue to see the company as one of the best positioned names in our coverage,” JPMorgan (NYSE:JPM) analysts led by Chris Schott wrote in a note after earnings were published. “We highlight healthy volume momentum across the base portfolio (as seen with strong volume growth of 7% in 3Q), a range of next-generation pipeline assets (tirzepatide, mirikizumab, Loxo-305, several Alzheimer’s call options) as well as a significant margin expansion story (we continue to anticipate high 30s% range over time).”

The stock is trading at about 16.9 times JPMorgan’s 2021 estimated EPS, with shares flat for the year at the time the report was published, which is a “great entry point ahead of several significant catalysts over the next few quarters," the firm said.

Note, too, that results were actually not bad: Revenue in the third quarter increased 5% driven by volume growth of 9%, while on a year-to-date basis revenue rose 6% driven by volume growth of 12%.

JPMorgan raised its estimates for the fourth quarter, and maintained its overweight rating on Eli Lilly.

Analysts in general are pretty solid on the stock, which has seven buys, two holds and not a sell in sight. 

And then you have the U.S. government giving Eli Lilly a helping hand. 

This week, the company announced that the U.S. government will pay Eli Lilly $375 million to supply 300,000 doses of its experimental antibody drug to treat the coronavirus. The deal is for delivery over the two months following an emergency use authorization from the Food and Drug Administration. The U.S. government also has the option to purchase 650,000 more doses through June 30.

"The U.S. is experiencing a surge in COVID-19 cases and associated hospitalizations, and we believe bamlanivimab could be an important therapeutic option that can bring value to the overall healthcare system, as it has shown a potential benefit in clinical outcomes with a reduction in viral load and rates of symptoms and hospitalizations," said Chief Executive Officer David A. Ricks in a statement.

If an emergency authorization is granted, the U.S. said patients will have no out-of-pocket costs. It is developing an allocation program for bamlanivimab. As part of the program, Lilly is partnering with Operation Warp Speed and a national distributor to finalize distribution plans and shipping preparations.

Lilly anticipates manufacturing up to one million doses of bamlanivimab 700 mg by the end of the year – with 100,000 doses ready to ship within days of authorization. The supply of Lilly's antibody therapy is expected to increase substantially beginning in the first quarter of 2021 as it adds manufacturing resources.    

There is more brewing: The company entered into an agreement with the Bill & Melinda Gates Foundation, as part of the Covid-19 Therapeutics Accelerator, to facilitate access to future Lilly therapeutic antibodies under development for the potential prevention and treatment of Covid-19 to benefit low- and middle-income countries.

And then there's Lilly's baricitinib combined with President Donald Trump's favorite, remdesivir. Lilly and Incyte (NASDAQ:INCY) Corporation presented data showing together the drugs reduced time to recovery and improved clinical outcomes for patients with Covid-19 infection compared with remdesivir. 

All signs point to a YES on LLY.

The Bear Case

The bear case for Eli Lilly is a variant on the old adage of not trying to catch a falling knife. It may not be the next Luckin Coffee (OTC:LKNCY) or Wirecard, but there is no glossing over the fact that bamlanivimab is not the drug that will make the difference between dying of Covid-19 and not dying of it.

A look at the share price tells you how much this matters. From a high of over $169 in July, the stock has fallen 23% and now trades at a seven-month low.

True, the U.S. government has dished out a $375 million consolation prize which more than covers development spend, but Lilly had built up hopes that it could treat advanced cases of the coronavirus, and trial evidence suggests that it only has an effect on milder cases. In other words, not the kind of drug that health systems will break the bank for to get their hands on.

Nor should this week’s earnings miss be glossed over. Marketing and R&D are not ‘one-off’ mishaps, they are part and parcel of the pharma business, and Lilly will face comparable challenges in every future quarter. The cost overruns warrant skepticism.

The near-term outlook is not the brightest either. In a conference call after this week’s earnings release, management guided for a decline of up 10% in average prices for its suite of other drugs in 2021. High unemployment, a healthcare system still focused on getting the pandemic under control, and – in all likelihood – a Democratic administration looking to squeeze drug prices harder to narrow the record deficit it will inherit will all generate headwinds next year.

It’s true that, if Covid-19 can be tackled by throwing billions of dollars to some other company whose drug has more tangibly positive effects, the rest of Lilly’s business, especially its new drug for type 2 diabetes should be able to enjoy the benefits of a positive secular outlook. But if that happy scenario materializes, then there is better value to be found elsewhere, rather than in a stock that still trades at over 21 times trailing earnings.

There are worse things to do with your money than buy Lilly, but there are plenty better too.

Point/Counterpoint: The Case for Eli Lilly

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Comments (2)
Scott Jones
Scott Jones Nov 01, 2020 12:55PM ET
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SRNE is a major player. Deep covid pipeline.
roger ramos
roger ramos Oct 31, 2020 11:18AM ET
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from a humanitarian standpoint, we should all take our money out of companies like this for charging so much on insulin prices. these are companies i refuse to invest in
Gent Shkodrani
Gent Shkodrani Oct 31, 2020 11:18AM ET
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Lol roger u dont exactly invest in them because u care anyways... u invest in them cose you probably see it worth the gamble...
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