Eli Lilly: Migraines and Diabetes

11/19/2018 5:00 am EST


David Toung

Senior Analyst: Medical Devices & Healthcare Services, Argus Research Corporation

Eli Lilly (LLY) manufactures drugs to treat pain, diabetes, and cancer. It also produces animal health products. We see new product launches, expanded indications for existing drugs, and potential regulatory approvals as catalysts for growth in 2018, suggests David Toung, Senior Analyst with Argus Research.

The company launched Emgality, for the prevention of migraine, in 3Q18. It is also driving growth through the recent launches of Olumiant (for rheumatoid arthritis), Verzenio (for the second-line treatment of breast cancer) and Taltz (for active psoriatic arthritis).

Although Lilly is seeing slower sales of mature products that face patent expiration and the loss of exclusivity, we expect it to generate EPS growth from margin expansion and the new products mentioned above. We note that management is targeting an operating margin of 30% by 2020, which would represent a 900-basis-point gain from 2016.

We note that Trulicity’s position in the diabetes market has been strengthened by results from the post-approval Rewind trial, which showed that the drug met the primary efficacy objective of significantly reducing major adverse cardiovascular events (MACE). Trulicity helps to control high blood sugar in people with type 2 diabetes.

The company’s new products also include Emgality, for the preventive treatment of migraine, which was approved and launched in the third quarter. Sales growth from the products mentioned above was partly offset by declining sales of former blockbusters Cialis, Strattera and Effient.

Lilly reported strong 3Q18 results on November 6, as adjusted EPS rose 32% to $1.39 and topped the consensus estimate by $0.04. The results led management to raise its full-year revenue and EPS guidance.

Based on the company’s updated guidance and strong 3Q18 performance, we are raising our adjusted EPS estimates to $5.57 from $5.45 for 2018 and to $5.85 from $5.75 for 2019.  The company pays an annualized dividend of $2.25 per share, for a yield of about 2.1%.

LLY shares trade at 18.8-times our 2019 EPS estimate, above the average multiple of 13.1 for our coverage universe of pharmaceutical stocks. We believe that this premium is warranted based on the company’s growth assets, including recently approved products, which are showing robust prescription growth.

We also expect the approval of new indications for existing drugs to drive further growth in prescriptions. We are reaffirming our buy rating and raising our target price from $115 to $135.

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