Eli Lilly Posts Solid 3Q as Drugs Drive Top-Line Growth
Eli Lilly (LLY) reported third-quarter results slightly ahead of both our and consensus expectations, but we don’t expect any major changes to our fair value estimate based on the minor outperformance. We continue to view the stock as modestly undervalued. Armed with one of the strongest lineups of new drugs, Lilly’s past research and development efforts have created a diverse portfolio of drugs, reinforcing its wide moat.
Lilly’s decision to review strategic options for its animal health division Elanco will likely lead to a divestiture announced by the middle of 2018, but we don’t expect the loss of the division to impact Lilly’s moat. While Lilly needed to lean on the division during the heavy patent loss years of 2011-14, the company’s drug group is on much more solid footing now and synergies between animal and human health seem limited. Also, following the success of the Zoetis split off from Pfizer, we expect a similar pathway for Elanco.
In the quarter, total sales increased 9% (7% volume and 2% price), driven by growth from recently launched drugs, but we expect growth will moderate with increasing generic and branded competition in 2018. While Trulicity posted 117% year-over-year growth and now represents Lilly’s third largest drug, we expect growth will slow significantly in 2018 following the competitive launch of Novo’s semaglutide. Also, generic competition on erectile dysfunction drug Cialis, Lilly’s second largest drug, will create a drag in 2018. Adding to headwinds, Sanofi recently gained FDA approval of a biosimilar version of Lilly’s largest drug Humalog, and we don’t expect litigation to delay Sanofi. Despite these challenges, continued strong growth from immunology drug Taltz, diabetes drug Jardiance, and several other new drugs should help drive overall growth, and we expect Lilly to exceed its long-term annual sales growth guidance of 5% through 2020. Lilly’s aggressive cost-cutting actions should improve margins over the next three years.
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