SGTX - Eli Lilly: Patients Get Skinnier Profits Get Fatter

2023-07-10 04:49:51 ET

Summary

• Eli Lilly has seen a massive ramp-up in its diabetes, or better said weight loss, drug Mounjaro.
• Investors continue to price in further advancements on this front; the question is how much is priced in.
• I see the reason to get upbeat amidst impressive research results for the drug on weight loss, yet I am not willing to get involved here just yet.

Shares of Eli Lilly ( LLY ) continue to show massive momentum and have been a huge outperformer versus a rather stagnating pharmaceutical sector at large. With shares trading at $450 here, they have tripled from pre-pandemic levels, pushing up the market value far in excess of $400 billion.

In fact, I last covered LLY stock last summer as I believed that strong share price momentum was outrunning the operating performance. This was driven by expectations of new approvals, but I feared that the market was turning a bit too upbeat on the shares at the time.

Creating Some Perspective

Eli Lilly was a $22 billion business early in 2020, posting EBITDA numbers of $7-$8 billion in the meantime. The company operated with an $11 billion net debt load, mostly due to an $8 billion deal for Loxo, as leverage was still quite modest.

Additions to the pipeline were needed with loss of exclusivity on the horizon for second-best selling drug Alimta. Ahead of the pandemic, the company guided for sales to advance to $24 billion with earnings seen up to $7 per share, translating into a 20 times multiple with shares trading at $140 per share. That being said, I was not perfectly happy to accept all adjustments between GAAP and non-GAAP earnings.

In the end, the company grew 2020 sales by 10% to $24.5 billion as earnings rose to $7.93 per share, with both metrics beating the original guidance outlined for the year, driven by a $871 million revenue contribution from Bamlanivimab, Lilly's Covid-19 drug.

The company guided for 2021 sales to rise to $26.5-$28.0 billion. Sales in the end rose as much as 15% to $28.3 billion, including a $2.2 billion revenue contribution from Covid-19 related drugs. Earnings only rose in a much more modest fashion to $8.16 per share.

The company originally guided for flattish results in 2022, but hiked the full year sales guidance to $28.8-$29.3 billion. Earnings guidance was cut by thirty-five cents to $8.15 per share due to higher IP and development charges. With shares having more than doubled to $330 since the start of the pandemic, the earnings multiple has essentially doubled to 40 times earnings, a huge valuation multiple by all means.

This multiple expansion took place as investors had high hopes from two potential major drug candidates. Eli Lilly's diabetes and obesity drug Mounjaro (Tirzepatide) and Alzheimer candidate Donanemab could fetch about $10 billion in sales, according to analysts. Mounjaro was approved by the FDA in May as the off-label use for weight loss indication has perhaps a bigger potential than diabetes. Progress on Donanemab would at least take a year, as approvals in this area are very hard to find (and even that is a massive understatement).

Even if $10 billion in sales would be added to the topline, I was cautious on the back of valuations, as I saw no reason to get involved.

On Fire

Since last summer, shares of Eli Lilly have risen from $330 to $450 per share, marking another whopping 35% share price return in about a year. During the summer of last year, the company posted a 4% fall in second quarter sales to $6.49 billion, with Mounjaro contributing $16 million in its debut sales. The softer results meant that the company lowered the adjusted earnings guidance for the year.

Third quarter sales rose 2% to $6.94 billion with Mounjaro contributing $187 million in quarterly sales. The drug was rapidly on track to become a blockbuster as sales trended at three quarters of a billion.

In February, the company posted a 9% fall in fourth quarter sales. Adjusted for the impact of the retreat of the pandemic related drugs, sales were up 5%, and if we adjust for the strong dollar, organic growth in constant currencies was up 10%. Mounjaro sales for the quarter came in at $279 million, showing consistent growth, already making up 4% of quarterly sales just over half a year after the approval and subsequent launch.

Full year sales rose a percent to $28.5 billion, as the year still included a $2.0 billion Covid-19 antibodies revenue contribution, as full year adjusted earnings came in at $7.94 per share, actually up from 2021. For 2023, the company guided for adjusted earnings at a midpoint of $8.45 per share with revenues seen between $30.3 and $30.8 billion.

First quarter sales for 2023 fell 11% to $6.96 billion amidst nearly $1.5 billion in Covid-19 antibody revenues in the first quarter of 2022 falling to zero. Mounjaro has seen a very strong contribution with sales reported at $568 million, trending above $2 billion a year within the year of the FDA approval and subsequent launch. Despite this great momentum, it was the reversal of the pandemic related revenues, which made that earnings fell a dollar to $1.62 per share (on adjusted basis). Amidst the strong dynamics, the company hiked the full year earnings guidance to a midpoint of $8.75 per share.

On top of the strong operating momentum in the first quarter, the company furthermore cut a deal to sell the rights to the olanzapine portfolio in a $1.05 billion deal, while selling the rights to Baqsimi in a $500 million deal. Amidst a pretty stable net debt load of around $12 billion, debt is no concern, certainly not after improved operating momentum and these announced deals. In fact, part of these funds were used to finance a bolt-on but interestingly structured deal for Sigilon Therapeutics ( SGTX ) in June.

Carried Away Momentum

With 903 million shares trading at $450, Eli Lilly commands an equity valuation just in excess of $400 billion. With earnings power still trading just over $8 per share, the company now trades at a premium of 50 times earnings multiple. Investors are anticipating continued growth in Mounjaro, perhaps even accelerating growth.

Mounjaro was originally a diabetes drug but has turned out to be the holy grail with regard to weight-loss. If that happens, even with current list prices of $12k, it means it could become the best-selling drug of all time, certainly if weight-loss indication will be added.

If this really could become tens of billions, or perhaps a hundred billion dollar drug, the outlook still looks very favorable, but that assumes that everything goes well. Societal backlash on associated profits and competition will likely want to take a bite into these earnings, although I must say that I am impressed with the sales run-up, as well as research results on weight losses, as much as 58 pounds on average!

Hence, I continue to watch the story with great amazement, and while I am happy to work with earnings numbers as high as $15-$20 per share a couple of years down the road, I am not yet willing to price in hyper scale earnings growth. Hence, I am very anxious to learn more on the continued ramp-up in sales of Mounjaro, or awaiting a significant pullback before potentially reconsidering my neutral stance.

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