Eli Lilly & Co. (NYSE: LLY). We expect continued top-line growth at Lilly, driven by recently launched and pipeline products. The past six months have been an active period for new drug approvals and label expansions. The company is also active in M&A and in-licensing. To combat COVID-19, it is developing neutralizing antibodies to treat the disease, and has received emergency use authorization for bamlanivimab as a treatment for mild to moderate COVID-19. Additional antibody drugs are on the way. In oncology, we think that the expansion of the global collaboration with Innovent could bring the PD-1 agent Tyvyt to the U.S. as a first-line treatment for non-small-cell lung cancer.
Lilly has increased R&D spending on treatments for COVID-19. While this may slow earnings growth in the near term, these therapies could contribute to future revenue growth given the size of the COVID-related market.
The company intends to seek emergency authorization for this combination by the end of November.
The results were mixed as Lilly sold higher volumes of certain products through lower-margin channels, such as Medicaid. R&D and operating expenses also rose faster than revenue due to higher spending on potential COVID-19 therapies.
U.S. grew 3% to $3.161 billion (+7% volume; -4% pricing). Overseas revenue grew 7% to $2.579 billion (+12% volume; -7% pricing).
As noted above, EPS growth was slowed by higher sales in less profitable channels and higher spending on COVID-19 treatments. Operating expenses grew 9%, including $125 million for the development of COVID-19 treatments. Lilly expects full-year COVID-19 R&D expense of approximately $400 million.
In addition to the development of bamlanivimab, Lilly is engaged in other COVID-19 programs.
Key commercial and pipeline developments include:
– Following FDA approval, Lilly has begun commercializing two higher dosings for Trulicity to complement the earlier approved dosings of 0.75 mg and 1.5 mg. Trulicity is indicated to treat type 2 diabetes mellitus as an adjunct to diet and exercise to improve glycemic control. Trulicity is also indicated to reduce major adverse cardiovascular events in adults with type 2 diabetes who have established cardiovascular disease or multiple cardiovascular risk factors.
– This pushes the PDUFA decision date for tanezumab beyond the current date of December 2020.
– Lilly and Innovient have agreed to expand their strategic alliance for commercializing Tyvyt, a PD-1 inhibitor and oncology agent. Lilly, which shares the rights to the drug with Innovient in China, has gained exclusive rights to Tyvyt outside China. It intends to launch Tyvyt in the U.S. lung cancer market in two or three years. And with the FDA apparently willing to accept clinical trial data from China in reviewing oncology drugs, Tyvyt could be on an accelerated path in the U.S. It is currently under review in China for two additional indications.
The Tyvyt-Alimta combination has already seen positive trial results in China. According to data from the Chinese phase 3 Orient-11 trial, Tyvyt used in tandem with Lilly’s Alimta and platinum chemo helped lung cancer patients live a median of 8.9 months without tumor progression, significantly longer than the 5.0 months experienced by the chemo group.
While there are already six PD-1/L-1 agents on the U.S. market, led by Keytruda, Lilly clearly believes that it can gain traction in the U.S.
EARNINGS & GROWTH ANALYSIS
Lilly continues to project 2020 adjusted EPS of $7.20-$7.40, representing growth of 19%-23%. It also reiterated its revenue guidance of $23.7-$24.2 billion.
FINANCIAL STRENGTH & DIVIDEND
Our financial strength rating on Lilly is Medium, the middle peg on our five-point scale. The company pays an annualized dividend of $2.96, for a yield of about 2.0%. Our dividend estimates are $2.96 for 2020 and $3.20 for 2021.
Drug development is inherently risky: pipeline products may not progress for clinical or commercial reasons, and setbacks can impact the share price. Acquisitions may also dilute earnings and fail to generate projected synergies. In addition, patent expirations and the loss of market exclusivity typically lead to generic competition.
We believe that this premium is warranted based on contributions from newer products, which are delivering robust volume growth. We also expect launches of new drugs and expanded indications for existing drugs to drive further growth in product volume. Lilly’s development work on treatments for COVID-19, impressive as it is, may not lead to significant financial returns, though it will burnish the company’s reputation as a top research-focused company.
On November 13 at midday, BUY-rated LLY traded at $142.57, up $1.54.