Eli Lilly’s Alzheimer’s Breakthrough: A Game Changer For Investors And Patients
Contributor since 2013 / 6987 Followers
Summary:
- Eli Lilly’s donanemab shows promise in slowing Alzheimer’s progression, offering significant market potential.
- Competitive landscape between Eli Lilly, Eisai, and Biogen could drive further innovation in Alzheimer’s therapies.
- Strong revenue growth and a history of dividend payments make Eli Lilly an attractive long-term investment.
Solskin
Last month, we published a bullish article on Eli Lilly (NYSE:LLY) highlighting the huge promise of Mounjaro as a weight loss drug. Now, the recent announcement of successful Phase 3 trial results for Eli Lilly’s Alzheimer’s drug, donanemab, has generated significant buzz in the investment community. In this article, we will analyze the significance of this breakthrough, compare it to other competitors in the Alzheimer’s treatment space, and evaluate Eli Lilly’s overall financial standing, providing a comprehensive investment analysis.
Donanemab Phase Three Success
The recent announcement of positive results from Eli Lilly’s large Phase 3 study on its Alzheimer’s drug, donanemab, has generated excitement and optimism in the investment community, as evidenced by the nearly 7% increase in the company’s stock value in a declining market. As an investment analysis team, we believe that this development is a significant breakthrough in the battle against Alzheimer’s disease, with far-reaching implications for both patients and investors.
The potential approval of donanemab by the FDA would confirm that drugmakers have finally found therapies capable of slowing the progression of Alzheimer’s, a debilitating disease affecting millions of people worldwide. This breakthrough comes after years of failed attempts, offering hope to those impacted by the devastating illness. The drug’s approval could also pave the way for Medicare and other health insurers to cover the costs of these expensive medicines, which could, in turn, spur a competitive market between Eli Lilly and other drugmakers, such as Eisai and Biogen, who have already secured approval for their Alzheimer’s therapy.
Despite the excitement surrounding donanemab’s efficacy, we must also consider the safety concerns associated with the drug. The study revealed that donanemab increased the risk of serious brain problems, which could limit its appeal to doctors and patients. However, the drug’s impact on slowing the decline in Alzheimer’s patients by 35% compared to a placebo over 18 months remains a significant achievement. We are hopeful that further research and development will address the safety risks associated with donanemab, making it an even more compelling investment opportunity.
In comparison, Eisai and Biogen’s (BIIB) lecanemab (branded name Leqembi) demonstrated a slower decline in Alzheimer’s patients, at 27% versus a placebo over 18 months, and had a more favorable safety profile. Although direct comparisons between the two drugs may be challenging due to differences in the studies, the competitive landscape that could emerge between Eli Lilly and other drugmakers may drive further innovation and improvements in Alzheimer’s therapies, ultimately benefiting both patients and investors.
The limited insurance coverage for anti-amyloid Alzheimer’s treatments, such as the denial of routine coverage by the U.S. Medicare program for the elderly, presents a challenge for these drugs. However, analysts suggest that the program’s policy could change if the drugs receive full FDA approval. The Alzheimer’s Association has urged Medicare to review existing data on new Alzheimer’s treatments and modify its coverage policy, which could significantly impact the drugs’ market potential.
With FDA approval for donanemab potentially arriving later in 2023 or 2024, Eli Lilly’s stock offers an attractive investment opportunity. The multibillion-dollar sales potential of Alzheimer’s treatments, coupled with the possibility of policy changes in Medicare coverage, make Eli Lilly’s innovative drug a powerful force in the market. We encourage investors to closely monitor the progress of donanemab and the possible policy changes that could impact its market potential.
We believe that the positive results from Eli Lilly’s large study on donanemab signify a significant milestone in the fight against Alzheimer’s disease. The company’s stock has demonstrated the market’s confidence in the drug’s potential, and we remain optimistic about the future of Alzheimer’s treatment. We are excited about the prospects that lie ahead for Eli Lilly, as well as the entire Alzheimer’s treatment industry, and we strongly recommend investors keep an eye on this promising and innovative space.
Risks
In our analysis, there are several risks associated with owning LLY shares that investors need to be aware of. Firstly, there is a high level of uncertainty surrounding the outcome of some key drug launches, such as the diabetes and weight loss drug Mounjaro, and the Alzheimer’s drug donanemab. The sales potential for Mounjaro faces variables such as insurance coverage and pricing, while the market uptake for donanemab is less clear, despite its potentially large market. With these two drugs representing close to half of Lilly’s projected sales over the next decade, we believe investors should be aware of this dependence.
Moreover, Lilly’s revenue is highly concentrated, with a significant percentage derived from relatively few products. In 2022, products such as Trulicity, Verzenio, Taltz, Jardiance, Humalog, COVID-19 antibodies, and Humulin collectively accounted for 69% of total revenues. Trulicity alone contributed 26% of total revenues in 2022, and the company expects GLP-1s, including Mounjaro, to represent a growing portion of its business.
Beyond product-specific uncertainties, Lilly faces intense competition from both generics manufacturers and brand-name drugmakers. The company is also exposed to considerable regulatory and legal risks, including product approvals, patent challenges, and liability lawsuits. Pharmaceutical research and development is inherently expensive and uncertain, with a high rate of failure. The lengthy and costly process of bringing a drug from discovery to market can take over a decade and cost upwards of $2 billion, with potential failures at any stage.
Financial & Valuation
Note: all data in this section comes from FactSet.
In recent years, Eli Lilly has demonstrated consistent revenue growth, with projections indicating that this trend will not only continue but also gain momentum over the next two years. This growth can largely be attributed to the success of the company’s weight management medications and its strong portfolio of pipeline drugs such as donanemab. By 2023, we expect revenue to increase by 7.3%, and by 2024, it could surge by an astounding 18.8%, reaching a total of $36.4 billion. Alongside this impressive revenue growth, the operating margin is predicted to achieve a record high of 33.7% in 2024, which would result in unprecedented earnings per share (EPS) of $11.52-a significant 36% increase from the anticipated $8.46 in 2023.
Eli Lilly has built a reputation as a reliable dividend growth stock, maintaining an admirable history of eight consecutive years of dividend growth and more than 30 years of continuous dividend payments. Although the company’s current yield of 1.05% may seem relatively low, it is quite secure due to the modest payout ratio of only 42%. Given the company’s remarkable earnings growth trajectory, there is substantial potential for future dividend growth.
We acknowledge that investing in Eli Lilly entails a premium. The company currently trades at a 45 times multiple on forward next twelve month consensus EPS, which is at the upper end of its five-year range compared to the S&P 500. Moreover, the stock trades at a 145% premium EPS basis, close to the peak of its five-year range. While this elevated valuation might dissuade some investors, it is essential to consider the company’s attractive growth potential and stable financial position.
Based on our assessment, we are of the opinion that Eli Lilly’s strong revenue growth, primarily driven by its weight management and Alzheimer medications, together with its record high operating margin and earnings per share projections, offer an enticing investment opportunity. Additionally, the company’s solid dividend growth history and prospects for future dividend increases contribute to its appeal. Although the high valuation may be a concern for some, we believe that the potential rewards surpass the risks for long-term investors seeking exposure to a company with robust growth prospects and a proven history of dividend payments.
Conclusion
Based on our evaluation, we believe that Eli Lilly’s breakthrough with donanemab has the potential to reshape the Alzheimer’s treatment market, offering hope to millions of patients and presenting a compelling investment opportunity. Despite the high valuation and potential safety concerns, Eli Lilly’s strong revenue growth, commitment to dividend payments, and the anticipated FDA approval for donanemab make it an attractive proposition for long-term investors. We encourage investors to closely follow the progress of donanemab and other developments in Alzheimer’s treatments, as well as potential changes to Medicare coverage, as these factors will undoubtedly impact the market potential and investment outlook for Eli Lilly and its competitors.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of LLY either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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