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That’s because, despite headwinds affecting the whole industry, pharma breakout Eli Lilly is on track to blow past our price target for them more than a quarter ahead of schedule!
Lilly has made all the right moves as the rest of the pharmaceutical industry is being selectively flushed with capital from investors seeking more defensive plays outside of tech and media.
Not only is LLY on track to get its blockbuster diabetes drug Mounjaro approved for weight loss treatments as well as type-2 diabetes (with a growing cohort of physicians using coupons to prescribe Mounjaro off-label as a weight loss treatment) but the firm is also in the exact right place in its research cycle to dodge a huge blow being dealt to the industry.
That blow is coming in the form of potential fraud that set off an entire branch of Alzheimer’s research 15 years ago.
We’ll get into the specifics below, but Lilly was in early-stage development and trials of a medication that treated a biomarker associated with Alzheimer’s that may—in truth—have nothing to do with the disease.
While some of Lilly’s competitors are set to stumble big if this fraud proves to be the real deal — LLY is in a position to wash its hands of an R&D project that hasn’t had the time to get too big.
There’s a lot more to discuss, so let’s just get into it below👇
Eli Lilly has been around since the late 1800's. Their current slate of products is currently focused on cancer and diabetes, and the team has managed to provide solid revenue growth with those and COVID-19 antibody treatments.
Of course, they’ve been flying recently on the approval of their type II diabetes drug Mounjaro. Feel free to read why this drug is becoming such a blockbuster here.
Eli’s earnings call last week gave us really strong initial sales numbers for Mounjaro, but the line we’re looking for is the off-label purchases of the drug, which came in strong. It is an excessively strong forward-looking indicator to see so many physicians pile on to this new class of medicine.
But one thing that’s driving an even more overweight sentiment is a new drug in its very early stages of development. It's so new it doesn’t have a brand name yet -- LLY developed a drug that hits the same dual-pathway as Mounjaro, but with more effectiveness.
This is really important because even though Mounjaro’s mechanism of action beats out competitors like Novo Nordisk, the receptors these drugs target can be managed a lot of different ways — which means there will be a LOT of competition in this space.
Long-term returns in pharma depend not just on you making breakthroughs, but on ensuring that you have the next breakthrough loaded up and ready to take over once your patent runs out and generics flood the space.
Mounjaro alone is the big highlight from Eli Lilly’s earnings today — but one small moment also demonstrated how the company may have dodged a pretty big bullet.
There is a Storm Brewing in Alzheimer’s Research:
Okay, this hasn’t hit the mainstream press as much we figured it should have — but (and man oh man are we ever shaving a LOT of details off of this story here) 15 years ago, a pair of scientists put out research that—on paper—pretty conclusively proved that a very specific protein causes plaques in the brain that eventually cause Alzheimer's.
These findings were kind of a holy grail because if your disease has a single protein causing part of the problem, then it’s simple enough to design a drug that treats that single protein.
So a huge segment of the scientific community (and pharmaceutical industry) got to work developing treatments for this single protein.
Fast-forward 15 years and there have been a LOT of drugs that have gotten approved that kind of treat this protein but have fuzzy results treating the actual symptoms of Alzheimer’s.
The next class of drugs treating this are in trials now — and Eli Lilly was developing a drug in really early stage trials that seemed really promising.
But now there is mounting evidence that the initial research fabricated a critically important piece of data — a piece of data that’s really hard to replicate and therefore wasn’t reproduced.
These are just allegations right now — but the fact that major Alzheimer’s treatment producers Biogen and Roche are addressing it and trying to temper investor expectations is really alarming. If these allegations turn out to have any veracity, it means an immense amount of development —whole careers in biochemistry — has been wasted treating a biomarker correlated with Alzheimer’s instead of finding and fixing the underlying cause of Alzheimer’s.
So like, why are we mentioning this in a report that’s ostensibly painting Eli Lilly in a positive light?
Because LLY was really early in development and not counting on any revenue from an approval or breakthrough in treating this protein.
Lilly’s remarks during their earnings call were basically their extremely professional way of dusting off their hands and walking away from this sector of Alzheimer’s research altogether.
This treatment would have accounted for less than 1% of Eli Lilly’s revenue, especially if Mounjaro maintains sideways revenue growth.
Meanwhile, major competitors to LLY—Biogen and Roche—are in a really difficult position because a lot of their current portfolio is getting eaten into by generics, with a lot of their projected revenue growth tied up in the success of drugs that were doing a SPECTACULAR job of treating this protein.
Only time will tell here, but this news will put sell pressure on these companies and paint LLY in a comparatively positive light.
Please note that our other major pharma pick—Merck—also bailed on their drug that treated this potentially bogus Alzheimer’s protein a few years back, so they're safe from the fallout from this if it gathers any steam.
Eli Lilly’s core portfolio experienced moderately better-than-expected growth during this call too.
The next big thing we’re looking for is an FDA response to Lilly’s request to have Mounjaro fast-track-approved for weight loss.
Meanwhile, Lilly has also managed to dodge a huge blow hitting a sizable chunk of the pharma industry right now.
That’s half the game in pharma—it’s about developing as much as possible so that your current portfolio of drugs is better than anyone else’s portfolio.
Lilly has been brilliantly managed, and that brilliance is being compounded by a strong dose of luck.
Price Target: $388 (21% upside)
Target Date: Q3 2023
Risk / Reward: Medium / Medium
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