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Morningstar | Lilly Posts Solid 4Q and Long-Term Outlook Looks Solid, but 2019 Guidance Is Slightly Weak

Eli Lilly reported fourth-quarter results slightly ahead of both our and consensus expectations, but the company also lowered its 2019 full-year guidance more than we expected partly due to the failed Lartruvo study and increased research and development spending associated with the Loxo acquisition. However, we don't expect any significant changes to our fair value estimate based on the results and guidance. We continue to view Lilly's wide moat in a strong position with a leading number of recently launched drugs and late-stage pipeline assets that should propel industry leading growth over the next five years.

While the outlook for 2019 is dampened by Loxo R&D spending and the Lartruvo failure, many recently launched drugs are posting significant gains, setting the company up for strong long-term growth. Lilly's biggest drug, Trulicity (diabetes drug, representing 14% of sales), posted 42% year-over-year growth. We expect continued growth for Trulicity but at a slower pace as competition from Novo increases with a likely oral launch of semaglutide in late 2019, which new patients may find more compelling over Trulicity's injectable dosing. Also, immunology drug Taltz posted growth ahead of our expectations at 78%, and we believe the drug is well positioned to take share in the psoriasis market based on leading efficacy over older TNF drugs like Enbrel. Additionally, several more recently launched drugs, including cancer drug Verzenio, immunology drug Olumiant, and migraine drug Emgality, all hold blockbuster potential.

On the pipeline side, Lilly continues to make solid strides. We remain most bullish in the near term for pain drug tanezumab, which holds strong efficacy along with what we believe are manageable side effects for patients that have limited options in managing pain. We expect remaining pivotal studies to complete in 2019 with a potential approval in 2020.

Additionally, Lilly provided updated guidance on the Elanco divestiture. The company expects to offer an exchange to Lilly shareholders for Elanco shares, similar to the way Pfizer divested its animal health business Zoetis. We continue to view these leading animal health companies as well positioned competitively with moats based on intangible assets and cost advantages.

For a complete review of Lilly's pipeline and currently marketed portfolio, please see our annual pipeline report, "Annual Drug Pipeline Report: Moats Remain Secure as Innovation Counters Pricing and Generic Headwinds, but M&A Accelerating."