Morningstar | Lilly Posts Strong 2Q Results and Decides to Divest Animal Healthcare Division
Eli Lilly posted strong second-quarter results ahead of both our and consensus expectations, and we plan to slightly raise our fair value estimate. While generic competition is pressuring some areas of Lilly's portfolio, the recently launched drugs more than offset these headwinds, leading to 7% operational revenue growth. Further, due to cost-cutting, Lilly's bottom line grew 35% year over year. While we expect these growth rates will slow over the next few quarters as generic competition intensifies (especially to erectile dysfunction drug Cialis), we expect Lilly will be one of the fastest-growing large drug companies in the industry with an annualized revenue growth rate of 5% over the next three years. We remain bullish on immunology drug Taltz, which has shown clinical superiority over the leading TNF drug class. Also, while Lilly's diabetes franchise remains well positioned, we expect growth for GLP-1 drug Trulicity (up 62% in the quarter) will slow as Novo Nordisk's clinically stronger drug Ozempic gains traction. However, we expect a positive outcomes study (Rewind) for Trulicity in the second half of 2018 to help mitigate competitive pressures. Overall, the strong positioning of Lilly's innovative new drug platform, combined with a strong entrenchment of more mature drugs, helps to reinforce our wide moat rating for the firm.In tandem with the earnings release, Lilly announced the decision to spin off its animal healthcare business Elanco in the second half of 2018. With no major synergies between the human and animal health businesses, and less of a need to lean on the group for stability (Lilly is beyond the heavy patent loss years of 2011-14), we had expected Lilly to divest this division. Within the animal healthcare industry, we believe Elanco is well positioned from a competitive advantage standpoint. From a valuation perspective, we estimate the segment is worth close to $12 billion-$13 billion, but several factors could affect this valuation.
For an overview of the competitive dynamics in the animal healthcare market, please see our Healthcare Observer titled "Deciphering Economic Moats and Valuation in the Animal Health Markets."
Eli Lilly and Company discovers, develops, manufactures, and markets products in a single business segment: human pharmaceutical products. The company's human pharmaceutical products include: diabetes and other endocrinology products, immunology products, neuroscience products, oncology products, and other products. The company's diabetes and other endocrinology products include: Baqsimi? and Basaglar?. The company's immunology products include: Olumiant? and Taltz?. The company's neuroscience products include: Cymbalta? and Emgality?. The company's oncology products include: Alimta?, Cyramza?, Erbitux? and Verzenio?. The company's other products include: Cialis?.
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