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Analyst: Lilly solid even without pipeline

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While Eli Lilly and Co.’s stock price is up 16 percent in the past four months, a new analyst covering the company thinks it has more room to grow. And that’s even without launching a new Alzheimer’s drug anytime soon.

Citi Research analyst Andrew Baum thinks Lilly shares are undervalued because investors don’t appreciate the older assets Lilly already has, particularly its lung cancer drug Alimta, its animal health business Elanco, its diabetes products and sales of all products in emerging markets.

Baum assumes those parts of Lilly’s business will add an extra $8.5 billion in revenue by 2018, substantially offsetting the more than $10 billion in annual revenue Lilly is shedding as patents on five blockbuster drugs expire between 2010 and 2014.

“The market appears to be materially underestimating the long-term earnings power and value in the base business given the longevity of Alimta cash flows post-2016, and increasing diabetes, Elanco and [emerging markets] exposure,” Baum wrote in his Nov. 29 report. He expects Lilly shares to rise another 16 percent, to $55 apiece.

While many investors warmed to Lilly in late summer and early fall because its experimental Alzheimer’s drug solanezumab showed some promise, Baum thinks they missed a recent favorable patent ruling from a federal court that will effectively extend Alimta's sales life for Lilly an additional five years.

If that's true, Lilly would enjoy Alimta’s $2.5 billion until 2021, as opposed to 2016, as investors had assumed.

“Following substantial and detailed patent analysis outlined in this report, we see a very low probability of generic Alimta launches in U.S. and Japan until the expiry of the ’209 method of use patent and equivalents post-2021,” Baum wrote. He does, however, expect some generic competition in European markets.

At Greenfield-based Elanco, Baum expects sales to keep growing at double digits, and double from $2 billion this year to $4 billion in 2018.

“We anticipate animal health assets will continue to re-rate given upward pressure on margins from food supply demand imbalance, new product innovations and high barriers to entry,” Baum wrote.

In diabetes, Baum expects Lilly’s annual sales to rise from $4 billion this year to $6.5 billion in 2018. That will be driven by Tradjenta, launched in conjunction with Boehringer Ingelheim GmbH, which Baum expects to become the third-best-selling drug in its class, reaching $2 billion in annual sales.

Baum also expects success for Lilly’s experimental drug dulaglutide—which is supposed to be a better version of the drugs Byetta and Bydureon, which Lilly sold back to its partners Amylin Pharmaceuticals Inc.

And in emerging markets, Baum expects Lilly to more than double sales from $3 billion this year to $6.6 billion in 2018. He expects emerging markets to generate $9 billion in sales for Lilly by 2021.

As for the Alzheimer’s drug solanezumab, Baum thinks it will be approved—but not until 2017, after Lilly runs another large Phase 3 clinical trial on the drug.

He acknowledges the political pressures to approve an Alzheimer’s drug now—and solanezumab is the first to show some effect on the disease progression, albeit a small effect. But Baum thinks an early approval of solanezumab stands a less than 5 percent chance of success.

“While Lilly may not have taken potential near-term approval for solanezumab ‘off the table,’ we are highly doubtful that solanezumab can be approved using any of the 'tools' cited by Lilly, in the absence of additional clinical data,” Baum wrote.

By 2017, he expects Switzerland-based Roche Group to also have an Alzheimer’s drug approved, meaning Lilly will have to share the market. He pegs solanezumab’s peak annual sales at $2 billion.

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