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MAY 2020 ELI LILLY

"In 2020, Lilly's sales should be driven by higher demand for newer drugs, including Trulicity, Taltz, Basaglar, Emgality, as well as the newly introduced Baqsimi and Reyvow."

MEDIUM-TERM INVESTMENT ANALYSIS FOR THE RISE OF ELI LILLY & COMPANY SHARES

COMPANY INTRODUCTION

  • Headquartered in Indianapolis, Eli Lilly & Company is one of the largest pharmaceutical companies in the world. It boasts a diversified product portfolio, including a solid set of new successful drugs. Its pharmaceutical product categories include neuroscience (Zyprexa, Cymbalta, Emgality), diabetes (Humalog, Humulin, Trulicity and others), oncology (Alimta, Cyramza, Verzenio), immunology (Taltz and Olumiant) and others (Cialis).
  • Over the past few years, Lilly has been actively seeking acquisitions and licensing agreements to increase its product portfolio and expand its core revenue stream. The $ 6.5 billion acquisition of ImClone Systems in November 2008 brought the company Erbitux, a compound used in the fight against cancer. Following the acquisition of ICOS Corporation in January 2007, Lilly gained full control of drug Cialis for the treatment of erectile dysfunction. Its other acquisitions include Hypnion Inc. (a drug development company focusing on sleep disorders), CoLucid Pharmaceuticals (control of Lasmiditan for acute migraine) and Loxo Oncology (added Selpercatinib to the lung and thyroid cancer portfolio). Lilly has also entered into cooperation agreements with several companies, including Pfizer, Incyte and Boehringer Ingelheim.
  • Lilly's revenue in 2019 was up 4% year-over-year to $ 22.3 billion. In 2019, Trulicity (18% of revenues), Humalog (approximately 13%), Alimta and Taltz (6% of revenues) contributed the most to the company's total revenues.
  • In 2020, Lilly's revenue growth is expected to be driven forward by higher demand for newer drugs such as Trulicity, Jardiance, Taltz, Verzenio, Basaglar, Emgality and the newly launched Baqsimi and Reyvow. Through business development deals, Lilly regularly adds promising new revenue-generating assets. In the first quarter of 2020, the company's shares significantly outperformed the industry as a whole.
  • On the other hand, competition for several of the company's drugs, the expected entry of the competing drug Forteo, rising price pressure in the United States, falling prices in some international markets and the potential impact of the coronavirus pandemic are some of the obstacles the company will face in 2020.

FACTORS LEADING TO THE ANALYSIS OF THE POTENTIAL GROWTH OF ELI LILLY'S SHARE PRICE

  • Shares outperforming the industry: Lilly's share price rose by 20.1% this year, overcoming the decline of the industry by 1.3%.
  • Key products with a focus on a wide range of therapeutic areas: Lilly boasts a wide range of products that serve a large number of therapeutic areas. The company focuses primarily on central nervous system disorders, metabolic diseases, autoimmune diseases, cardiovascular diseases and cancer. These are all areas with high growth and, above all, commercial potential.

                                 Graphs source: Equities.com

  • Lilly's strong position in the diabetes market: Lilly has a strong portfolio of diabetes drugs up his sleeve, which includes Tradjenta, Jardiance, Trulicity, Synjardy, Synjardy XR, Glyxambi, Basalgar and Humalog U-200 KwikPen. In 2017, the incorporation of the cardiovascular indication into the Jardiance brand increased sales. Lilly is also developing an automated  insulin delivery system (Phase II) that automates insulin dosing in type I diabetes and facilitates overall diabetes management. In May 2019, it launched the lower-selling version of Lispro insulin, version of Humalog in the United States, and plans to launch version of Humalog Mix75 / 25 KwikPen and Humalog Junior KwikPen by mid-April this year. The lower introductory prices for new drugs are the result of a long-term effort by the US government to limit the selling prices of diabetes drugs to the maximum.
  • Constant work to build and expand the primary revenue infrastructure from the identification of the potential drug product, through the complete testing and approval phase to the creation of a new source of revenue: Lilly works hard to build the core revenue infrastructure and owns a wide range of compounds at various stages of development. Lilly believes it has the potential to launch 20 new products in the 10-year time horizon from 2014 to 2023.
  • Lilly's key areas of interest are diabetes, oncology, immunology and neurodegeneration. Potential sources of income include Tanezumab (an osteoarthritis painkiller - currently being studied in the United States), Mirikizumab (a psoriasis medicine - currently in phase III, ulcerative colitis - phase III and Crohn's disease - phase III), ultrafast Lispro / ultra fast-acting insulin (reviewed in the US and EU) and oral RET inhibitor, Selpercatinib (targeted for lung and thyroid cancer - currently under review in both the United States and Europe.
  • Lilly's new candidate for diabetes, which has the potential to expand the company's primary income base, is Tirzepatide, which showed an impressive ability to lower blood sugar and promote weight loss in October 2019 in tests on patients with type II diabetes. For Tirzepatide, phase III studies began as early as the end of 2018. In 2020, the company plans to launch a cardiovascular effects study for Tirzepatide.
  • The new drugs, Olumiant (in Europe) for rheumatoid arthritis, Verzenio for metastatic breast cancer and Emgality (galcanezumab) for the preventive treatment of migraine, all have more than a strong starting position in the market. In July 2019, Lilly received FDA approval for Baqsim, a glucagon nasal powder for the treatment of severe hypoglycemia in diabetic patients. To date, Baqsim is the only nasally administered glucagon that has been approved by the FDA. In October 2019, the FDA approved Lilly Reyvow oral tablets for the treatment of acute migraine. In this way, the company has strengthened its portfolio of painkillers. In 2020, Lilly expects to launch two drugs, Selpercatinib and ultra-fast Lispro.
  • Relatively newer drugs are also undergoing review processes to expand the indications / expansion of labels (usability). These include Taltz drugs approved for axial spondyloarthritis in August 2019 and for psoriatic arthritis between 2017/2018, as well as Cyramza and Verzenio (phase III for the treatment of breast cancer). In the meantime, two EMPEROR phase III studies of Jardiance for chronic heart failure and phase III studies for chronic kidney disease are also underway. Olumiant is being reviewed for atopic dermatitis in Europe and Japan, and a review is expected to begin in the United States this year.
  • Commitment to dividends and cost savings. Although several of Lilly's drugs face generic competition (a term used at products that are different but solve the same problem or provide the same effect), the company returned in December 2016 to pay annual dividends and regularly returns excess money through share repurchases. Cash distribution among shareholders through dividends and share repurchases was approximately $ 2.6 billion in 2017, $ 1.7 billion in 2018 and $ 7 billion in 2019.
  • Lilly is actively seeking potential opportunities for licensing and acquisition agreements to sustain the company's growth in the short and medium term. Achieving the set goals is aided by cost reduction strategies and the employee base. Lilly regularly invests in new drugs and overall company growth.
  • Developing markets and Japan will be the company's main growth regions in the long run: Lilly is looking towards Japan and developing markets to help ensure maximum growth in the years to come. Cyramza and Verzenio generate massive sales volumes in Japan due to high unsatisfied demand. The company also launched Trulicity, Taltz, Jardiance and Olumiant in the Japanese market, which together form the cornerstones of sales growth in the country.

4 REASON WHY ELI LILLY SHARES MAY CONTINUE TO GROW THIS YEAR

  • Lilly announced first-quarter revenue and, instead of lowering preliminary estimates provided earlier this year, actually raised expectations for the rest of 2020. It's hard to estimate how COVID-19 and efforts to slow down it's spreading will affect Eli Lilly in the long run, but right now it looks like society has nothing to worry about. Here are four factors that suggest that its shares could continue to rise by 2020.
  • Outlook for the rest of the year confirmed. Efforts to curb easily transmitted coronavirus are decimating for most corners of the economy, but Eli Lilly still expects significant growth in the foreseeable future. If the economic result meets expectations, the company will record another year of revenue growth at a double-digit rate.
  • The clumsiness is over. During the decade that preceded the appointment of the current Eli Lilly CEO, the company's financial results stagnated without profit in negative territory. After the appointment of David Rick to the lead role, the situation began to change as if waved with wand. From the moment that Ricks took the helm, Eli Lilly finally began to show significant revenue growth. In 2019, adjusted revenues increased by 11% compared to the previous year. This year's outlook for the company's management indicates that the company expects an increase in profit by at least by another 11%.
  • No patent barriers on the horizon. Drugs placed on the market before 2014 accounted for less than half of the company's total revenues in the first quarter of 2020. The company still partly relies on Humalog's aging license, which accounts for about 12% of total revenues and will take a long time for this revenue stream to dry completely. Approximately one in 10 Americans has been diagnosed with diabetes and they all need help regulating blood sugar. That's so much that the transition from branded insulin sales to a cheaper US government-sponsored version will still pay off for the company.
  • In 2017, the US Food and Drug Administration (FDA) approved the sale of a Humalog-like drug to Sanofi, called Admelog. Despite competition from Sanofi, Lilly's own low-cost version of Lispro insulin is doing well in competition with Admelog. In the first quarter of 2020, sales of Humalog and Lispro insulin fell by only 5% year-over-year to an annualized $ 2.8 billion, and this decline was simply offset by sales of recently launched drugs.
  • Winning lineup. Trulicity sales in the first quarter increased 40% year-over-year to an annualized $ 4.9 billion, and this treatment for non-insulin diabetes is not the only member of the Lilly Club launched after 2014 that brings huge profits. Sales of Taltz (monthly psoriasis injections) rose 76% to an annualized $ 1.7 billion in the first quarter. Lilly also announced a sharp increase in sales of several younger drugs, which could lead to even faster growth. Sales of Verzenio tablets in 1Q 2020 climbed 72% to an annualized $ 752 million. Sales of Olumiant, an oral treatment for rheumatoid arthritis launched in 2018, increased 70% to an annualized $ 558 million. In 2019, Eli Lilly was one of several companies to launch new monthly injections to prevent migraines. Emgality's annual sales reached $ 296 million in the first quarter and could rise much further if popularity continues to grow among the estimated 4 million Americans who regularly suffer from debilitating headaches.
  • Something to look forward to. Eli Lilly shares offer a dividend yield of 1.8%, which investors can expect to grow in the upcoming years. Last year, the company used 69.2% of free cash flow to meet its dividend liability, which is low enough to safely increase dividend payments in line with earnings growth. With a profit set at a double-digit percentage in 2020 and possibly beyond, this company could offer nice market profits in the long run.
Graph source: Barchart.com

RISKS

  • Generic threats to key products: There are some concerns about the impending expiration of a patent facing several products in Lilly's portfolio. Products such as Zyprexa, Cymbalta, Evista and Gemzar face declining sales due to general competition. In 2017, Lilly lost patent protection in the United States for the key drugs Strattera, Axiron and Effient. In September 2018, Lilly lost her exclusivity for Cialis. Competing products entered the market in the same month. This resulted in a rapid erosion of sales. In August 2019, Lilly similarly lost her exclusivity for Forteo.
  • Intense competition: In addition to general threats, Lilly products face intense competition from both large pharmaceutical companies and small and medium-sized companies. The competition for diabetes care products has intensified with the launch of Novo Nordisk's drug Victoza. Launched in 2018 in Novo Nordisk's drug Ozegic, Smeglutide Ozempic represents strong competition for Lilly's key growth factor, Trulicity.

RESULTS IN THE Q4 2019

  • Lilly reported adjusted earnings per share of $ 1.73 in the fourth quarter of 2019, comprehensively surpassing the median of analysts expecting a result of $ 1.52. Revenues increased by 31% year-on-year as higher R&D costs were more than sufficiently offset by higher revenues and a lower tax rate.
  • Revenue of $ 6.11 billion exceeded analysts' expectations of 6.07 billion. Total sales increased 8% year-on-year, supported by strong sales of newer drugs, namely Trulicity, Taltz, Jardiance, Basaglar, Emgality and Verzenio, offsetting lower sales of older products such as Cialis and Forteo and the impact of Lartruvo product withdrawals. Sales volumes increased by 10% in the fourth quarter.
  • New pharmaceutical products (products launched since 2014) generated revenue of $ 2.8 billion, contributed 14% to revenue growth and accounted for nearly 46% in terms of total revenue, an increase of 2% over the previous quarter. Revenue in the U.S. increased 7% to $ 3.52 billion, and outside the U.S., it grew 10% to $ 2.6 billion. Among the new Trulicity products, it generated sales of $ 1.21 billion, a year-on-year increase of 31% due to higher demand in the United States and higher sales volumes outside the United States. Revenue of Cyramza sales were $ 245.1 million (+ 11% year-on-year), while sales of Jardiance were up 39% to $ 268.0 million. Basaglar generated revenue of $ 307.2 million during the period, a year-on-year increase of 32%. Taltz generated sales of $ 420.1 million (+ 37% year-on-year). Olumiant had turnover of $ 127.8 million in 4Q 2019, compared to $ 114.6 million in the previous quarter, and Verzenio had turnover of $ 179.1 million in 4Q 2019, up from $ 157.2 million in the previous quarter due to increased U.S. demand .
  • Operating Results: Operating revenue increased 10% year on year to $ 1.61 billion. The operating margin in the quarter reached 26.3%. Total operating expenses (including research, development and marketing, selling expenses and administrative expenses) increased by 6% in the quarter.
  • 2019 Results: 2019 full-year revenue increased 4% to $ 22.32 billion, beating analysts' estimates of $ 22.29 billion. The expected range was set by the company's management at $ 22.0 - 22.5 billion . Adjusted earnings per share were $ 6.04/share. Analysts expected $ 5.80. Lilly's profit increased by 11% year-on-year.
  • Outlook for 2020: Lilly expects earnings per share of $ 6.70 to $ 6.80 per share this year. Management expects Lilly to record growth in the range of 11 - 13% this year. Revenues are expected to be in the range of $ 23.7 billion to $ 24.2 billion, which should be helped by the inclusion of Qbrexza in the product portfolio as part of this year's expected acquisition of Dermira. The adjusted operating margin in 2020 is expected to be 31%, the same as in 2019. Marketing, sales and administration costs are expected to be in the range of $ 6.2 billion to $ 6.4 billion. The outlook for R&D costs is expected to be in the range of $ 5.6 billion to $ 5.9 billion. Lilly's revenue growth is expected to be driven forward by higher demand for newer drugs, including Trulicity, Jardiance, Taltz, Verzenio, Basaglar, Emgality, the newly introduced nasal powder, Baqsimi glucagon, and the possible launch of newly approved oral tablets for acute migraine with called Reyvow.
  • Valuation: Lilly shares have increased by 20% year-on-year since the beginning of the year and by 36.6% year-on-year. For comparison, the S&P 500 Index has lost 10.9% since the beginning of the year and 1.7% year-on-year.

HYPOTHETICAL EXAMPLE - CFD ON
ELI LILLY & COMPANY SHARES

  • Invested amount CZK 1 million … USD 39,971 (CNB exchange rate as of 4/29/2020)
  • CFD stock contract type
  • Leverage 1:5
  • Margin 20 % of the CFD stock value
  • Price 153.28 USD/CFD shares as of 5/4/20
  • CFDs … value $ 153.28 … 20% margin … $ 30.656
  • Target Price1 … > 160.00 USD/CFD share
  • Target Price2 … > 164.40 USD/CFD share
  • Target Price2 … > 185.00 USD/CFD share
  • Support Level 1… 144 USD/CFD share
  • Support Level 2… 134 USD/CFD share
  • With a full 100% investment, up to 1,303 units could be purchased at a margin of $ 30.656. However, under the unwritten rule of investors, the maximum amount invested should never exceed 50% of the investor's free funds.
  • In the case of the purchase of 1 CFD share of Eli Lilly, the movement of the price to USD 164.40 / CFD share offers a potential of USD 11.12, thus USD 1,112 for 100 CFD shares.
  • If 50% of available funds were invested and 651 CFD shares were purchased, a move of $ 11.12 would increase the potential appreciation of the analysis to approximately $ 7,239.
  • However, in the event of a negative development and a decrease in the CFD of the share to $ 144, the same trade would mean a loss for the investor exceeding 15% of the total volume of the investor's funds.

Please note that with regard to the size of the trading account and the size of the market, it is essential to adjust the size of the leverage and adjust the degree of risk selected accordingly. Trading CFD contracts and Forex is high risk and improperly set risk management can result in the loss of much or all of the investor's funds.

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