eli lilly and company - stock valuation report · eli lilly and company 7/14/18 wu, e 1 | page...
TRANSCRIPT
EliLillyandCompany-StockValuationReport
EricWu
EliLillyandCompany
7/14/18
Wu,E
1|P a g e
StockEvaluationReport:EliLillyandCompany,7/14/18
SUMMARY
EliLillyandCompany(LLY)isaglobalhealthcareleaderthatdiscovers,develops,manufactures,
andmarketspharmaceuticalproductsworldwide.Thecompanyoperatesthroughtwo
segments,HumanPharmaceuticalandAnimalHealthproducts.EliLillyisthe16thlargest
companywithinthehealthcaresectoroftheS&P500,generating$22,781.3millioninrevenue
inFY2017,an8%increasefromFY2016.1(all
revenuesnotedinmillions)
INVESTMENTTHESIS
WeareplacingaBUYratingonLLYwitha
pricetargetof$85.51.Withthecombination
of11newproductswithintheirpipeline
poisedtolaunchby2023,rapidlygrowing
productssuchasTrulicity,Taltz,Basaglar,
Cyramza,andJardiance,andanagingand
increasinglyunhealthydemographic,EliLilly
lookstoweathertheupcominglossof
domesticpatentexclusivityforCialis,Forteo,
andAlimta
RISKSTOTHISRECOMMENDATION
• Pharmaceuticalresearchand
developmentiscostlyanduncertain
• Losingeffectiveintellectualproperty
protectiononrevenuegenerating
productswillleadtorapidandsevere
revenuedeclineinthoseproductlines
• Humanpharmaceuticalbusinessis
subjecttogovernmentpricecontrolsand
unanticipatedtaxliabilities
• Intensecompetitionfromlower-cost
genericandbiosimilarmanufacturers1
ContactInformation
Fund SIM,OSUInstructor RoyceWest,CFA
Name EricWu,PharmDEmail [email protected]
Summary
Recommendation BUY
Ticker LLY
Sector Healthcare
Industry Pharmaceuticals
Priceasof7/15/18 $89.71
TargetPrice $108.24
PotentialUpside 20.7%
DividendYield 2.62%
TotalProjectedReturn 23.32%
MarketData
MarketCap 93.26B
SharesOutstanding 1,085,430,000
EPS(TTM) 1.97
P/ERatio 19.89
EV/EBITDA 14.23
Beta 0.3
QtrlyRevenue(YoY%) 9%
Performance
52WeekPriceLow-High 73.69-89.87
1YearReturn 6.77%
EliLillyandCompany
7/14/18
Wu,E
2|P a g e
TableofContents
COMPANYOVERVIEW............................................................................................................................3
GeneralOverview.....................................................................................................................................3
BusinessSegments...................................................................................................................................3
AnimalHealthProducts........................................................................................................................4
HumanPharmaceuticalProducts.........................................................................................................5
MarketLandscape..................................................................................................................................10
PatentExclusivityLossSummary......................................................................................................13
INVESTMENTTHESIS............................................................................................................................14
HealthcareSectorSummary...................................................................................................................14
FinancialAnalysis....................................................................................................................................15
ValuationAnalysisandPriceTarget.......................................................................................................16
DiscountedCashFlowModel.............................................................................................................17
RelativeMultiplesValuationModel...................................................................................................18
RISKS.........................................................................................................................................................19
CONCLUSION..........................................................................................................................................20
APPENDIX................................................................................................................................................21
PipelineSummary...................................................................................................................................21
EstimatedProductRevenue...................................................................................................................22
DiscountCashFlowValuation................................................................................................................23
IncomeStatement..................................................................................................................................24
REFERENCES...........................................................................................................................................25
EliLillyandCompany
7/14/18
Wu,E
3|P a g e
CompanyOverview�InvestmentThesis�Risks
CompanyOverview
GENERALOVERVIEW
EliLillyandCompany(LLY)isaglobalhealthcareleaderheadquarteredinIndianapolis,Indiana
thatdiscovers,develops,manufactures,andmarketspharmaceuticalproductsworldwide.The
companyoperatesthroughtwosegments,HumanPharmaceuticalProductsandAnimalHealth
Products.Establishedin1876,LLYemploysapproximately38,000individualsworldwidewith
productsmarketedin120countries,leadingthemtobethe16thlargestcompanypermarket
capwithinthehealthcaresectoroftheS&P500.5
Thehumanpharmaceuticalsegmentconsistsofseveraldivisions:Endocrinology,oncology,
cardiovascular,neuroscience,andimmunology.Lilly’sanimalsegmentoperatesthroughtheir
Elancodivision,focusingonbothanimalsforconsumptionandcompanionanimals.1
In2017,LLYgenerated$22,871.3millioninrevenue,an8%increasefromtheprioryear.LLY
postedanearnings(loss)of$0.19attributedtonewU.S.taxlawsandcompanyrestructuring.
With11medicationspoisedtolaunchby2023(9totalsince2014),LLYlookstocontinue
increasingrevenuetrends.2Thestockhasoutperformedtheindustrythisyearthusfar,
however,competitivepressuresareexpectedtoincreaseaspatentexclusivityforcertain
productssuchasCialisareexpiring.
BUSINESSSEGMENTS
EliLilly’sanimalhealthproductssegment(operatedthroughElancoAnimal
Health)isaglobalcompanythathasenjoyedadecadeofgrowth.Elancofocuses
onidentifyinganddevelopingproductsthatmeetunmetveterinary,food
producer,andpetownerneeds.Additionally,Elancoalsoutilizesdiscoveriesfrom
thehumanhealthlaboratoriestodevelopproductssupportingthewellbeingoffarmanimals
andpets.Elancosellsitsproductsprimarilytowholesaledistributors.Unfortunately,ithas
underperformedasoflate(-2.3%revenuebetweenFY2016andFY2017)andLillyisreviewingstrategicalternativesincludingasale,merger,initialpublicoffering,orretentionofthe
business.TheyarehopingtomakeadecisionaboutElancoinmid-2018.2
Lilly’shumanpharmaceuticalsproductssegmentdrivesthemajorityofrevenues
withinthecompany.Of$22,871.30millionrevenue,$19,785.60originatedfrom
thehumanpharmaceuticalproductssegment.Thissegmentisfurtherdivided
into6divisions:Endocrinology(Humalog®,Trulicity®,Forteo®,Humulin®,
Trajenta®,Jardiance®,Basaglar®),oncology(Alimta®,Cyramza®,Erbitux®),
cardiovascular(Cialis®,Effient®),neuroscience(Cymbalta®,Strattera®,Zyprexa®),immunology
(Taltz®),andother.2
EliLillyandCompany
7/14/18
Wu,E
4|P a g e
CompanyOverview�InvestmentThesis�Risks
FY2016 FY2017 Change%
AnimalHealth 3,158.20 3,085.60 -2.30%
Human
Pharmaceuticals18,063.90 19,785.60 9.53%
Total 21,222.10 22,871.30 7.78%
FY2016 FY2017 Change%
USA 11,506.20 12,785.10 11.11%
Europe 3,768.10 3,943.20 4.65%
Japan 2,330.90 2,419.70% 3.81%
Other 3,616.90 3,723.30 2.94%
Lilly’sAnimalhealthbusinessoperatedthroughElancocomprised13%oftotalcompany
revenue.Elancoreported$761.3millioninrevenuein2018Q1,a1%decreasefrom2017
($769.4million).AccordingtoLilly’sQ1pressrelease,thisisduetoworldwidefoodanimal
revenuedecreasingby7%drivenbymarketaccesspressures.Companionanimalrevenue
increasedby10%,however,primarilydrivenbyhigherrealizedpricesandthefavorableimpact
offoreignexchangerates.3
Lilly’sAnimalHealthProductsinclude1:
FoodAnimal
• Rumensin®:acattlefeedadditivethatimprovesfeedefficiencyandgrowthandalsocontrols
andpreventscoccidiosis
• Coban®,Maxiban®,andMonteban®:ananticoccidialagentusedinpoultry• Posilac®:aproteinsupplementtoimprovemilkproductivityindairycows
• Optaflexx®andPaylean®:leannessandperformanceenhancersforcattleandswine
Human
Pharmaceutical
87%
AnimalHealth
13%
RevenueBySegment
United
States
56%
Europe
17%
Japan
11%
Other
Foreign
Countries
16%
RevenueByRegion
EliLillyandCompany
7/14/18
Wu,E
5|P a g e
CompanyOverview�InvestmentThesis�Risks
• Tylan®:anantibioticusedtocontrolcertaindiseasesincattle,swine,andpoultry• Denagard®:anantibioticforthecontrolandtreatmentofrespiratoryandentericdiseasesin
swineandpoultry
CompanionAnimal
• Trifexis®:amonthlychewabletabletfordogsthatkillsfleas,preventsfleainfestations,
preventsheartwormdisease,andcontrolsintestinalparasiteinfections
• Comfortis®:achewabletabletthatkillsfleasandpreventsfleainfestationsindogs• Interceptor®Plus:Amonthlychewabletabletthatpreventsheartwormdiseaseandtreatsand
controlsadulthookworm,roundworm,whipworm,andtapewormindogs
• Galliprant®:ananti-inflammatorytabletthattargetsthekeyreceptorassociatedwithcanine
Osteoarthritispain
• Feline,canine,andrabiesvaccines:Duramune®,UltraDuramune®,DuramuneLyme®,Bronci-Shield®,Fel-O-Vax®,ULTRAFel-O-Vax®,andFel-O-Guard®,andRabvac®
Lilly’sHumanPharmaceuticalProductsexperiencedvariedgrowthandloss.Comprisingof87%oftotalrevenueforFY2017,Lilly’sHumanPharmaceuticalProductsreported$4938.7millionin2018Q1,a10.7%increasefrom2017Q1.AccordingtoLilly’sQ1PressRelease,thismaybedue
torevenueincreaseof4%duetofavorableimpactofforeignexchangerates,a3%increasedue
tohigherrealizedprices,anda2%increaseduetovolume.Increasedrevenuewaspartially
offsetduetolossofpatentexclusivityforStratteraandEffient®,aswellasdecreaseddemand
forCialis.3Notably,endocrinologyhasenjoyedstronggrowth(25%)andwillbediscussedin
furtherdetaillater.Somedivisionswithinthehumanpharmaceuticalproductssuchas
EliLillyandCompany
7/14/18
Wu,E
6|P a g e
CompanyOverview�InvestmentThesis�Risks
cardiovascular(-11%)andneuroscience(-20%)experiencednotablelossandwillalsobe
discussedinfurtherdetaillater.
Lilly’sHumanPharmaceuticalSegmentConsistsof1:
Endocrinology
• Humalog®,HumalogMix75/25,HumalogU-100,HumalogU-200,HumalogMix50/50:insulinanalogsforthetreatmentofdiabetes;For2018Q1,Humalogrevenueincreasedby12%
relativeto2017Q1.Largelyduetohigherrealizedpricesduetochangesinestimatestorebates
anddiscountsandchangesinpayersegmentmixinconjunctionwithincreasedvolume.
Internationalrevenuesalsoenjoyedfavorableimpactofforeignexchangerates.3
EliLillyandCompany
7/14/18
Wu,E
7|P a g e
CompanyOverview�InvestmentThesis�Risks
• Humulin®,Humulin70/30,HumulinN,HumulinR,andHumulinU-500:humaninsulinsforthe
treatmentofdiabetes;The4%increaseinrevenuefor2018Q1vs2017Q1wasdrivenby
increaseddemand,partiallyoffsetbylowerrealizedpricesanddecreasedforeignrevenue3
• Trulicity®:GLP-1agonistusedforthetreatmentoftype2diabetes;2018Q1revenueincreased
by82%relativeto2017Q1.ThisislargelyduetohigherdemandwithintheGLP-1classand
increasedshareofmarketforTrulicity.Foreignrevenuewasbolsteredbyincreasedvolumeand
favorableimpactofforeignexchangerates3
• Trajenta®:DPP4inhibitorusedforthetreatmentoftype2diabetes
• Jentadueto®andJentaduetoXR:acombinationofTrajenta(linagliptin)andmetforminforthe
treatmentoftype2diabetes
• Jardiance®:SGLT2inhibitorusedforthetreatmentoftype2diabetesandtoreducetheriskof
cardiovasculardeathinadultpatientswithdiabetesandestablishedcardiovasculardisease;
2018Q1revenueenjoyeda104%increaserelativeto2017Q1.Thiswaslargelydueto
increasedshareofthemarketforJardianceandgrowthintheSGLT2class3
• Glyxambi®:acombinationtabletofTrajenta(linagliptin)andJardiance(empagliflozin)forthe
treatmentoftype2diabetes
• Synjardy®andSynjardyXR:acombinationtabletofJardiance(empagliflozin)andmetformin
forthetreatmentoftype2diabetes
• Basaglar®:along-actinghumaninsulinanalogforthetreatmentofdiabetes;2018Q1revenue
($166million)increasedby$12.3millionrelativeto2017Q4.Thisislargelyaresultofincreased
demandduetoMedicarePartDformularyaccessandpartiallyoffsetbylowerrealizedprices
andchangesinestimatesofrebatesanddiscounts.
• Forteo®:aparathyroidanalogusedforthetreatmentofosteoporosisinpostmenopausal
womenandmenathighriskandforglucocorticoid-inducedosteoporosisinmenand
postmenopausalwomen;2018Q1sawa10%decreaseinrevenuecomparedto2017Q1.
RevenueintheU.S.decreasedby31%,primarilyduetodecreasedvolumeandlowerrealized
prices;thiswasdampenedbyanincreaseinforeignrevenuedrivenbyfavorableimpactof
foreignexchangeratesandincreasedvolume3
• Evista®:aselectiveestrogenreceptormodulatorusedforthepreventionandtreatmentof
osteoporosisinpostmenopausalwomenandforthereductionoftheriskofinvasivebreast
cancerinpostmenopausalwomenwithosteoporosisandpostmenopausalwomenathighrisk
forinvasivebreastcancer
• Humatrope®:agrowthhormoneusedforthetreatmentofhumangrowthhormonedeficiency
andcertainpediatricgrowthconditions
EliLillyandCompany
7/14/18
Wu,E
8|P a g e
CompanyOverview�InvestmentThesis�Risks
Neuroscience
• Cymbalta®:anSNRIusedforthetreatmentofmajordepressivedisorder,diabeticperipheral
neuropathicpain,generalizedanxietydisorder,fibromyalgia,andchronicmusculoskeletalpain
duetochroniclowerbackpainorchronicpainduetoosteoarthritis
• Zyprexa®:anatypicalantipsychoticusedforthetreatmentofschizophrenia,acutemixedor
manicepisodesassociatedwithbipolarIdisorder,andbipolarmaintenance
• Strattera®:anorepinephrinereuptakeinhibitorusedforthetreatmentofattention-deficit
hyperactivitydisorder
• Prozac®:anSSRIusedforthetreatmentofmajordepressivedisorder,obsessive-compulsive
disorder,bulimianervosa,andpanicdisorder
• Amyvid®:aradioactivediagnosticagentforpositronemissiontomographyimagingofbeta-
amyloidneuriticplaquesinthebrain
Oncology
• Alimta®:anantimetabolite,antineoplasticagentusedincombinationwithanotheragentfor
advancednon-smallcelllungcancerforpatientswithnon-squamouscellhistology
EliLillyandCompany
7/14/18
Wu,E
9|P a g e
CompanyOverview�InvestmentThesis�Risks
• Erbitux®:anEGFRinhibiting,antineoplasticagentusedasbothasingleagentandincombinationforthetreatmentofcertaintypesofcolorectalcancersandforcertaintypesof
headandneckcancers
• Cyramza®:aVEGFinhibiting,antineoplasticagentusedinmetastaticgastriccancer,metastatic
NSCLC,andmetastaticcolorectalcancer;2018Q1noteda7%increaseinrevenuerelativeto
2017Q1.Thiswaslargelyduetoincreasedvolumeandhigherrealizedprices.Foreignrevenue
wasbolsteredbyfavorableimpactofforeignexchangeratesandincreasedvolume,partially
offsetbylowerrealizedprices3
• Gemzar®:anantimetabolite,antineoplasticagentusedforthetreatmentofmetastaticbreast
cancer,NSCLC,andadvancedorrecurrentovariancancer(intheEUforbladdercancer)
• Portrazza®:anEGFRinhibiting,antineoplasticagentusedincombinationformetastatic
squamousNSCLC
• LartruvoTM:aPDGFR-alphablocking,antineoplasticagentusedincombinationforthe
treatmentofsofttissuecarcinoma;2018Q1U.S.Revenue($43million)noteda$1.5million
increaserelativeto2017Q4.3
• VerzenioTM:acyclin-dependentkinaseinhibiting,antineoplasticagentusedasasingleagentorincombinationforthetreatmentofadvancedormetastaticbreastcancer;2018Q1revenue
($29.7million)notedanincreaseof$8.7millioncomparedto2017Q43
Immunology
• Olumiant®:ajanusassociatedkinaseinhibitor,usedforthetreatmentofadultswithmoderate
toseverelyactiverheumatoidarthritis;2018Q1revenue($32.2million)noteda$9.2million
increaserelativeto2017Q4,largelyduetoastronglaunchuptakeinGermany3
• Taltz®:ananti-interleukin17Amonoclonalantibody,antipsoriaticagentusedforthetreatment
ofmoderatetosevereplaquepsoriasis;2018U.S.revenue($111.2million)sawadecreaseof
$31.3Millionfrom2017Q4.Thiswaslargelyduetolowervolumeduetospecialtypharmacy
buyingpatterns,offsetbyhigherdemand,includinganincreaseinnewpatientstarts3
EliLillyandCompany
7/14/18
Wu,E
10|P a g e
CompanyOverview�InvestmentThesis�Risks
Cardiovascular
• Cialis®:aPDE5inhibitorusedforthetreatmentoferectiledysfunctionandbenignprostatic
hyperplasia.U.S.revenueincreasedby6%comparedto2017Q1drivenbyhigherrealized
prices,butwaslargelyoffsetbydecreaseddemandduetotheentryofgenericsildenafil.Cialis
revenueoutsidetheU.S.decreasedby23%drivenbylossofexclusivityinEurope.3
• Effient®:athienopyridine,antiplateletagentusedforthereductionofthrombotic
cardiovascularevents(includingstentthrombosis)inpatientswithacutecoronarysyndrome
whoaremanagedwithanartery-openingprocedureknownaspercutaneouscoronary
intervention
MARKETLANDSCAPE
EliLillyisthe9thlargestpharmaceuticalcompanywithinthepharmaceuticalindustry.Although
thehealthcaresectorasawholehasperformedwellrelativetotheS&P500benchmark,itis
notedthatthepharmaceuticalsindustryhasconsistentlylaggedbehind.Therearemanyfactors
thatmayhavecontributedtothis,althoughfearsofharshlegislationlimitingprofitswere
avoidedthisyear,andpharmaceuticalshaveenjoyedaslightreboundinperformance.
Withawidearrayof
targeteddiseasestates,
Lillyfacesanequally
widevarietyof
competing
pharmaceutical
companiesandgeneric
manufacturers(discussedlater.)Onemitigatingfactoristhatmanypharmaceuticalcompanies
targetspecificdiseasestatesmindfullyallocatingtheirresourceswhilelimitingtheirexposure
tocompetition.Notably,incomparisonto4ofthe5largestcompaniespermarketcapwithin
thepharmaceuticalindustry:Johnson&Johnson(JNJ),MerckandCo(MRK),NovartisAG
EliLillyandCompany
7/14/18
Wu,E
11|P a g e
CompanyOverview�InvestmentThesis�Risks
(NVS)andPfizerInc(PFE),manyoverlappingdiseasestatesaretargetedandseveraltrendsare
evident.
ThisfigureshowstotalpharmaceuticalrevenueinFY2017andgrowthfromFY2016.Worth
mentioning,manyof
thesecompanieshave
otherbusinesssegments
outsideof
pharmaceuticalsorare
involvedwithgeneric
manufacturing(NVS),
butthisfigureisbased
oncomparable,
innovative
pharmaceuticalrevenue.
DespiteJNJbeingthe
largestcompanywithin
thehealthcaresector
permarketcap,all4
othercompaniesgeneratedhigherrevenuesthroughtheirpharmaceuticalsegment.JNJdid,
however,enjoyanear18%increaseinto2017.
EliLillyandCompany
7/14/18
Wu,E
12|P a g e
CompanyOverview�InvestmentThesis�Risks
ThisfigurefurthercomparesLilly’sdivisionalrevenuesversuscompetingrivalcompanies,along
withtheir%changefrom2016to2017.Notably,Lillyhasenjoyedalargeportionofrevenue
fromendocrinology,whichisunsurprisingconsideringtheirportfolioisheavilyweightedwithin
thediabetesdiseasestate.
AlookattheU.S.trendsinregardstoobesityanddiabetes(oftenlinkedduetocorrelative
natureofpatients)showsthedramaticallyincreasingnumbersaffectedbyboth.Between1994
and2015,thepercentageofpatientswithinthecountrydiagnosedwiththesediseasestates
hasnearlydoubled.Toputthisintoperspective,in2012theestimatedtotaleconomiccostof
diagnoseddiabeteswas$245billion,whichwasa41%increasefrompreviousestimatedcosts
in2007of$174billion.11Withindiabetestreatmentguidelines,GLP-1agonistssuchasTrulicity
havebeengainingmomentum,astheirfavorablesideeffectprofileandimproveddosing
schedule(onceweekly)havegainedproviderappeal.Desirableweightlossandlackof
hypoglycemiariskhaveledtoincreasedusageandTrulicity’sweeklydosingdifferentiatesthis
productwithremainingGLP-1agonists.
Althoughtheyhavethelowestamountofrevenuegeneratedthroughimmunology,Taltzand
OlumiantenjoyedmassivegrowthandwilllooktocontinuethattrendasOlumiantgainedFDA
approvalwithintheU.S.inJuneof2018.Losseswithinthecardiovascularandneuroscience
divisionsarelinkedtolossesofpatentexclusivityforseveralproducts.Withintheneuroscience
division,ZyprexaandCymbalta
Age-adjusted Prevalence of Obesity and Diagnosed Diabetes Among US Adults
Obesity (BMI ≥30 kg/m2)
Diabetes
1994
1994
2000
2000
No Data <14.0% 14.0%–17.9% 18.0%–21.9% 22.0%–25.9% > 26.0%
No Data <4.5% 4.5%–5.9% 6.0%–7.4% 7.5%–8.9% >9.0%
CDC’s Division of Diabetes Translation. United States Surveillance System available at http://www.cdc.gov/diabetes/data
2015
2015
EliLillyandCompany
7/14/18
Wu,E
13|P a g e
CompanyOverview�InvestmentThesis�Risks
revenuecontinuetodeclinesincetheirpatentsexpiredin2011and2013,respectively.The
cardiovasculardivisionnotedastrongdeclineduetoCialisrevenuelossasPfizerreacheda
settlementthatallowedTevain2017tobeginmanufacturingagenericfortheirPDE5inhibiting
competitor,Viagra.Thefollowingdiagramdepictsimpendingpatentlossesand2017revenues:
WithimpendingdomesticlossesofpatentexclusivitywithCialis,andforeignlossesofForteo
andCymbalta,Lillywillhavetoseekoutopportunitiestomitigaterevenuelossesduetothose
products.Oncedrugslosepatentprotection,lower-pricedgenericsquicklysiphonoffasmuch
as90%ofthebrand-namesalesastheyofferproductspricedatonaverage30%ofthebrand-nameproducts.12
Lillywillhopetoweathertheimminentlossesofrevenuethroughcontinuedgrowthfromtheir
currentportfolioaswellasdrawingrevenuefromtheirinnovativepipelineinwhichtheyhope
tohave11newproductsintroducedby2023(9since2014.)Theircurrentpipeline(Appendix)showsthatLillyhopestointroduceproductsfromamultitudeoftheircurrentdivisions.
EliLillyandCompany
7/14/18
Wu,E
14|P a g e
CompanyOverview�InvestmentThesis�Risks
InvestmentThesis
HEALTHCARESECTORSUMMARY
Withtheaforementionedfactorsprovidingoptimismdespitetheimpendinglossofpatents,
severalotherfactorsmayalsoplayasignificantrole.AstheU.S.continuestoage,healthcare
expensesincreasedramaticallyaswell.AstheCDChasexplained,from1997to2013,patientsaged≥65increasedfrom34.2Mto46.5M(outof271.3Mto315.7M),a16.84%increase
relativetototal
population.Mean
annualexpensesper
personwithexpenses
forpatientsaged≥65
was$10,125
comparedto$5,256
forthetotal
population.14,15TheCentersforMedicare&MedicaidServices(CMS)hasprojectednationalhealthcarespendingtogrowatanaveragerateof5.5%peryearfor2017-2026(2008-2016grewat4.2%)19.Thesefactorsmay
demonstratealong-terminfluenceforprofitability,asitisestimatedthatthepatient
populationaged≥65lookstodoubleby2050.Additionally,asweenterthelatetorecession
phasesofthebusinesscycle,expertsbelievethatinvestorswillnotethesignsofeconomic
slowdownleadingtoheavierinvestmentswithindefensive-oriented,lesseconomicallysensitive
sectors(thosetiedtobasicneeds,suchashealthcare.)4
Despiteoptimisticfactors,thepharmaceuticalindustryhaslaggedtheremainderofthesector
forthelastseveralyears.Thismaypartiallybeinresponsetouncertaintyinpotentiallegislation
thatlookstoreducepharmaceuticalpricesforconsumerswhichwouldnaturallycreatearipple
ofdecreasedprofitsthroughout
thehealthcaresector.When
currentU.S.PresidentDonald
Trumpdeclaredviasocialmedia
platformTwitter23inregardsto
speculativePfizerdrugprice
increases,PFEsawa1.2%decreaseinstockpriceandthepharmaceuticalindustryasawhole
Source:https://www.cdc.gov/chronicdisease/resources/publications/aag/healthy-aging.htm
EliLillyandCompany
7/14/18
Wu,E
15|P a g e
CompanyOverview�InvestmentThesis�Risks
sawareductionby0.55%perFidelity.Notably,bothcompanyandindustrybouncedbackby
thenextday.OnMay11,2018,PresidentTrumpspokeinregardstohisproposalforhealth
carereform.Hehadmentionsofeliminatingthemiddlemen,limitingspecialinterests,while
instructingSecretaryAzar(EliLillyandCompany’sPresidentoftheU.S.Divisionfrom2012-2017
andnowUnitedStatesSecretaryofHealthandHumanServices)tocontinueworkingtowards
battlingrisingcosts.Notably,PresidentTrumpstated13:
Despitepreviouslystatingthatpharmaceuticalcompanieswere“gettingawaywithmurder,”
PresidentTrumpdidn’tmentionplansthatallowedMedicaretodirectlynegotiatedrugprices
orpermitlower-priceddrugimportsfromothercountries,whichwerepreviouslymetmuch
resistance.Instead,hementionedincreasingcostsforforeigngovernmentsandpatientstohelp
alleviatethecostburdenwithinTheU.S.S&PandNASDAQbiotechindicesrosenearly3%
followingtheaddress.17Notably,ifthecurrentadministrationtargetsforeigndrugprices,a
proposalthathadpotentiallydireconsequencesforthepharmaceuticalindustryresultedin
whatcouldprovetohaveanentirelyoppositeandthuspositiveneteffectonLilly.
FINANCIALANALYSIS
EliLillyandCompanyisafinanciallyhealthycompany.
Totalrevenues
continuetogrow,
with2018Q1revenuesenjoyingan8%increasefrom2017Q1.3WithregardstoLilly’soperatingexpensesasa
percentageoftotalrevenue,Lillyhascommittedto
maintainingproportionalR&Dexpensestomaintainand
developtheirpromisingpipeline.Additionally,througha
“company-wideefforttodriveproductivity,streamline
howtheywork,andareducedworkforce”Lilly
continuedtonoteadecreased
proportionofSG&Aexpenses.2
Thisallcontributedtoa
continuallyincreasingoperatingmarginwithacompanygoalof30percentorbetterby2020.2
}
~
EliLillyandCompany
7/14/18
Wu,E
16|P a g e
CompanyOverview�InvestmentThesis�Risks
Incomparisontothesecompanies’averages,Lilly
maintainssimilarorslightlymoreimpressivemargins.
Additionally,withacomparablecurrentratio(1.4)astheotherlargepharmaceuticalcompanies,Lilly
continuestomaintainahealthyworkingcapitalto
ensurethatit
canadequately
meetits
current
liabilitieswhileprovidingan8.16%returnonequity.4
Lillycontinuestoconsistentlyexceedconsensusearningsestimatesforthepast4quarters,while
demonstratingcontinued
earningsgrowth.Finally,
despitetheextremescrutinyfromthepressand
governmentalofficialsinregardstodrugcostsweighing
pharmaceuticals,Lillyhasmanagedinthepast5yearsto
provideanannualizedtotalshareholderaveragereturnof15%,comparedto16%fortheS&Pbenchmarkduetothe
increaseinstockpriceandsteadydividendstream.2
Ofnote,duetoThe2017TaxAct,anestimatedincometax
provisionof$1.91billionwasrecordedinDecemberof2017,
whichresultedinthe-0.19EPS,laterreconciledto4.28.1,2
VALUATIONANALYSISANDPRICETARGET
Withthesefactorsinmind,since2013(whenpatentexclusivityforCymbaltawaslost),Lillyhas
sustainedcontinued,consistentsalesgrowth.Althoughkeypatentlossesareexpectedin2018,
itappearsthatLillyismuchbetterequippedwitha
robustpipelineandcurrentportfoliotoweatherthe
losses.Thus,basedonprevioustrendsandtypical
pharmaceuticalproductcycles,myrevenuegrowth
estimateisslightlymorebullishthanconsensus
estimates.BasinglossofCialisrevenueonlosses
experiencedbyPfizerwhenTevabegan
manufacturinggenericsildenafilin2017,my
estimationsfordivisionalrevenuesare(Consensus
estimatewas$23,930):
EliLillyandCompany
7/14/18
Wu,E
17|P a g e
CompanyOverview�InvestmentThesis�Risks
Withasteadyandstablecashflow,andsteadilyandconsistentlyimprovingmetricsandinputs
suchastheaforementionedoperatingexpenses,TheDiscountedCashFlow(DCF)Modelisan
appropriatemodeltousetoassessLilly’sintrinsicstockvalue.Additionally,DCFisn’tinfluenced
byshort-termmarketconditionsornon-economicfactors,whichisusefulduringthistimeof
volatilityduetopublicscrutiny.Ihaveassigneda60%weighttotheDCFbasedvaluation.With
intensecompetitionwithintheprescriptiondrugcompanies,multiplesbasedvaluation
demonstratesimportanceaswecanutilizesimilar,competingcompaniestodeterminean
estimatedpricetargetwhileseekingcorrelationsbetweentheiroperatingandfinancial
characteristics.Ihaveassigneda40%weighttomyvaluationbasedonmultiples.
DISCOUNTEDCASHFLOWMODEL
Theappendix
containsdetailsin
regardstotheDCF
modelingused.I
havetakena
discountratingof9.50%andaterminalgrowthrateof4%.ThecurrentS&P500multipleimpliesa4%growthrateand10%discountrate.With
defensivecharacteristics,favorabledemographics,traditionallylowbeta,andotherfactors
listedabove,Ibelievethe9.50%discountratewouldbewarranted.Notably,ifareasonable
9.0%wereused,our
valuationwould
increasefrom$111to$122.2,(23.7%to36.2%)Withhigh
levelofuncertainty
andscrutiny
regardinghealth
careregulations(short-termconcernswithnothingcertainorconcreteyet)weighingstock
prices,thisappearstobeanopportunitytoBUYLillyasthestockappearstobeundervalued.
Thesefiguresabovedetailhowstockpricesmay
fluctuatewithregardstoadjustmentstoboth
discountratesandterminalgrowthrates.
RELATIVEVALUATIONMODEL
Thehealthcaresectorasawholetraditionally
tradesatslightlyhigherratesrelativetothe
EliLillyandCompany
7/14/18
Wu,E
18|P a g e
CompanyOverview�InvestmentThesis�Risks
S&P500.Thisislargelyattributedtolargeprofit
margins,continualandsteadyrevenuegrowth,and
improvingoperatingmargins.However,boththe
sectorasawholeandLillyasanindividualstockis
currentlytradingjustbelowthebenchmarkP/E.This
againmaybeattributedtouncertaintyingovernment
legislationand
scrutinyresultingfromincreaseddrugpricing.However,
asmentioned,thismayverylikelybeanunrealized,
short-termphenomenonthatpresentsusabuying
opportunity.FollowingtheS&P500,Lillyiscurrently
showinghigherpricingratioscomparedtotheirmedian
overthelast10years.Thisappearstobeareflectionof
themarketasawhole.Additionally,afterthe
largeone-timepaid
taxin2017lowering
earnings,effectivetaxratesdecreasedto15.5%for2018Q1.3Incomparison
withsimilarpeers
withinthe
pharmaceuticalindustry,
Lillyisnotablynotfarofffrom
theaveragemultiplesthese
companiespresent.
Weighingeachratioequally
resultsinatargetpriceof
$104.09.Finally,withsteady,predictablecash
flowsandremarkably
similarpeersto
comparewith,a
60:40valuationnetsa
finalpricetargetof
$108.24,ora20.7%upsidetocurrent
pricing.
EliLillyandCompany
7/14/18
Wu,E
19|P a g e
CompanyOverview�InvestmentThesis�Risks
Risks
• Pharmaceuticalresearchanddevelopmentiscostlyanduncertain1
o Forevery5,000compoundsdiscovered,only1reachesthepharmacy
o Fewerthanathirdofmarketeddrugsachieveenoughcommercialsuccesstorecoup
theirR&Dinvestments21
o AccordingtoastudyconductedbyTuftsCenterfortheStudyforDrugDevelopment,
costofdevelopingaprescriptiondrugthatgainsmarketapprovalisapproximately
$2.6billion,a145%increaseovertheestimatethecentermadein200320
o FDArequiresdrugstoundergothreephasesofclinicaltestingonhumans:
PhaseI:SafetyandDosage(70%movetothenextphase)
PhaseII:EfficacyandSideEffects(33%movetothenextphase)
PhaseIII:Efficacyandmonitoringofadversereactions(25-30%ofdrugsmovetothe
nextphase)22
• Losingeffectiveintellectualpropertyprotectiononrevenuegeneratingproductswillleadtorapidandsevererevenuedeclineinthoseproductlines1
o Oncedrugslosepatentprotection,lower-pricedgenericsquicklysiphonoffasmuch
as90%ofthebrand-namesales12
o AlthoughViagrahadbeenlosingrevenuesteadilysince2011,2017sawa30%declineinrevenuedespitethegenericreleaseoccurringlateinthefiscalyear
o Cymbaltasawadeclineinrevenueofnearly70%theyearafterlosingpatentexclusivity
• Humanpharmaceuticalbusinessissubjecttogovernmentpricecontrolsandunanticipatedtaxliabilities1
o Asnotedpreviously,pharmaceuticaldrugpricinghasbeenhighlyscrutinizedwithin
boththemediaandbygovernmentofficialso Uncertaintyandvolatilityisexpectedtocontinueaseffortstolimitincreasingdrug
pricesarecontinuallypresent;Despitethis,PresidentTrumpdirectedblameon
“middlemen”suchaspharmacybenefitmanagers• Intensecompetitionfromlower-costgenericandbiosimilarmanufacturers1
o Whencomparablegenericsareavailable,theyofferproductspricedatonaverage
30%ofthebrand-nameproducts.12o In2010,CongressapprovedtheBiologicsPriceCompetitionandInnovationAct
(BPCIA),allowinganabbreviatedapprovalpathwayforbiosimilars(alessexpensive,
interchangeableproductwithanFDA-approvedbiologicalproductsuchasinsulin)o In2015,thefirstbiosimilarproductwasapprovedformarketingintheU.S.;Notably,
LillyhasBasaglarwhichhasdemonstratedimmenserevenuegrowthfrom2016to
2017andcontinuestorealizethatgrowthinto2018Q1
EliLillyandCompany
7/14/18
Wu,E
20|P a g e
Conclusion
Conclusion
BUYEliLillyandCompany(NYSE:LLY)withapricetargetof$108.24asitiscurrentlyundervaluedbyapproximately21%
Sincethestartof2018,LillyhashadOlumiant(baricitinib),arheumatoidarthritismedication
usedinEuropeapprovedintheU.S.TheFDAapproveditatlowerdoses,butsuccessinforeign
countrieswillyielddomesticbenefits.Lilly’sgalcanezumabalsometitsprimaryendpointinits
phaseIIIstudy,providingencouragingpotentialforfuturemigraineandclusterheadache
therapy.
CombiningLilly’spromisingpipelinewiththeoptimisticfactors(agingdemographics,
increasinglyunhealthypopulation,increasedhealthcarespending,defensivesector,inelastic
demand,etc.)underlyingthepharmaceuticalindustry,Lillylookspoisedtocontinuetheir
successfortheforeseeablefutureastheycontinuetoimprovethewell-beingoftheirfinancial
health(increasingrevenues,decreasingoperationexpenses,etc.)andasaresult,patienthealth.
EliLillyandCompany
7/14/18
Wu,E
21|P a g e
Appendix
PIPELINESUMMARY
Phase1
Phase2
Phase3
RegulatoryReview
HumanSegmentDivision
*Multipleindications2
EliLillyandCompany
7/14/18
Wu,E
22|P a g e
Appendix
EliLillyandCompany7/14/18Wu,E
23|P a g e Appendix
EliLillyandCompany7/14/18Wu,E
24|P a g e Appendix
EliLillyandCompany7/14/18Wu,E
25|P a g e References
References
1. EliLillyandCompany.(2017).AnnualReportandProxyStatement2017.Retrievedfrom
https://investor.lilly.com/static-files/423887ae-38f3-463c-9d11-43088a30d68f2. EliLillyandCompany.(2017).2017IntegratedSummaryReport.Retrievedfrom
https://assets.ctfassets.net/hadumfdtzsru/2Ayd5rsLd2AyMsQ8wY8wO0/79e2398c034863923b99098
b53762406/2017_Lilly_Integrated_Summary_Report.pdf3. EliLillyandCompany.(2018).Q1EarningsRelease2018.Retrievedfrom
https://investor.lilly.com/static-files/a644463e-77d5-41de-8d99-cd0604e580e3
4. Datafrom:Fidelity.com(7-14-18)5. Datafrom:Finance.Yahoo(7-14-18)
6. Datafrom:MarketRealist(7-14-18)7. JohnsonandJohnson.(2017).ProxyStatement2017.Retrievedfrom
https://jnj.brightspotcdn.com/c4/59/2988b7a8407c93507f0a08708d9e/2017-0310-proxy-statement-
with-bookmarks.pdf8. Pfizer,Inc.(2017,2014,2011,2008).FinancialReport2017,2014,2011,2008.Retrievedfrom
https://investors.pfizer.com/financials/annual-reports/default.aspx
9. NovartisAG.(2017)AnnualReport2017.Retrievedfromhttps://www.novartis.com/investors/novartis-annual-report/annual-report-archive
10. MerckandCo,Inc.2017.AnnualReport2017.Retrievedfromhttp://investors.merck.com/financials/annual-reports-and-proxy/default.aspx
11. EconomiccostsofdiabetesintheU.S.In2012.Diabetescare.2013;36:1033–1046.[PMCfree
article][PubMed]12. DeRuiter,Jack.“DrugPatentExpirationsandthe‘PatentCliff.’”U.S.Pharmacist–TheLeadingJournal
inPharmacy,USPharmacist,20June2012,stage.uspharmacist.com/article/drug-patent-expirations-
and-the-patent-cliff.13. Garden,Rose.“RemarksbyPresidentTrumponLoweringDrugPrices.”TheWhiteHouse,TheUnited
StatesGovernment,11Mar.2018,14:08,www.whitehouse.gov/briefings-statements/remarks-president-trump-lowering-drug-prices/.
14. “HealthyAging.”CentersforDiseaseControlandPrevention,CentersforDiseaseControlandPrevention,15Jan.2016,www.cdc.gov/chronicdisease/resources/publications/aag/healthy-aging.htm.
15. “NationalCenterforHealthStatistics.”CentersforDiseaseControlandPrevention,CentersforDiseaseControlandPrevention,3May2017,www.cdc.gov/nchs/fastats/health-expenditures.htm.
16. Mukherjee,Sy.“WhyTrump'sBigDrugPriceSpeechSentHealthCareStocksSoaring.”Fortune,
Fortune,11May2018,fortune.com/2018/05/11/trump-drug-pricing-proposal-health-stocks/.17. Mukherjee,Sy.“WhyTrump'sBigDrugPriceSpeechSentHealthCareStocksSoaring.”Fortune,
Fortune,11May2018,fortune.com/2018/05/11/trump-drug-pricing-proposal-health-stocks/.
18. Datafrom:Bloomberg(5-16-18)19. “NationalHealthExpenditureProjections2017-2026.”NationalHealthExpenditureProjections2017-
2026,CentersforMedicare&MedicaidServices,17Apr.2018,www.cms.gov/Research-Statistics-
Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/index.html.
EliLillyandCompany7/14/18Wu,E
26|P a g e References
20. Mullin,Rick.“TuftsStudyFindsBigRiseinCostofDrugDevelopment.”CENRSS,AmericanChemical
Society,20Nov.2014,cen.acs.org/articles/92/web/2014/11/Tufts-Study-Finds-Big-Rise.html.21. Spiegel,Francis.“TheEconomicsofPharmaceuticalResearchandDevelopment:AnIndustry
Perspective.”AdvancesinPediatrics,InstituteofMedicine(US)CommitteeonTechnological
InnovationinMedicine,1Jan.1991,www.ncbi.nlm.nih.gov/books/NBK234300/.22. “TheDrugDevelopmentProcess-Step3:ClinicalResearch.”USFoodandDrugAdministrationHome
Page,CenterforBiologicsEvaluationandResearch,13June2018,www.fda.gov/ForPatients/Approvals/Drugs/ucm405622.htm.
23. Trump,DonaldJ.“‘Pfizer&Others..."Twitter,Twitter,9July2018,
twitter.com/realdonaldtrump/status/1016368503723577344?lang=en.