Is There More Upside For Eli Lilly Stock At $160?

by Trefis Team
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Despite a 37% rise since the March 23 lows of this year, at the current price of around $163 per share we believe Eli Lilly’s stock (NYSE:LLY) has more room for growth. Eli Lilly stock has rallied from $119 to $163 off the recent bottom, in-line with the S&P which moved 36%. Eli Lilly stock is also up 104% from levels seen in early 2018, two years ago.

Eli Lilly’s stock has fully reached the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Despite the healthy rise since the March 23 lows, we feel that the company’s stock still has potential partly led by its Olumiant drug, which is being tested in phase 3 as a possible candidate for Covid-19 treatment.

Some of this rise of the last 2 years is justified by the roughly 12% growth seen in Eli Lilly’s revenues from 2017 to 2019, which translated into a similar growth in Net Income Margins. Given the company’s steady revenue and earnings growth over recent years, its PE multiple has also expanded. We believe the stock is likely to see more upside despite the recent rally and the potential weakness from lockdowns driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 104% Change in Eli Lilly Stock between 2017 and now?‘, has the underlying numbers.

Eli Lilly’s PE multiple increased from 19x in 2017 to 21x in 2019. While the company’s PE is now 27x, higher than the levels seen in recent years, it could expand further subject to positive findings in the late stage pipeline.

So what’s the likely trigger and timing for further upside?

The global spread of Coronavirus has meant there just aren’t many people visiting doctors for non-emergency cases, and several types of elective surgeries are being postponed, resulting in lower prescriptions being issued. We believe Eli Lilly’s Q2 results in July will confirm the hit to its revenue. That said, the growth in Eli Lilly stock over recent weeks is primarily about its late stage pipeline, as its rheumatoid arthritis drug, Olumiant, entered phase 3 for possible Covid-19 treatment. This is important, given it could add billions of dollars in incremental sales over the next few years, if it is approved by the regulators. For perspective, the FDA has already given emergency use authorization to Gilead for its drug – Remdesivir – which costs up to $3,120 for private insurance plans, and $2,340 for governments for a five-day treatment course, and the peak sales are estimated to be around $8 billion.

Additionally, the positive results in phase 3 for Eli Lilly’s breast cancer drug Verzenio are also encouraging, given the drug’s peak sales are estimated to be over $7.5 billion. The company is also seeing market share gains for its diabetes drug, Trulicity, which will further bolster sales. As lockdowns are lifted and investors could begin to focus on the company’s performance in 2021 and onward – potentially driving Eli Lilly stock higher over the coming months.

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations vs historic valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. 

While Eli Lilly looks like it can gain more, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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