BMO's Bearish Stance On Eli Lilly Comes To An End

The bearish case for Eli Lilly And Co LLY's stock is based on multiple concerns, but the stock's decline since the beginning of the year implies a better risk-to-reward profile, according to BMO Capital Markets. 

The Analyst

BMO's Alex Arfaei upgraded Eli Lilly from Underperform to Market Perform and lifted the price target from $74 to $79.

The Thesis

The case against owning Eli Lilly's stock is based on the following factors, the analyst said:

• Downside risk from Humalog.
• The likelihood of Medicare Part D reform pressuring insulin prices. 
• Competition from Novo Nordisk A/S (ADR) NVO. 
• A cautious outlook for Vernezio.
• Uncertainty surrounding Bari.
• Positive data from Astra Zeneca plc (ADR) AZN's Farxiga presenting a competitive risk to Jardiance. 
• Headwinds in the animal health business. 

Yet the stock's fall since the turn of the year implies that the concerns are mostly priced in, the analyst said. 

Arfaei highlighted projected tailwinds for Eli Lilly:

• Trulicity continuing to show strong growth.
• Stabilization in Alimta.
• Gowth from Taltz, Jardiance and Basglar.
• A potential divestiture of Elanco that would unlock value.

Looking forward to Eli Lilly's first-quarter earnings report on April 24, the company should meet if not modestly beat expectations, the analyst said. BMO is modeling for Eli Lilly to earn $1.17 per share in Q1 on revenue of $5.506 billion versus the Street estimates of $1.14 per share and revenue of $5.494 billion.

Eli Lilly should end 2018 at the top end of its revenue and EPS guidance of $4.81 to $4.91 per share and $23 to $23.5 billion., Arfaei said. Beyond 2018, the analyst isn't expecting the company to achieve its revenue growth guidance of 5 percent through 2020, mostly due to Humalog and Humulin concerns.

Price Action

Shares of Eli Lilly were trading higher by 0.53 percent at the time of publication Friday morning. 

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