Why Morgan Stanley Is Buying The Dip In Eli Lilly

Eli Lilly And Co LLY stock has pulled back in recent months, rendering its valuation more attractive, according to a Morgan Stanley analyst. 

The Lilly Analyst: David Risinger upgraded Eli Lilly from Equal-weight to Overweight and increased the price target from $157 to $176.

The Lilly Thesis: The 9% pullback in Lilly shares seen since June 30 was mainly due to disappointing second-quarter results, the management downplaying COVID-19 antibody opportunities and concern about an impending readout on high-dose Ozempic from rival Novo Nordisk A/S NVO, Risinger said in a Thursday note. 

This has rendered the forward P/E in line with the five-year average, the analyst said. 

Fundamentally, Lilly is likely to outperform, driven by long-term growth prospects, positive Phase 3 tirzepatide results starting in the fourth quarter and rising enthusiasm for its Alzheimer's pipeline, he said.

The consensus estimates underappreciate Lilly's long-term revenue and EPS growth potential, Risinger said.

Morgan Stanley's 2025 revenues and EPS estimates are both 7% above the consensus, the analyst said. 

Tirzepatide could be best-in-class for glucose lowering, weight loss and cardiovascular risk, he said. 

Risinger sees peak sales potential for the candidate as reaching $10 billion. Beyond diabetes, tirzepatide could become a leading prescription drug for obesity, the analyst said.

Among other catalysts, Lilly has four proof-of-concept results from its early stage diabetes pipeline coming in 2021, he said. 

"Lilly's Alzheimer's pipeline represents an inexpensive call option, in our view."  

The analyst estimates only $725 million in risk-adjusted Alzheimer's pipeline sales in 2025.

An FDA approval for Biogen Inc's BIIB highly controversial Alzheimer's investigational drug aducanumab could be a perception positive for Lilly, as a regulatory nod could suggest a low regulatory bar for Alzheimer's, he said.

Lilly has two Alzheimer's candidates — N3PG and tau antibody — set to report Phase 2 data in 2021, Risinger said.

With Morgan Stanley assuming only 5% odds of success for each, the risk-reward is skewed to the upside, the analyst said.

As such, Morgan Stanley increased its estimates for Lilly's key franchises and extended its model.

LLY Price Action: At last check, Lilly shares were down 0.84% at $148.30. 

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