Eli Lilly's stock gained more than 5 percent on Thursday and was trading higher by another 1.50 percent at $72.45 ahead of Friday's market open. Despite the nod of approval from investors, Alex Arfaei of BMO Capital Markets isn't fully convinced.
BMO Capital's Commentary
In a research report following Eli Lilly's guidance announcement, the analyst maintains a Market Perform rating with a price target boosted to $70 from a previous $64, which creates a "balanced" risk to reward profile for the stock.
According to Arfaei, Eil Lilly's guidance is not based on improved fundamentals, rather it is based on "short-term boosts," including:
- $200 million of previously undisclosed revenue from the Boehringer Ingelheim animal health vaccine acquisition.
- Dated foreign exchange expectations, especially regarding the Yen.
- A more positive outlook for mature franchises such as Humalog and Forteo versus the analyst's expectations of the segments declining.
"Overall, none of the factors above reflect meaningful fundamental improvements in Lilly's long-term growth prospects," the analyst argued. "Thus, we are cautious and at the low end of 2017 guidance."
Downside Risk
Arfaei further pointed out four key concerns that provide downside risk to the stock:
- Foreign exchange headwinds are expected to be 3 percent as opposed to the company's expectations of 1 percent.
- Alimta could operate in a heightened competitive environment and lose exclusivity in 2017.
- Pricing pressure for the insulins could accelerate.
- Cyramza may not grow as much as expected given the increased competition.
At last check, Eli Lilly shares were up 1.13 percent at $72.18.
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