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What’s Driving Lilly’s (LLY) Shares after 2016 Decline?

Zacks

After a rather difficult 2016, share price of pharma giant, Eli Lilly & Company LLY has picked up in 2017.

What Hurt Shares in 2016?

In 2016, Lilly’s shares were hurt due to soft earnings and some negative pipeline updates, including the failure of its high-profile investigational Alzheimer’s disease drug, solanezumab.

As a result, shares recorded a sharp decline of 12.7% in 2016, compared with a drop of 5.5% for the Zacks classified Large-Cap Pharma industry.


However, the stock has done well so far this year. Year to date, Lilly’s shares have risen 9.1%, while the industry is up 2.6%.

What is Aiding the Recovery?

Lilly’s outperformance lately has been backed by a robust guidance for 2017 and a number of positive regulatory updates announced in the recent past, including Jardiance’s label update, Lartruvo’s U.S. approval and Olumiant’s approval in the EU. Also, its win against Teva in the Alimta patent lawsuit pushed the shares up.

Bullish Outlook for 2017

In mid-Dec 2016, Lilly issued a better-than-expected financial guidance for 2017, which it later maintained at the fourth quarter conference call held in January this year. Adjusted earnings per share are expected in a range of $4.05 to $4.15, representing a growth rate of 15% to 18%.

Revenues are expected in a range of $21.8–$22.3 billion. While new products like Trulicity, Taltz, Basaglar, Cyramza, Jardiance and Lartruvo are expected to see higher revenues in 2017, Lilly expects some established products like Trajenta, Forteo and Humalog to continue doing well. The Animal Health division is also expected to see revenue growth.

Jardiance’s Label Update

In Dec 2016, the FDA approved the inclusion of the cardiovascular (CV) indication to the label of diabetes drug Jardiance, which was later launched in Jan 2017.

With about 50% of the deaths in type II diabetics across the world resulting from the CV disease, addition of this data to Jardiance’s label is expected to significantly bolster sales of the drug. Jardiance recorded sales of $201 million in 2016.

The European Commission also approved the Jardiance label update for the cardiovascular indication in 2016

Win Against Teva in Alimta Patent Lawsuit

In January this year, Lilly announced that it has received a favorable ruling in a lawsuit against Teva Pharmaceutical Industries Ltd.TEVA related to the infringement of a vitamin regimen patent for its cancer drug Alimta by the U.S. Court of Appeals for the Federal Circuit. The Court of Appeals confirmed a lower court’s 2015 decision that the Alimta vitamin regimen patent is valid and would be infringed by the generic challenger's proposed products.

If the patent is ultimately upheld through all the remaining challenges, including IPR proceedings, Alimta would maintain U.S. exclusivity until May 2022.

Alimta generated sales of $2.28 billion in 2016, accounting for almost 11% of the company’s total sales.

Two Drug Approvals

In Oct 2016, Lartruvo (olaratumab) was launched in the U.S. for the treatment of soft tissue sarcoma (STS). In Europe, it was launched in mid November. Lartruvo is the first FDA-approved front-line treatment to receive regulatory approval for STS in four decades and is expected to boost the company’s top line this year.

Meanwhile, in January this year, Lilly expanded its existing immuno-oncology partnership with Merck & Co., Inc. MRK to include a new study that will evaluate Lartruvo in combination with Merck’s Keytruda in patients with previously treated advanced or metastatic STS.

Earlier this month, Lilly along with partner Incyte Corporation INCY announced that the European Commission has granted marketing authorization to once-daily baricitinib in Europe for the treatment of adults with moderate-to-severe active rheumatoid arthritis (RA). The drug will be marketed by the trade name of Olumiant. This is the first regulatory approval for Olumiant. It is the first JAK inhibitor approved to treat RA in the EU. The drug is under review in the U.S.

Conclusion

Lilly will continue to face headwinds in 2017 including competition from immuno-oncology agents, loss of exclusivity for many drugs in emerging markets, and rising competitive pressure for key drug Alimta in the U.S. However, we believe the new drug approvals, a strong animal health and diabetes business, a solid pipeline and aggressive savings will pave way for growth this year.

Lilly carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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