Eli Lilly (LLY), one of our highest-P/E portfolio holdings, is an exemplar of a richly valued growth stock that should easily sail inflationary waters, suggests Stephen Leeb, growth stock specialist and editor of The Complete Investor.
Since we recommended it about four years ago the stock is up about 170%. It’s tempting to take that kind of profit in a market that promises to get rockier, but we think Lilly is a good bet to continue to reward us further.
Lilly is clearly an outstanding drug company, superior to its major rivals. But what really convinced us to stay with the company is that its strong growth extends over multiple modalities.
Always a leader in diabetes, the company has strengthened this franchise with drugs like tirzepatide. It not only sharply reduces symptoms of diabetes 2 but also can reduce obesity — arguably the most serious chronic health condition in the developed world — treat chronic kidney disease, and in some cases treat sleep apnea.
The company also has become a major player in oncology with drugs that treat advanced breast cancer and lung disease. In immunology the company has introduced drugs that moderate Crohn’s disease and eczema.
The Lilly drug recently creating the biggest headlines is donanemab, for early treatment of Alzheimer’s. The drug has been fast tracked by the FDA and appears to be superior to rival offerings. In valuing Lilly, however, our expectations for this drug are relatively modest.
We consider it a part of the company’s neurology franchise, which includes development of gene therapies to treat Parkinson’s and neurodegenerative diseases. Though this area has blockbuster potential, for now in projecting Lilly’s growth we give the company’s metabolic drugs much greater weight. That leaves a lot of room for upside surprises.
Lilly also has developed medicines for Covid that WHO has strongly recommended. Though these medicines, primarily Baricitinib, reduce death rates of critically ill patients by nearly 50%, right now we expect their overall contribution to the company’s growth to be minimal.
With very little contribution from the neurology area, Lilly’s earnings should climb from a bit more then $8 a share in 2021 to over $15 a share in 2025. That kind of growth should continue past mid-decade and then be turbocharged by much larger contributions from neurology.
Any stock as richly valued as Lilly is vulnerable to sharp setbacks, but with its diversification over multiple areas, if you want to own a major drug company, this is clearly the one.
