Eli Lilly is still best long-term growth story in large cap pharma despite messy quarter

Published Tue, Nov 1 20222:25 PM EDTUpdated Tue, Nov 1 20222:30 PM EDT

Eli Lilly (LLY) reported a noisy third-quarter before the opening bell Thursday, but the numbers did not change our thesis in what we think is the best long-term growth story in large cap pharma. The results themselves were a beat, with total revenue increasing 2% year over year, or 7% on a constant currency basis, to $6.94 billion, compared to the consensus estimate of $6.892 billion, according to Refinitiv. The gains were driven by a 14% increase in volumes, partially offset by a 7% decline in price and a 4% foreign exchange (FX) headwind. The adjusted operating margin was 28.9%, representing an increase of about 1 percentage point over last year. Eli Lilly's ability to expand operating margins over the next few years has been a focal point of why we own the stock. On the bottom line, Eli Lilly grew its adjusted earnings-per-share by 12% to $1.98, beating the consensus forecast of $1.92, according to Refinitiv. This non-GAAP figure includes a 6-cent-per- share charge related to acquired in-process research and development (IPR & D) and development milestone charges. This is a new accounting standard pharmaceutical companies began reporting this year. (GAAP stands for generally accepted accounting principles.) The headline figures look fine, but things got messy with the outlook for the rest of 2022, meaning the fourth (current) quarter. Lilly lowered both its sales and adjusted EPS outlook, mostly due to increased headwinds from FX. Bottom line Another messy quarter for Eli Lilly but one that has little impact on what we believe is still a compelling story. To be clear, we understand that Lilly deserves to get dinged Tuesday afternoon, and the stock fell more than 4% to $346. Though it's worth noting that LLY has gained 25% in 2022, a year that the S & P 500 has lost more than 16%. Management lowered its full-year outlook, we didn't get any major pipeline announcements, and its investments in growth mean the long-term operating margin expansion story could be on pause in 2023. When a stock is trading at an all-time high and has significantly outperformed the broader market year like Eli Lilly has, a print like this is more likely to trigger profit-taking than create new incremental buyers. LLY's record intraday high was Monday at $363.92 per share. But we see no