Hi Ho Silver...
The Lone Ranger? Who is that "masked" man? Nope. It's Francesco Branca, director of the Department of Nutrition and Food Safety in the World Health Organization.
On Friday morning, Branca spoke to Reuters in London. According to Reuters, Branca spoke on the topic of newly effective obesity drugs such as Novo Nordisk's (NVO) Wegovy and Eli Lilly's (LLY) dual-action drug known as Mounjaro. Mounjaro has already been approved for the treatment of diabetes.
Branca said that these drugs are no "silver bullet" that would address the recent and rapid rise in global obesity rates. The WHO is said by Reuters to be conducting its first review of obesity management guidelines in more than 20 years. Branca expects the organization to first revise guidelines for the treatment of children and adolescents with obesity and then will make recommendations for adults.
Branca feels that the messaging around these new drugs, that "we've found a solution" is wrong. He feels that these drugs will have to be part of a more comprehensive approach. As an Eli Lilly shareholder, I am pretty excited about the prospects for Mounjaro.
Eli Lilly
A little more than two weeks ago, pharmaceutical giant Eli Lilly released the firm's first quarter earnings. The firm also released phase three trial results that showed that patients who took Mounjaro lost up to 15.7% of their body weight over a period of slightly more than 10 weeks (72 days). One caveat... the study focused on type-2 diabetes patients who also happened to be obese.
For the quarter, LLY posted an adjusted EPS of $1.62 (GAAP EPS: $1.49) on revenue of $6.96B. The earnings prints were reflective of both fairly significant misses and fairly significant contractions from the one year ago comparison. The revenue print beat Wall Street, though also showed a y/y contraction. The declines were driven by a $1.47B reduction in revenue generation largely attributable to the decline in Covid-19 antibody sales.
However...
The firm boosted guidance for the full year, largely due to a weaker US dollar versus last year and also due to improved business execution. Lilly took full year revenue up to $31.2B-$31.7B from prior guidance of $30.3B-$30.8B, while also taking full year adjusted EPS up to $8.65-$8.85 from previously given guidance of $8.35-$8.55.
Back to Mounjaro
During the first quarter, Mounjaro sales totaled $568.5M, easily beating expectations in the low $430M's. These sales more than doubled from Q4 2022. There is no year over year comp as the drug only became commercially available last June. As the drug becomes more widely subscribed. insurance coverage will grow and this itself will help grow sales. The firm, at the time of those earnings, said that as of April 1st... almost 60% of type-2 diabetes patients across the realm of commercial health insurance plans and Medicare, currently had access. The Medicare coverage was key.
Fundamentals
For the first quarter, Eli Lilly posted operating cash flow of $1.731B. Out of that came CapEx of $668.5M, leaving the firm with robust free cash flow of $1.062B. Out of that total, the firm repurchased $750M worth of common stock and paid out $1.017B in dividends to shareholders. Hence, the firm will need to rebalance how it allocates capital to shareholders.
At quarter's end, LLY ran with a cash position of $3.725B and inventories of $4.545B. This brought current assets up to $20.811B. Total liabilities add up to $16.01B. This leaves the firm with a current ratio of 1.3, and quick ratio of 1.02, both healthy enough for a passing score.
Total assets amount to $53.163B, including $11.16B in goodwill and other intangibles. At 21% of total assets, I do not see this as a problem. Total liabilities less equity comes to $41.868B, including $18.972B in long-term debt. I would prefer that Lilly divert some free cash flow going forward from the repurchase of common stock toward improving the gap between the firm's cash position and its debt-load going into a recession, but so far they have not asked for my counsel.
My Thoughts
The stock trades at 49 times forward looking earnings, so it is expensive. The balance sheet is okay. Performance has been strong-ish. Guidance is strong. Free cash flows should remain robust enough to correct whatever the firm needs to correct when they need to correct it.
Then, on top of all the other best-selling drugs in the firm's stable (including Trulicity), there is Mounjaro, which has game-changer type potential. That's the reason I am and have been long this name. I bought this one close enough to the bottom of the last cycle, so I have a net basis of $313.35 (+41%). What to do now?
LLY had developed a cup with handle pattern earlier this year that provided a $375 pivot point. My first target is $450. I intend to peel some off there. Should the break out continue uninterrupted, my second target is $469. If this run does not crack by then I would be truly surprised.
My panic point started out at $288. Of course, as we let a winner run, we also drag our panic point along for the rise so as to lock in the victory should fortunes turn. My current panic point would be a failure at the 21 day EMA (exponential moving average). That's currently $407 and around 8% below the last sale.
