New Upside Potential Drives JPMorgan's Eli Lilly Upgrade

JPMorgan has upgraded Eli Lilly and Co (NYSE: LLY) to Overweight from Neutral based on the potential for new product driven upside to estimates in 2017 and beyond. The brokerage's bullish thesis also reflects a favorable risk/reward for solanezumab data in Alzheimer patients late this year.

Notably, Lilly modified the study to include only a cognitive endpoint (ADAS-Cog14) as its primary endpoint, moving the more challenging function endpoint (ADCS-iADL) to a secondary earlier this year.

"While the FDA recommends both cognitive and function endpoints for Alzheimer's drug approvals, we would not be surprised to see a positive cognitive endpoint and a trend towards functional benefit ultimately being sufficient for approval," analyst Chris Schott wrote in a note.

Outcomes And Probabilities

The analyst sees more than 15 percent upside in the stock if EXP-3 study meets both primary and secondary endpoints, which he states are between a 10–20 percent probability.

The analyst expects a more muted 10 percent upside if the study hits on its primary but only shows a trend on secondary endpoints (50–60 percent probability).

Further, Schott predicts a 10 percent drop in stock if the study fails both endpoints (about 30 percent probability).

Moreover, irrespective of the outcome of solanezumab, Schott sees a diverse range of new product opportunities supporting Eli Lilly's greater than 5 percent top-line growth target.

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The analyst forecast about 6 percent top-line growth through 2020, with about 5 percent excluding risk adjusted solanezumab sales.

The analyst's sales growth target is also supported by a number of $1+ billion product opportunities such as Trulicity, Jardiance, Taltz, baricitinib and abemaciclib.

"In aggregate, we forecast recent/upcoming new product launches to generate $11.4 billion in sales by 2020," Schott highlighted.

Driven by healthy top-line growth, the analyst also projects significant margin expansion over the next several years and predicts margins of about 32 percent by 2020 versus about 22.5 percent estimated in 2016. As a result, Schott anticipates annual EPS growth of about 16 percent though 2020.

At time of writing, shares of Lilly rose 1.57 percent to $79.82, while the analyst raised his price target by $3 to $95 (implying 21 percent upside potential over last close).

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