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Shares of Eli Lilly (LLY) are taking a hit after the Centers for Medicare & Medicaid Services (CMS) published late Tuesday its proposed national coverage determination (NCD) for Biogen’s Aduhelm, an FDA approved monoclonal antibodies (mAbs) directed against amyloid for the treatment of Alzheimer’s disease. The CMS determined that Aduhelm will be limited to Medicare recipients who are willing to enroll in qualifying clinical trials.
It may only be a preliminary decision, but it’s a tough one for Biogen’s Aduhelm, a first-of-its kind treatment that was already controversial and heavily scrutinized. The bulls had hoped for coverage with evidence development due to the significance of the unmet need for Alzheimer’s treatments, but the bears were right because the CMS decision will limit the population to those in clinical studies, making Biogen’s initial commercial opportunity much smaller than thought.
We understand why Eli Lilly shares are trading lower today. The market is viewing the preliminary decision on Biogen’s Aduhelm and extrapolating its implications to others like Eli Lilly, whose Alzheimer’s treatment donanemab is expected to receive FDA approval later this year. However, we question the magnitude of Eli Lilly’s decline for a few reasons.
First off, we believe Eli Lilly’s donanemab is superior to Biogen’s Aduhelm, and what will add conviction in their treatment is the data from the ongoing Phase 3 TRAILBLAZER-ALZ 2 study. The readout of this study is a catalyst event that should help the industry better understand how its benefits outweigh the risks. The readout of this study is expected in the first half of 2023 and according to JPMorgan analysts, Eli Lilly believes a successful phase 3 readout will address any reimbursement hurdles.
Secondly, donanemab’s estimated revenues are immaterial to 2022 guidance. Right now on FactSet, the consensus estimate for donanemab revenues this year is $153 million. This figure is a drop in a bucket to Lilly’s $27.8 billion to $28.3 billion 2022 guidance range. In all likelihood, donanemab sales probably will not begin to materially ramp up until after the Phase 3 readout of the study we just mentioned. So in other words, Eli Lilly has plenty of time to prove out the efficacy and safety of its treatment and further distance themselves from Biogen.
Lastly, while Alzheimer’s is an important part of the Eli Lilly thesis, they have plenty of other things going for them. Lilly consistently delivers peer leading growth rates due to the strength of its recent product launches and minimal loss of exclusivity (LOE) risk. What Lilly is doing to combat obesity is significant and represents a new long-term growth opportunity. And finally, don’t lose sight of management’s excellent track record of operating margin expansion.
The bottom line here is that while yesterday’s news was a negative headline for mAbs, we are not making any changes to our long-term view of Eli Lilly’s Alzheimer’s opportunity. We would be buyers of the stock if we were not restricted from trading today.
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(Jim Cramer’s Charitable Trust is long LLY.)