After you receive this post, we will be exiting our position in Bristol-Myers Squibb for the charitable trust, selling 800 shares at roughly $57.38. In addition, the charitable trust will be initiating a position in Eli Lilly, buying 100 shares at roughly $232.66. Following the trades, Eli Lilly will represent 0.6% of the portfolio.

With the S&P 500 healthcare sector bouncing off a greater than 8% decline, we are on the hunt for bargains, scanning for best-of-breed names with strong fundamentals and positive catalysts on the horizon. Also, with so many stocks off their prior higher levels following the last month’s swoon in the portfolio, we are looking for opportunities to move up in quality and upgrade the portfolio.

Exiting Bristol-Myers:

Bristol-Myers Squibb is one of the smallest positions in the portfolio, and we will sell the last of our shares for a small average gain of around 4%. We were aggressive sellers in this position from May through late July as the stock marched to the upper $60s on what we viewed as nothing more than a rotation back into the drug stocks.

We considered BMY as a source of cash because we have not been pleased by how the Celgene assets and late-stage pipeline had performed. Also, we did not like how there has been uncertainty with when Mavacamten, the key drug acquired from the MyoKardia deal, would get approved. Loss of exclusivity risk has also been an overhang and the key reason why the stock can’t expand off its high single-digit price-to-earnings per share multiple.

On top of this, we were disappointed by how Bristol announced the other day that Deucravacitinib did not meet its primary efficacy endpoint in moderate to severe ulcerative colitis. This update won’t break Bristol-Myers' back, but it gave us one more reason to be less positive in the name.

Buying Eli Lilly:

On the other hand, let’s take a look at Eli Lilly. The Charitable Trust was buying this one earlier this year and aggressively under $200 after the stock fell hard in March on Alzheimer’s data that failed to live up to lofty expectations. But we stuck by it, battled, and eventually came out on top after we rang the register for a great gain in June when the stock surged in sympathy to the FDA approving Biogen’s Aduhelm, an Alzheimer’s drug that we think is inferior and less controversial than Lilly’s.

So why are we making this swap? As discussed earlier, we are seeing an opportunity to upgrade the portfolio here. It’s not in our style to sell a stock so close to its 52-week low, but BMY and LLY are both roughly 15% off from their respective highs. When we see this scenario play out in a market that has also broadly pulled back, the question we are forced to ask ourselves as portfolio managers is what is the better stock? Who is more likely to reclaim and eventually take out its higher level? In our view, we think the answer is LLY.

Eli Lilly is the best-of-breed name in pharma right now. The company is run by a great management team with a great track record of margin expansion. Eli Lilly’s product lineup also has very little loss of exclusivity risk and consistently delivers top-tier growth thanks to its leading diabetes franchise, which is most known for Trulicity.

We also see a very attractive combination of recently launched and late-stage assets that should continue to support growth well into the future. Specifically, our focus is on Emgality for migraine, Verzenio in breast cancer, Tirzepatide in diabetes, LOXO 305, and Mirikizumab for ulcerative colitis. And, of course, Eli Lilly’s Alzheimer’s pipeline has the potential to be transformational if successful. On our radar is the company’s planned accelerated approval filing (expected before the end of the year) and additional data readouts in 2022.

We are starting relatively small on Eli Lilly as we like to leave plenty of room to scale in over time. As always, we never like to buy all at once when putting on a new stock position for the Charitable Trust. The reason for this is that we are humble. Our entry point may not always be the best price, and we plan to accumulate more shares into weakness.

Given our positive view on Eli Lilly’s product cycle, pipeline, and opportunity in Alzheimer’s, we think the stock can at least work its way back to the high it made in August. We are initiating the position with a $275 price target.

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