Eli Lilly reported mixed third-quarter 2021 results Tuesday morning, but the results itself may not tell the whole story here. Revenue of $6.773 billion (+18% YoY) exceeded estimates of $6.639 billion, while adjusted earnings per share of $1.94 (+38% YoY) missed estimates of $1.98 largely due to a higher-than-expected tax rate and not core operational performance.

Eli Lilly grew its business at a fast clip even when excluding revenue from its COVID-19 therapies, which in the quarter generated $217.1 million in sales.

Key Products:

Taking a look at the company’s key products, some notable beats in the quarter included Trulicity, whose sales grew 45% year over year to $1.6 billion, topping estimates of $1.5 billion. Taltz sales of $593 million were also better than the $576 million estimates. Olumiant sales of $406 million topped estimates of $213 million. Also, Jardiance sales of $390 million exceeded estimates of $371 million.

Some misses in the quarter were Humalog sales of $626 million compared to estimates of $629 million, Alimita sales of $457 million compared to estimates of $576 million, Emgality sales of $140 million compared to estimates of $160 million, and Verzenio sales of $335.5 million compared to estimates of $376 million.

'Significant' Pipeline Update:

In addition to the consistent growth Eli Lilly puts up quarter after quarter, the company made several important progress updates to its pipeline, and this is where the investment case really gets intriguing. The company announced its U.S. submission of tirzepatide in type 2 diabetes using a priority review voucher. Eli Lilly hopes to obtain approval in the United States by the middle of 2022. Tirzepatide is expected to be a major source of growth in the future, with analysts at JPMorgan writing in an October note that they estimate a $10 billion+ opportunity for the drug in type 2 diabetes with potentially multi-billions more in obesity.

Eli Lilly also announced the initiation of a rolling submission for donanemab to the FDA for accelerated approval in early Alzheimer's disease. The company expects regulatory action in the second half of 2022, and we view this as a major catalyst event for the stock. Additionally, Lilly announced a Phase 3 head-to-head trial comparing donanemab to Biogen’s aducanumab to assess superiority of brain amyloid plaque clearance in early Alzheimer’s disease. It is a bit interesting that efficacy was not named the primary endpoint of the study, but management reasoned that plaque clearance may be the appropriate surrogate for predicating clinical efficacy.

We think the pipeline progress announced today is very significant. Tirzepatide is a potential blockbuster drug and donanemab could be transformational to the company’s growth rate. But don’t take it from us. Earlier this morning on “Squawk Box” CEO David Ricks said that these are “two of the most valuable projects we’ve ever worked on and maybe the most value projects in the industry right now.”

Guidance:

On guidance, we find it positive that management raised its total revenue and adjusted earnings per share for 2021. The company now expects total revenue to be in the range of $27.2 billion to $27.6 billion, up from $26.8 billion to $27.4 billion, reflecting additional revenues from COVID-19 antibodies and an improved outlook for the core business. The $27.4 billion midpoint of this new range is slightly higher than the consensus of $27.375 billion. For adjusted earnings per share, management raised its range from $7.80 to $8.00 to $7.95 to $8.05, reflecting the additional antibody revenues and core business. The new $8.00 midpoint is nicely higher than consensus estimates of $7.90 and should shake off any investor concerns about the few penny earnings miss this quarter that was largely due to taxes anyway.

Management also shared a couple of key points to know for 2022. One thing investors should know is that Lilly expects minimal revenue from its COVID-19 therapies next year. This may lead to some difficult comps, but it is not a reason to sell because the company has so much more going for it than COVID-related sales. Not much of a surprise there.

On profitability, management seemed to suggest operating margins may come under pressure next year as investments to support the pipeline ramp up. This callout may have been one of the reasons why LLY initially traded lower at the start of today’s session after being higher for most of the pre-market activity. However, the dip proved to be short-lived, and the stock price recovered as investors likely realized that the company’s upfront investments are in support of top-tier revenue growth for the future. Also, management reiterated its long-term objective of mid-to-high 30s operating margins (from 29.1% year to date). Management plans to provide formal 2022 guidance at their Investor Day event in December.

Bottom Line — Buying Opportunity:

Overall, a solid quarter from Eli Lilly despite the mixed headlines as the operational performance and management’s visibility into year-end was enough for them to raise the company’s full-year outlook. Additionally, we are pleased with the significant progress made with the two most important pipeline assets. We look forward to the possibility of both being approved by the FDA next year.

We thought LLY would have traded even higher in response to the positive pipeline announcements made earlier, thus making the muted reaction in the market a buying opportunity, in our view.

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