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Cramer's Investing Club: Recent Drop in a Portfolio Drug Stock Only a Minor Setback

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After the big run last week, Eli Lilly (LLY) shares have backed off to a bit to the mid-$260s due to a combination of investors booking profits where they had them in a volatile market and rotational pressure from the risk-on attitude of Tuesday's rally.

What sent shares of Eli Lilly to new highs last week, including a roughly 10% gain on a single day, was an Investor Day event that was nothing short of impressive. They raised 2021 revenue and earnings per share guidance above consensus thanks to additional revenue from Covid antibodies sales. And their 2022 outlook was much better than what anyone expected.

See, heading into the event, many analysts feared 2022 would be a down earnings year for Lilly due in part to a reduction in Covid antibody revenue and a step up in investment to fund their large phase 3 programs and support their massive new product launches. But Eli Lilly put an end to that narrative last week.

  • Their sales outlook was higher than estimates at the top end of the range.
  • The adjusted earnings per share guide of $8.50 to $8.65 crushed expectations of $8.13 thanks to operating margin expansion.
  • If Eli Lilly delivers the 32% operating margin in guidance, that would mean the company has expanded margins by over 1,100 basis points since 2016.
  • And by the way, if the FDA ever approves the use of Eli Lilly's second generation Covid antibody cocktail treatment, those sales will represent pure upside to the numbers.

On top of guidance, Eli Lilly showcased a pipeline that we think is the most valuable in the industry. The two most important medicines in the pipeline with commercial opportunities greater than $10 billion are tirzepatide for the treatment of type 2 diabetes and obesity (an area of increased focus for Lilly) and donanemab for Alzheimer's. Both are expected to be approved by the FDA in 2022 and support Eli Lilly's top-tier growth for years. In addition to the great work Eli Lilly is doing in obesity and neuroscience, management highlighted the opportunities that exist in their oncology and immunology pipelines.

The Investor Day event was everything we had hoped for and confirmed our belief that Eli Lilly has the strongest and cleanest multi-year top and bottom-line growth story in all of large-cap pharma. The top-line growth is fueled by recent and upcoming launches, with Lilly on track to deliver 20 new medicines in a 10-year period beginning in 2014. And the earnings growth is coming from management's superior productivity and ability to expand margins up to the mid-to-high 30s in the medium term.

If you didn't get in ahead of the Investor Day, we think this roughly 6% to 7% pullback from the high has given investors a second chance to either start a position or further add to one if they wanted more.

The CNBC Investing Club is now the official home to my Charitable Trust. It's the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.

 As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.

 (Jim Cramer's Charitable Trust is long LLY.)

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