While Goldman Sachs is raising their Pharma and Specialty Pharma view to Attractive from Neutral, the one rating change that stands out for me is rating cut of Eli Lilly & Company (NYSE:LLY):
Source of opportunity We are moving Eli Lilly (LLY) to the Americas Conviction Sell List based on our view that (1) long-term estimates are at risk due to the double patent cliff, thin pipeline, and the need to fund the early stage pipeline and support new product introductions beyond 2015; (2) the short-term outlook is at risk due to the Effient launch curve, which we believe will underwhelm based on our proprietary surveys; and (3) risk to LLY’s premium multiple, which trades at a 2015 P/E multiple of 14.2x vs. the sector average of 9.6x despite the dichotomy in relative growth profile with its peers.
Catalyst With a patent cliff now the largest in the industry and recent setbacks to its pipeline, we see significant downside risk to long-term estimates for which there is little offset. In the near term, the launch of Effient, an anti-platelet drug, is key to sentiment. Based on our survey of 50 cardiologists, we believe that the launch curve will underwhelm, and peak sales (to LLY) will reach only $500 million. While we acknowledge that Effient consensus projections have withered over the past year, this could prompt a market reassessment of LLY’s long-term EPS relative outlook (2011-2015: -14% vs. avg of -3%) and right-size its premium multiple (2015: 14.2x vs. avg of 9.6x). In addition, LLY’s relative positioning in the sector has weakened amidst industry deal activity to stabilize cash flows and cut excess fat.
Action: Upcoming patent troubles are widely known and would not generate much interest if not coming out of such powerhouse. What cought my eye was the negative view on the uptake of Effient, providing a near-term negative catalyst for the company. Expect the shares to come under pressure today, potentially going south of $33.