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 and rotational pressure stemming from a risk-on period that started with Tuesday’s rally.

What sent shares of Eli Lilly to new highs last week was an Investor Day event that was very impressive. They raised 2021 revenue and earnings per share guidance above consensus thanks to additional revenue from COVID-19 antibodies sales. Their 2022 outlook was much better than what anyone expected. Heading into the event, many analysts feared 2022 would be a down-in-earnings year for Lilly due in part to a reduction in COVID-19 antibody revenue, a step up of investments to fund their large phase 3 programs and support launches of their new products. However, Lilly put an end to that narrative:

• 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.

• And by the way, if the FDA ever approves the use of Eli Lilly’s second generation COVID-19 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 are Tirzepatide for the treatment of type 2 diabetes and obesity (an area of increased focus for Lilly) and Donanemab for Alzheimer’s (truly one of the first if you ex out the controversial Biogen's Aduhelm). Both are expected to be approved by the FDA in 2022 and support Eli Lilly’s top-tier growth for years. They also have great works going on in neuroscience, and management highlighted the opportunities that exist in their oncology and immunology pipelines.

Adding to Eli Lilly

The Investor Day event was bottom-line perfect, confirming our view that Eli Lilly has the strongest and cleanest multi-year growth story. What surprises us the most, actually, is the fact that shares have now cut half of the gain produced from the event. We're viewing this roughly 6% pullback from the high as a buying opportunity to add to our Eli Lilly position. Yesterday, we bought shares in the $265 area, effectively increased this position to 7.2% from the former 6%. We've also increased the allocation for this position, from the former 5% to now 8%.

Exiting Pfizer (PFE), Booking A 28% Gain

The reason why we were able to add and increase our weighting for LLY was because we sold out of all of our Pfizer positions. We exited this 3% position at an average price of $60.12/share, cost basis being $46.96/share, effectively realizing a 28% gain. We sold shares of Pfizer pretty much at all time high here, for a couple reasons. First, shares have been surging in recent months because of Covid-variants concerns, which came especially true when the Omicron started to surface. Shares of Pfizer trade as a defensive strategy, as investors buy when there are growth scares. We believe this defensive play has gotten too much ahead of itself, and in the near-term there will be some shift towards a more risk-on sentiment as the Omicron variant doesn't appear to be of too much concerns. Second, from the portfolio management perspective, a 28% percent gain is always primed to be booked. We couldn't just book the gain partially because our position in Pfizer has always been smaller than what we want it to be. As a result, we thought to book all the gains together, reserve the capital for something else. We decided to use that capital for our addition and increase in weighting of Eli Lilly. For this name, we have an attractive cost-basis, a strong share size and a greater outlook in terms of where shares would likely go.