Eli Lilly (LLY) reported a noisy third-quarter before the opening bell Thursday, but the numbers did not change our thesis in what we think is the best long-term growth story in large cap pharma.

• The results themselves were a beat, with total revenue increasing 2% year over year, or 7% on a constant currency basis, to $6.94 billion, compared to the consensus estimate of $6.892 billion, according to Refinitiv. The gains were driven by a 14% increase in volumes, partially offset by a 7% decline in price and a 4% foreign exchange (FX) headwind.

• The adjusted operating margin was 28.9%, representing an increase of about 1 percentage point over last year. Eli Lilly’s ability to expand operating margins over the next few years has been a focal point of why we own the stock.

• On the bottom line, Eli Lilly grew its adjusted earnings-per-share by 12% to $1.98, beating the consensus forecast of $1.92, according to Refinitiv. This non-GAAP figure includes a 6-cent-per- share charge related to acquired in-process research and development (IPR&D) and development milestone charges. This is a new accounting standard pharmaceutical companies began reporting this year. (GAAP stands for generally accepted accounting principles.)

• The headline figures look fine, but things got messy with the outlook for the rest of 2022, meaning the fourth quarter. Lilly lowered both its sales and adjusted EPS outlook, however mostly due to increased headwinds from FX.

Selected products

Here’s a rundown of Lilly’s key growth products, which in the third quarter collectively grew revenue 18% year over year and now account for 70% of its core revenue.

• Tirzepatide, marketed as Mounjaro for type-2 diabetes, revenue of $187 million beat estimates of $79 million. This figure includes a one-time upfront receipt of $86 million for forming a partnership in Japan. It was still a beat in the quarter even when backing out this figure.

• Trulicity revenue of $1.85 billion missed estimates of $1.95 billion.

There were some beats and misses in some other drugs like any company report, which we detail below. However, the data point we are more focused on is the incredible early results of Mounjaro, which we remind you launched four months ago. We remain impressed with how quickly the uptake has been in the United States. It has had the fastest launch of any type 2 diabetes injectable incretin class by an extremely wide margin.

Of course, one could look at the beat from Mounjaro and the miss at Truclitiy and say Mounjaro is simply cannibalizing the growth of a different key drug. Eli Lilly does not believe to be the case based on the low switching rates and the expansion of the market, and we agree. Approximately 70% of Mounjaro new therapy starts are patients naive to the type 2 diabetes injectable incretin class and less than 10% for switches from Trulicity. The important next step for Eli Lilly is to invest in its manufacturing capacity in order to keep up with its unprecedented demand.

• Verzenio revenue of $618 million beat estimates of $615 million

• Jardiance revenue of $573 million beat estimates of $495 million

• Taltz revenue of $679 million missed estimates of $682 million

• Retevmo revenue of $40.5 million missed estimates of $52 million.

• Mounjaro revenue of $187 million beat estimates of $79 million. This figure includes a one-time upfront receipt of $86 million for forming a partnership in Japan. It was still a beat in the quarter even when backing out this figure.

• Emgality revenue of $169 million beat estimates of $166 million

• Olumiant revenue of $183 million missed estimates of $190 million

• Tyvyt revenue of $77 million missed estimates of $102 million

• Cyramza revenue of $232 million missed estimates of $235 million

Other notable products:

• Covid antibodies’ revenue of $387 million for the quarter beat estimates of $171 million

• Humalog revenue of $447 million missed estimates of $570 million

• Alimta revenue of $119 million missed estimated of $171 million

• Humulin revenue of $238 million missed estimates of $262 million

• Basaglar revenue of $193 million beat estimates of $169 million

• Forteo revenue of $177 million beat estimates of $144 million

Pipeline update

• As a reminder, the FDA granted a Fast Track designation for tirzepatide to treat obesity or overweight with weight-related comorbidities. Lilly plans to initiate a rolling submission in 2022 and complete the submission shortly after Surmount-2 data is available, which is expected in April 2023. The company believes it could see regulatory action as early as late next year. We remain of belief that tirzepatide (marketed as Mounjaro for type-2 diabetes) could grow to become one of the best selling drugs of all time.

• In Alzheimer’s, Lilly believes the positive top line Phase III results for Biogen’s lecanemab reinforces its confidence in its own medicine, donanemab, and the upcoming readout from its Phase III Trailblazer-Alz 2 study, which is expected by the middle of 2023.

Guidance

Turning to 2022 guidance, management lowered its total revenue outlook to reflect $300 million in incremental headwinds from foreign exchange rates. It now sees revenue in the range of $28.5 billion to $29 billion, down from $28.8 billion to $29.3 billion and in-line with estimates of $28.75 billion.

Unchanged were management’s outlook for adjusted gross margin of 78% and adjusted income margin of 29%.

The company’s adjusted earnings per share outlook was revised lower by approximately 20 cents to the range of $7.70 to $7.85. The change was driven by the negative impact of foreign exchange and increased IPR&D and development milestone charges, which were 6 cents in the quarter.

On the earnings call, we also learned some early thoughts about how management is thinking about next year. Management expressed confidence in the growth outlook of its core business. While the initial revenue from its next wave of potential launches will be modest, it believes the potential launch of four new medicines between now and the end of 2023 will serve as additional catalysts for continued growth. Those four medicines to watch are donanemab in Alzheimer’s, pitubrutinib in oncology, mirikizumab in psoriasis and ulcerative colitis and lebrikizumab in atopic dermatitis.

Elsewhere, Lilly expects its investment in R&D, manufacturing capacity, and workforce to slow its operating margin expansion next year. These investments are all completely understandable because they are in the best interest of the company and will sport Lilly’s leading revenue growth and margin expansion over the mid to long term. However, management said it will slow Lilly’s operating margin expansion in 2023, and the stock might have gotten dinged on that.

Bottom line

Another messy quarter for Eli Lilly but one that has little impact on what we believe is still a compelling story. It’s worth noting that LLY has gained 25% in 2022, a year that the S&P 500 has lost more than 16%. We see nothing here to change our long-term bullish views about the company, and the new medicines launched this year and plans to launch next year. As a pharmaceutical company that has very limited sensitivity to what happens with the broader economy, we appreciate Lilly for its defensive growth. We prefer to see a little more weakness off the all-time high before stepping in and add shares.