The country's approval increases our conviction that the drug will eventually reach the U.S. market and strengthen Lilly's growth prospects and wide moat.
By Damien Conover, CFA | 07-03-17 | 08:00 AM | Email Article

Despite a regulatory delay in the U.S. on  Eli Lilly’s rheumatoid arthritis drug Olumiant announced earlier in the year, the Japanese regulators joined European regulators in approving the drug, which increases our conviction that it will eventually reach the biggest market in the U.S. and strengthen Lilly’s growth prospects and wide moat. We still view Lilly as slightly undervalued, with the investment community underappreciating the company’s growing presence in immunology with Olumiant and psoriasis drug Taltz.

Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.

With approvals in Japan and Europe, along with the FDA potentially only needing additional data involving dosing and safety, we expect Olumiant (partnered with Incyte) to reach the U.S. market in 2018, supporting sales in 2020 of close to $1 billion, ahead of consensus expectations of $500 million. We expect Olumiant’s better efficacy and cleaner safety profile than Pfizer’s Xeljanz (another already approved JAK inhibitor) to support the blockbuster sales. Also, we don’t expect as negative of a black-box warning for Olumiant, as the severe adverse events for Olumiant were not concentrated and were very limited in infection or malignancies (typical side effects for both Xeljanz and TNFs). The strong efficacy and safe side-effect profile should lead Olumiant to gain close to 8% of the large rheumatoid arthritis market. However, near-term competition from other JAK inhibitors threatens Olumiant’s positioning with Gilead/Galapagos’ filgotinib and AbbVie’s ABT-494 posting solid data that could dilute Olumiant’s market share. Nevertheless, we expect the next generation of JAK inhibitors to gain market share from the older TNF class (including AbbVie’s Humira) due to strong efficacy and decreased side effects. Additionally, the oral dosing (versus injections for TNFs) should further help the JAK inhibitors gain market share.

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Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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