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Buy, sell or hold after Lilly's Alzheimer's flop .pdf

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Buy, sell or hold after Lilly's
Alzheimer's flop?
November 28, 2016
John Russell

So you own a chunk of Eli Lilly and Co. stock and you just want to know two things today.
1. How important was the Indianapolis-based drugmaker’s news last week that its experimental drug
for Alzheimer’s disease flopped, pushing down Lilly shares down as much as 15 percent?
2. Should you buy, sell or sit tight?
We hate to say it, but good luck finding a consensus on either of those. Wall Street analysts are all
over the map.
On my desk, right now, is a stack of a dozen or so analysts’ reports on Lilly, issued by most of the
big investment banks on Wall Street, and a few small ones, too.
The analysts wrote the reports after Lilly announced Wednesday that its drug solanezumab failed to
slow the progression of Alzheimer’s disease in thousands of patients.
The news surprised some analysts, and completely blindsided others. But there really is no general
agreement on whether Lilly remains a good investment, or if investors should start feeling nervous.
How much is Lilly stock worth? In recent days, analysts have revised their target prices, ranging from
$64 to $100 a share.
First, let's hear from the bears.
• BMO analyst Alex Arfaei downgraded Lilly stock from buy to hold and slashed his price target (or
the price he thinks the stock will hit in the next 52 weeks) from $91 to $64. “Clearly, the results are a
negative surprise given our 75 percent estimated probability of success” for solanezumab, he wrote.
• UBS analyst Marc Goodman grew increasingly pessimistic as the hours went by. In his first note
last Wednesday, he maintained his hold rating and his price target price of $82. But, by the end of
the day, he had second thoughts and cut the price target by about 15 percent, to $70. He noted that
Lilly had a full pipeline of new drugs, but wondered if the company could truly compete in certain
product areas, including arthritis, breast cancer and migraine headaches. “While the markets for
these products are large opportunities, we expect these markets to be highly competitive, and Lilly
will be a later comer in each of them,” he wrote.
• Morgan Stanley analyst David Risinger maintained his hold rating, but lowered his price target
from $88 to $73. “We were assuming 2020 solanezumab sales of $1.5 billion, which we cut to zero,”
he wrote.
Now, let’s hear from the bulls.

• Goldman Sachs analyst Jami Rubin kept her buy rating, but cut her price target from $95 to $82.
Her headline summed up her mood: “Moving on.” And she likes what’s ahead, even if solanezumab
was messy: “We believe Lilly is one of the most compelling new product stories within pharma. …
We expect Lilly’s growth to be primarily driven by a solid portfolio of new products and significant
operating margins expansion.”

• Jefferies analyst Jeffrey Holford maintained his buy rating and his price target of $100. “While this
was a disappointing outcome, we note Lilly management expects to grow revenues between 2015
and 2020, while expanding margins,” he wrote. “Meanwhile, the company is still pursuing the
Alzheimer’s indication through a number of other programs.”
• Deutsche Bank analyst Gregg Gilbert cut his price target from $98 to $78, which allowed him to
keep his buy rating. (The stock was at $67 in midafternoon trading Monday.) “We stick with the buy
rating from the new lower stock price as we continue to like Lilly’s multi-year growth potential driven
by in-in and pipeline products.”
• J.P. Morgan analyst Chris Schott, in the same tone, kept his buy rating, but cut his price target from
$95 to $85. “Beyond solanezumab, we see a diverse range of new product opportunities,” he wrote.
And now let’s hear from those somewhere in the middle:
• Sanford C. Bernstein analyst Dr. Tim Anderson kept his buy recommendation and his price target
of $91. He had predicted solanezumab would flop, and when it did, he basically shrugged. “We
expected failure was the most likely outcome, which is why solanezumab was never incorporated
into our forecasts,” he wrote. “It is also why we have been on the sidelines ahead of this read-out.”
• Credit Suisse analyst Vamil Divan kept his buy rating, but lowered his target price from $96 to $87
and sounded a note of caution: “It will now be critical for Lilly to successfully execute on those
[pipeline] products to regenerate investor interest and drive upside.”
Yes, "execute" is the key word.
Three months ago, incoming Lilly CEO Dave Ricks told me his first order of business, after moving
into the corner office, was to make sure the company executed its game plan.
“We have a great opportunity here,” Ricks said. “We’ve come out of the Y-Z period. We’ve turned
over a number of cards, positive data readouts on a number of products. And really, 2017 is a year
of execution for us to really fulfill the value we see in those products and get them to patients.”
Wall Street is waiting for Lilly’s next touchdown. The last thing it wants to see is another fumble.
In the meantime, good luck deciding which recommendation to follow.

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