Eli Lilly ‘s presentation Tuesday evening at the influential JPMorgan Healthcare Conference was light on near-term financial updates, as expected, but heavy on discussion about the world’s most valuable drugmaker’s plans to sustain its recent run of successes well into the future. Investors liked what they heard and sent Lilly shares to an all-time high Wednesday. Eli Lilly intends to keep spending heavily, but wisely, on research and development in the coming years, CEO Dave Ricks said after the closing Tuesday, amid what Wall Street widely expects will be a period of blistering topline revenue growth fueled by tirzepatide — the active ingredient in its recently approved anti-obesity drug Zepbound and its 2022-cleared Mounjaro type-2 diabetes treatment. Shares of Lilly hit a record intraday high during Wednesday’s trading, above $637 each, before giving back some of the gains. Lilly, the eighth-most valuable company in the S & P 500 , briefly swelled to a market value of more than $600 billion for the first time ever. LLY 6M mountain Eli Lilly’s stock performance over the past six months. To help build a stellar drug pipeline that also includes next-generation obesity drugs and Alzheimer’s therapies, Eli Lilly has almost doubled its spending on research and development since 2018, reaching a projected $9 billion last year for a company expecting to generate $33.7 billion in revenue. “Our ambition is to grow [R & D] the way we have” but to do it in a deft way that yields new product breakthroughs, Ricks said. The focus will be on “a few big ideas” for patients with currently unmet needs, he said. “It seems unlikely we’re going to be able to grow rapidly by pursuing a lot of small ideas.” Ricks said that continuing to spend on R & D, which includes clinical trial costs, is necessary for Lilly to maintain the robust sales growth investors have come to expect from the company. Wall Street sees Eli Lilly’s revenue soaring to more than $66 billion in 2028, due in large part to Mounjaro and Zepbound. “If we pick our heads up in a few years and we’ve doubled Lilly R & D — and it’s kept pace with roughly 24%, 25% of sales right now — I think investors should be excited about future growth,” Ricks said. “If we’ve not doubled [R & D], we’ll return it to shareholders responsibly. Dividend it out, buy back shares, maybe do smart M & A. But that’s not the base scenario.” Ricks did not offer investors too many specifics around Eli Lilly’s financial expectations for 2024. Those will come in a few weeks when the company reports fourth-quarter earnings. But he stressed that executing product launches is his No. 1 priority this year. The most notable new product is Zepbound, which received U.S. regulatory approval in November and hit pharmacy shelves last month. Insurance coverage for obesity drugs like Zepbound — crucial to reaching their commercial potential — has been increasing and will continue to do so over time, Ricks said. Late-stage studies examining Zepbound’s ability to treat sleep apnea and reduce the risk of heart failure , which are expected to be complete in 2024, should help the reimbursement case, Ricks said. “I think the proof points will keep stacking up.” Novo Nordisk ‘s Wegovy, which was approved by U.S. regulators in 2021, is the main rival for Zepbound in weight loss. In type-2 diabetes, Novo Nordisk’s Ozempic, cleared in 2017, competes with Lilly’s Mounjaro. All four belong to a broader class of drugs known as GLP-1s, which improve blood-sugar control and effectively reduce appetite, helping patients lose weight. Ricks complemented the work Novo Nordisk has been doing to get GLP-1s covered for obesity, but suggested having a second company operating in the market could further the process along. “Here, I think, two is better than one,” he said. Eli Lilly and Novo Nordisk have both been investing heavily to expand GLP-1 manufacturing capacity, but it’s an expensive, multiyear process due to the complex nature of making these injectable drugs. Asked during Tuesday’s presentation when “capacity won’t be the rate limiter for the category,” Ricks responded by saying, “not anytime soon.” “I don’t say that in a negative way. I think that speaks to the incredible opportunity here,” Ricks said, arguing Lilly’s experimental oral GLP-1 orforglipron would, if approved, help meet that demand. Orforglipron entered late-stage trials in 2023, so it likely be multiple years before it’s on the market. An oral version of Novo’s Ozempic has already approved to treat type-2 diabetes, while a pill version of Wegovy has completed a late-stage study. Ricks reaffirmed Eli Lilly’s expectation that its Alzheimer’s treatment donanemab will receive Food and Drug Administration clearance in the first quarter of 2024. After Zepbound, donanemab would be Lilly’s second most important new product for the year ahead. The company has s pent decades and billions of dollars trying to develop a drug that successfully slows the progression of the memory-robbing disease. “I think the donanemab economic story will be partly treatment, but the bigger upside actually is prevention,” Ricks said, noting that Eli Lilly’s prevention study is underway. It’s expected to be completed in 2027 . Two other health care-related Club holdings — Danaher and GE Healthcare — also presented Tuesday at the JPMorgan conference. Danaher Following a few strong months for its stock, Danaher’s presentation at the event was disappointing — but not in a way that changes our investment outlook. That conclusion is traced back to the following quote from CEO Rainer Blair about the company’s bioprocessing business — an important division that’s weighed down by customer inventory gluts in recent months as Covid pandemic-fueled activity moderates. “We would say that we’re not yet at the inflection point,” Blair said Tuesday. “For 2023 the bottom? Sure. But we did not see an inflection point in the fourth quarter.” A few minutes earlier in Danaher’s presentation, when Blair first declared 2023 to be the bottom for the bioprocessing business, the company’s stock turned modestly higher, shaking off small losses. But not long after Blair said that order growth was “not yet at the inflection point,” shares of Danaher turned lower. The stock closed Tuesday off 1.7% and continued to fall Wednesday. DHR 6M mountain Danaher’s stock performance over the past six months. It’s not what investors, including us at the Club, wanted to hear Tuesday, considering the stock had jumped nearly 27% since Oct. 30, compared with a 14% gain in the S & P 500 over the same timeframe. Danaher reported third-quarter earnings Oct. 24, and the stock fell that day after management again lowered part of its revenue forecast. We bought into that post-earnings weakness, hoping to get ahead of the inflection point because that’s where a lot of money will be made. Despite Blair indicating Tuesday that Danaher is having more “constructive dialogue” with customers, this anecdotal evidence has yet to translate into hard orders. The bottom in the business may be in, but, at this point in the recovery cycle, the return to growth is what will get investors more excited. To be sure, with inventories starting to get lean, Blair said he believes the bioprocessing business is likely to show signs of improvement in the second half of 2024. That is one piece of good news Tuesday. Other positives working in Danaher’s favor include a flurry of deal activity in the biotech sector and expected interest rate cuts later this year from the Federal Reserve, which would lower the cost of money for drug companies that borrow to buy Danaher’s products and services. Put it all together, and Danaher remains a promising investment. We learned Tuesday it just requires a bit more patience before the inflection point — and its related payoff — will arrive. GE Healthcare Nothing groundbreaking came out of GE Healthcare’s presentation Tuesday, but we still emerged feeling assured about our position in the medical technology provider. The stock fell nearly 1% on Tuesday, though well off the lows of the day. It continued to drop modestly Wednesday. The discussion around profitability was a bright spot, as CEO Peter Arduini said the company has “all the right plans in place” to consistently improve its performance on key metrics, such as operating margin, over the next few years. It’s on track to be between 15% and 15.5% in 2023, after standing at 14.5% on a standalone basis in 2022 while still under the roof of former parent company General Electric . GEHC officially became an independent firm in January 2023. Some on Wall Street have their doubts about GE Healthcare’s ability to durably expand margins, but Arduini sounded confident that it can be accomplished by executing a strategy that includes winning new business, product innovation, and pricing gains. The integration of artificial intelligence into GE Healthcare’s products is one way to deliver that innovation, management emphasized Tuesday, representing an underappreciated wrinkle to the investment case for the company. We struggle to see why any customer wouldn’t rush to upgrade aging systems — such as MRI machines and CT systems — if there’s newer, AI-enabled equipment that can increase their employees’ productivity and improve patient outcomes with enhanced diagnoses. For example, GEHC has leveraged an AI technique known as deep learning for MRI machines, leading to significant improvements in the quality of image generation, Arduini said Tuesday. Ultrasound systems also are “very much being affected in a positive way by digitization and AI,” he added. GEHC 6M mountain GE Healthcare’s stock over the past six months. At a higher level, GE Healthcare offered encouraging commentary on the hospital capital expenditure environment in 2024, saying it should be better than last year as staffing levels improve and the cost of money comes down (as mentioned in Danaher section, too). If that holds true, that should have positive implications for GEHC’s order book. Missing from Tuesday’s presentation was an update on China, which has become a source of concern for many health-care investors. Unlike peers, GE Healthcare has yet to see a meaningful deterioration in its operations in the country amid Beijing’s anti-corruption campaign targeting the medical sector. In fact, the company saw year-over-year increases in revenue and orders in China during the third quarter. This situation is an area to watch for GE Healthcare going forward. (Jim Cramer’s Charitable Trust is long LLY, DHR and GEHC. See here for a full list of the stocks.) 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Eli Lilly‘s presentation Tuesday evening at the influential JPMorgan Healthcare Conference was light on near-term financial updates, as expected, but heavy on discussion about the world’s most valuable drugmaker’s plans to sustain its recent run of successes well into the future. Investors liked what they heard and sent Lilly shares to an all-time high Wednesday.
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