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The shares of Eli Lilly (LLY) are taking a hit after the Centers for Medicare & Medicaid Services (CMS) published late Tuesday its proposed national coverage determination (NCD) for Biogen’s Aduhelm, an FDA approved monoclonal antibodies (mAbs) directed against amyloid for the treatment of Alzheimer’s disease. Aduhelm will not be offered to Medicare recipients, unless they are willing to take part in qualified clinical trials.

While it may be only a preliminary decision in this case, Biogen’s Aduhelm is facing a difficult task. This first-of-its-kind treatment was highly scrutinized and controversial. Due to the significant unmet medical need, Biogen had expected coverage and evidence development. But the bears proved right. The CMS decision will make it much harder for Biogen to get commercial exposure.

It is not hard to understand why Eli Lilly shares trade lower today. Market participants are analyzing the initial Biogen decision regarding Aduhelm’s impact on Eli Lilly and extrapolating it to other companies like Eli Lilly. Eli Lilly’s Alzheimer’s treatment donanemab will likely be approved by FDA later in this year. For a few reasons, however, we are skeptical about the extent of Eli Lilly’s decline.

We believe Eli Lilly’s donanemab outperforms Biogen’s Aduhelm. The data from Phase 3 TRAILBLAZER ALZ 2 will support our conviction. This is a major event in the industry that should allow it to better see how the potential benefits compare with the possible risks. This study will be completed in 2023’s first half. According to JPMorgan analysts Eli Lilly thinks that a phase 3 successful readout will resolve any reimbursement issues.

The estimated revenue of donanemab is irrelevant to the guidance in 2022. FactSet shows that donanemab’s estimated revenues for this year are $153million. The figure is below Lilly’s guidance range of $27.8 to $28.3 trillion 2022. Donanemab sales will likely not increase significantly until the results of Phase 3, which we have just discussed. In other words Eli Lilly still has ample time to demonstrate the safety and efficacy of this treatment, and also distance themselves further from Biogen.

The Eli Lilly thesis recognizes that Alzheimer’s Disease is important, but they also have many other advantages. Because of the quality of recent product launches, Lilly delivers peers-leading growth rates and has minimal loss of exclusivity. Lilly’s efforts to tackle obesity are significant, and represent a long-term business opportunity. Finally, do not forget about the outstanding track record of managing operating margin growth.

Bottom line is this: While yesterday’s news caused a bad headline for mAbs we do not intend to change our long-term outlook on Eli Lilly’s chance at an Alzheimer’s cure. We’d be buying stock today if trading restrictions were lifted.

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