Eli Lilly and Company (LLY) shares fell nearly 3% on Tuesday after The New York Times alleged that the pharmaceutical giant had stopped an active COVID-19 antibody trial due to "safety issues." Reuters followed up after the market close with allegations that U.S. drug inspectors had uncovered "serious quality control problems" at the plant "ramping up" COVID-19 drugs. The stock was trading just under yesterday's close in Wednesday's pre-market session.
- Media reports allege safety issues with Lilly's antibody trial and manufacturing processes.
- The stock posted an all-time high in July but has traded poorly since that time.
- Downside risk currently appears limited, despite the allegations.
The disclosures are likely to undermine public confidence in the vaccine process, adding to concerns brought to light when AstraZeneca PLC (AZN) was forced to stop a Phase 3 trial last month. It also highlights the corroding effect of billions that pharma and biotech companies have already pocketed in the hunt for an effective vaccine. The process and payoffs have taken a toll, with more than half of Americans now saying that they won't take a vaccine when approved.
The allegations are a two-edged sword for Lilly because they call into question the rest of a vast drug pipeline that has translated into years of strong profits. The stock has been pulling back since hitting an all-time high in July but is holding onto double-digit annual returns that may now be at risk. Even so, Eli Lilly's bottom line probably isn't dependent on this specific compound, and a few carefully placed apologies could go a long way in restoring the company's reputation.
Wall Street hasn't reacted to the news yet, maintaining a "Strong Buy" consensus on Lilly shares based upon six "Buy" and two "Hold" recommendations. No analysts are recommending that shareholders close positions at this time. Price targets currently range from a low of $144 to a Street-high $190, while the stock is set to open Wednesday's session just $6 above the low target. This humble placement should keep a lid on selling pressure in coming weeks.
Lilly Long-Term Chart (2000 – 2020)
A multi-year uptrend topped out at $109 in 2000, marking a high that wasn't challenged for more than 18 years. It sold off in two broad waves through the middle of the decade, posting a 12-year low in the mid-$20s after the 2008 economic collapse. A strong recovery effort topped out just above $90 in 2015, giving way to narrow sideways action, ahead of a 2018 breakout that lifted above multi-decade resistance.
The rally posted new highs in March 2019 and February 2020, while the pandemic selloff offered a buying opportunity ahead of two new highs into July. Eli Lilly stock has acted poorly since that time, breaking 50-day exponential moving average (EMA) support and failing four attempts to remount that intermediate barrier. Price action is now caught between that level and support at the 200-day EMA, which could get tested in coming sessions.
The uptrend entered a rising channel in the second quarter of 2019 and continues to trade within those narrow boundaries. It is currently engaged in a monthly-scale stochastic sell cycle that has the potential to limit buying interest into the first quarter of 2021. Apathy looks like the most potent force heading into year end, with this headwind in place and accumulation-distribution readings slumping near monthly lows.
The Bottom Line
Eli Lilly stock is under pressure this week after news reports raised questions about the company's safety procedures.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.