Some hedge funds have a tendency to move on from their holdings in short order in an effort to book profits and redeploy capital into a new higher-conviction opportunity. According to its recent 13F filing, the Duquesne Family Office headed by billionaire portfolio manager Stanley Druckenmiller closed out 28 positions in total last quarter -- and one of these moves really stood out.
Last quarter, Druckenmiller's fund exited its position in pharmaceutical leader Eli Lilly(NYSE: LLY). Shares of Lilly have been soaring over the past year. This is mostly due to the company's success in weight management thanks to its blockbuster diabetes and obesity drugs, Mounjaro and Zepbound. Nevertheless, I still think Lilly's stock has a lot of gas left in the tank.
Below, I'll break down three tailwinds outside of the weight loss market that Lilly investors should not be overlooking right now.
1. Entry into the Alzheimer's arena
While there are a number of approved medications to treat Alzheimer's disease or related symptoms, I would argue that the market itself is still quite fragmented. For now, Biogen and Eisai are major players in the space thanks to their collaboration treatment, Leqembi.
But back in July, the Food and Drug Administration approved Eli Lilly's Alzheimer's disease drug, donanemab (Kisunla). This marked an important milestone for Lilly as it broadens the company's already prolific medical portfolio and opens the door to a market expected to be worth over $30 billion by early next decade.
LLY Chart
Entering the Alzheimer's arena was a long time coming for Lilly, and it's hard to argue that some of the upside from donanemab wasn't already priced into the stock prior to FDA approval. As the chart above illustrates, shares of Lilly really kicked into another gear between May and July -- right around the time of donanemab's formal approval.
2. A new eczema drug
Lilly scored another big win back in September when the FDA approved its eczema drug, Ebglyss. Although I suspect Lilly will face more competition in the eczema market than it will in Alzheimer's disease, Ebglyss does present a unique opportunity for the company.
Many common treatments for eczema come in the form of creams or ointments. However, sometimes these topical solutions only mute symptoms temporarily -- leaving patients with lingering issues such as dry skin or itchiness. Ebglyss is an injectable solution, and is meant to be used by patients who cannot treat their eczema with topical gels alone.
While it's hard to estimate how much of the eczema market Lilly will be able to acquire, Ebglyss' differentiators should help the company stand out and make a name for itself one way or another.
Image source: Getty Images.
3. A moonshot opportunity in AI
Although it's not being spoken about too much, Eli Lilly is taking artificial intelligence (AI) very seriously. Earlier this year, the company announced that it's working with OpenAI -- the developer of ChatGPT -- to help discover novel treatments for antimicrobial resistance (AMR).
Admittedly, I don't see Lilly making considerable headway in AMR anytime soon. Finding solutions to drug-resistant pathogens is monumentally complex, and there's no guarantee that the power of generative AI will lead to anything material for this complicated health issue.
Even so, Lilly's foray into the world of AI could lead to major benefits down the road -- whether they're related to AMR or not. So while AI in the healthcare industry is likely a decades-in-the-making opportunity, I wouldn't underestimate the broader opportunity it presents for Lilly.
The bottom line
Here, according to the hedge-fund tracker Hedge Follow, is Duquesne's trading activity in Lilly stock over the last five quarters, with shares owned in each period:
Q2 2023: 536,450
Q3 2023: 454,120
Q4 2023: 402,550
Q1 2024: 61,660
Q2 2024: 0
Druckenmiller has been a net seller of Lilly stock for several consecutive quarters. Furthermore, his fund dumped most of its position in Lilly during the first quarter of this year. After such a massive sell-off, it may have been obvious that Duquesne would exit the position entirely sooner rather than later.
With Lilly stock up 56% in just 12 months, I don't necessarily blame Druckenmiller and his team for moving on. With that said, I think exiting the stock entirely before the company even starts commercializing Kisunla or Ebglyss is hard to justify. Moreover, ultra-long-term investors may want to stick around to see if the company's ambitions in AI begin to bear fruit.
Selling Lilly stock now seems like short-term profit-taking. It ignores the potential of other billion-dollar businesses unfolding, and misses out on the positive impact those could have on the stock over time.
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