Valiant Capital Partners has made a big bet on Eli Lilly.
The drug giant is currently the largest long equity position of the Tiger Grandcub, accounting for 8.66 percent of the firm’s capital, according to the third-quarter letter, which was obtained by Institutional Investor.
In the letter, Valiant founder Chris Hansen tells clients he built his stake in Lilly over the past six months through a mix of cash equity and long-dated options. Valiant seems especially excited about Lilly’s potential in the burgeoning anti-obesity market.
Hansen notes in the letter that the obesity epidemic has accelerated in the past ten years, from 25 percent of the U.S. population in 2012 to an estimated 42 percent today, or 120 million people. This number is expected to grow to 170 million in the next decade, he writes.
And Hansen believes Lilly is well positioned with its offering, Mounjaro, pointing out that it has “outperformed every other weight loss medication on the market today.” He adds, “After extensive market mapping, we concluded Lilly had the best combination of near-term drivers and long-term pharmaceutical differentiation.”
Hansen says Lilly’s near-term driver will be the aesthetics market — cosmetic surgery. Based on Valiant’s research, 25 to 90 percent of current aesthetics patients are already on a weight loss medication or are waiting for a prescription to be filled. “These are full cash pay customers, and we believe consensus is missing this key piece of the market due to the focus on traditional metrics around population size, payer coverage, net price reductions, etc.,” Hansen explains, asserting that Lilly’s pipeline over the next four years “will truly differentiate it and lead to significant market share gains.”
He says the two notable drugs are retatrutide, a third-generation agonist that averages a 24 percent reduction in body weight, and orforglipron, an oral medication that results in weight loss of almost 15 percent and has “no restrictions on ingestion, unlike other orals that require fasting or dosing multiple times a day.”
Hansen acknowledges there is a lot of hype around this class of drugs. But he notes that Valiant is buying Lilly at 20 times fiscal 2025 earnings estimates, with earnings still growing at more than 50 percent.
Valiant was up 10.7 percent through the first nine months of the year, trailing the S&P 500, which rose 13.06 percent in that period, according to the letter. Its longs kicked in more than 23 percentage points to gross profits, whereas shorts cost it 6.7 percent and macro cut into profits by 2.8 percent, says the document.
Looking ahead, Hansen expects interest rates to rise to their historic averages and believes the probability of structurally higher inflation for the next decade is high. He cites a sharp increase in the M2 money supply measure from pre-Covid levels, the “deflationary tailwind of the globalization of supply chains reversing,” and the U.S. running a fiscal deficit in excess of 7 percent of GDP even as the economy remains at full employment.
Hansen also thinks that even if a dramatic rise in rates ultimately harms the economy and causes inflation and then rates to fall along with the economy, “such a respite will prove fleeting.” He stresses the need for overall fiscal discipline and a big increase in productivity. Otherwise, “inflation will quickly reassert itself when the economy recovers.”
How does this macro view impact Valiant’s overall portfolio? Hansen says the firm does not let its skepticism impact positioning. So its positioning is virtually unchanged from the second quarter. Gross equity exposure rose slightly, to 217 percent, and net exposure slipped, to 43 percent. Macro exposure increased modestly, to 7.6 percent.
“We continue to believe that our short portfolio provides us with a phenomenal hedge against economic deterioration, geopolitical events, or financial market dislocations,” Hansen insists. “And [it is] a belief that was once again supported by our performance during a down market.”
