At Risevest, our guiding principle is to uncover investment prospects resilient to market volatility, ensuring optimal returns for our clients regardless of economic fluctuations. Currently, our team is honing in on companies with strong fundamentals and stocks that demonstrate steadfastness across various economic cycles.
With respect to this, we added Eli Lilly, one of the leading global pharmaceutical companies in the manufacturing and marketing of obesity and insulin drugs to our stock portfolio.
Investment Thesis
We believe Eli Lilly will continue to post solid profits for the long term with accelerated growth. The company has demonstrated exceptional performance in the healthcare sector, with average gross profit margin, operating profit margin and net profit margin of 79.2%, 28.8% and 24%, respectively, over the past five years.
The company has untapped potential in the obesity industry, presenting a significant market upside. As the second market leader with a robust 23% market share, Eli Lilly’s future prospects in the obesity market are poised to generate higher revenue for the company.
Lilly’s cancer drug, Verzenio, reported strong performance in early-stage breast cancer, opening up the potential to be the first cyclin-dependent kinase 4 and 6 (CDK4/6) drug to launch in this multi-billion-dollar market. The CDK 4/6 inhibitor drugs market is set for rapid growth, expected to reach $25.17 billion by 2028 with a 20% compound annual growth rate over the next five years.
Within the Major Pharmaceutical Preparations Industry, Eli Lilly’s market share grew by 4% quarter-on-quarter to 10.50%. The company is expanding its market presence with a new direct-to-consumer website for migraine, diabetes, and weight-loss drugs.
It offers access to independent doctors and support and enables home delivery of medications. The diabetes and weight loss drugs Mounjaro, Zepbound, Jardiance, and Trulicity, along with cancer drug Verzenio and immunology drug Taltz, are positioned to remain important drivers for cash flows.
We also believe Eli Lilly has a competitive price and patent rights advantage. A significant number of their products cost less comparatively. Zepbound costs $1,059 for a month’s supply, which is less expensive compared to Mounjaro. A similar drug by Novo Nordisk costs $1,349 for a month’s supply.
One of the company’s moat is patent rights, with their average patent lifespan being 20 years. Pharmaceutical companies often rely on patent protections to recoup their R&D investments during the course of research and during sales. Also, with patent rights, other players are unable to reproduce drug therapies developed by patent-holding pharma companies.
Business Summary
Eli Lilly is a renowned global pharmaceutical enterprise specialising in the innovation, development, and distribution of cutting-edge prescription medications and various healthcare solutions. It was founded in 1876 by Colonel Eli Lilly and its headquarter is in Indianapolis, Indiana, USA.
Eli Lilly has been operating for the past 148 years, with about 100 innovative drugs manufactured and therapy products marketed in 120+ countries. Eli Lilly’s business model excels due to its world class research and development (R&D) division, with a substantial investment of its revenue in this area (Eli Lilly spends $9.313 billion in R&D in 2023).
This strategic focus has enabled the company to consistently nurture a robust pipeline of novel and advanced products. Moreover, it has facilitated valuable partnerships and collaborations with prominent players in the pharmaceutical industry.
Lilly’s recent partnerships include:
- Collaboration with Egypt to produce one million doses of insulin by 2030.
- License and collaboration agreement with PRISM BioLab aimed at discovering oral inhibitors of a protein-protein interaction (PPI) target, with the deal worth over $660m.
- Partnership with Isomorphic Labs Ltd and Novartis Isomorphic to use its prowess in AI to help discover new medications that can potentially treat various diseases.
- In 2022, Eli Lilly partnered with South Africa’s Aspen for Drug Distribution Across Africa, which generated $23m in revenue across Eli Lilly’s product portfolio in sub-Saharan Africa.
- Fauna Bio, a biotechnology company improving human health by leveraging animal genomics, entered a multi-year agreement with Eli Lilly to apply its artificial intelligence (AI) platform to support pre-clinical drug discovery efforts in obesity.
Eli Lilly is known for its cutting edge drug therapies, among its notable drug portfolio. The top-performing medications of Eli Lilly includes: Mounjaro, Trucility, Jandiance, Verizio, Taltz and Humalog.
With a gross margin of 79%, Eli Lilly keeps innovating on new drugs while maintaining very strong profitability. Its future sales growth will be propounded by the approval Zepbound won in November last year. The FDA approved Eli Lilly’s Zepbound drug in November of last year. This is an obesity drug that helps people with weight loss. There’s about 40% of the adult population in the USA that suffers from obesity. Long term, this is a potential hundred billion dollar industry and Eli Lilly has a strong position in the big drug-provider pharmaceutical industry.
Business Performance
Over the last three years, Eli Lilly has showcased commendable annual revenue growth of 11.9%. Notably, the fiscal year 2023 witnessed a robust revenue climb to $34 billion, marking a noteworthy 19% uptick from the preceding year’s $28 billion.
In terms of profitability metrics, the Return on Assets (ROA), Return on Equity (ROE) and Return on Invested Capital (ROIC) stand at 9.47%, 46.86% and 29% respectively, surpassing industry averages of 7.7%, 38.9% and 15.5%. Also, for the last 5 years, Eli Lilly managed to grow its earnings per share at 73% a year. This year, 2024, we expect Eli Lilly stock earnings of $2.56 per share, surging 58%.
Eli Lilly diverts a significant amount of revenue to its capital expenditure which is mainly their R&D. For the last 5 years, on average, capital expenditure has been 6.3% of revenue. The company’s total capital expenditure for the year 2023 was $3.48billion.
Table 1.0 Profitability Profile
| $B | 2019 | 2020 | 2021 | 2022 | 2023 |
| Revenue | 22,320 | 24,540 | 28,318 | 28,541 | 34,124 |
| Gross Profit | 17,598 | 19,057 | 21,345 | 21,912 | 27,042 |
| Net Income | 8,318 | 6,193 | 5,581 | 6,244 | 5,240 |
| Adjusted EBITDA | 7,232 | 8,535 | 9,820 | 10,176 | 12,315 |
| Capital Expenditure | 1,034 | 1,388 | 1,310 | 1,854 | 3,448 |
| Diluted EPS | 3.05 | 4.96 | 6.79 | 6.12 | 6.9 |
Risks
There is strong competition from other major players in the industry like Novo Nordisk. Eli Lilly, however, has a competitive price advantage.
Bringing a new drug to market is an expensive and time-consuming process. Research and development (R&D) costs, including clinical trials and regulatory expenses, can be significant, and there isn’t always a 100% guarantee of success.
The pharmaceutical industry is heavily regulated to ensure the safety and efficacy of drugs. Navigating complex regulatory pathways and gaining approvals from regulatory agencies can be challenging and time-intensive.
Patent Expirations: Pharmaceutical firms typically count on patents to recover their research and development costs. When patents expire, generic competitors can join the market, resulting in a loss of exclusivity and potential revenue decrease. However, on a positive note, Eli Lilly enjoys an average patent lifespan of 20 years.
As mentioned earlier, we believe Eli Lilly is a good addition, and will continue to post solid profits for the long term, following the company’s demonstration of exceptional performance in the healthcare sector.