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Eli Lilly analysis: a great company with a few aces up its sleeve

Jamie Cameron
6. 4. 2023
4 min read

Eli Lilly seems perfect in every way. But that's a warning light for investors - she's likely to be highly valued. And it's no different for the biomedical giant.

Basic overview

Eli Lilly $LLY-0.1% is an American pharmaceutical company based in Indianapolis, founded in 1876. It is one of the largest pharmaceutical companies in the world, and its stock is included in the Dow Jones Industrial Average. Eli Lilly is primarily focused on the areas of pharmaceuticals, biologics and vaccines. Its key products include insulin for diabetes (Humalog, Humulin), cancer drugs (Alimta, Cyramza, Verzenio), biologics (Trulicity, Taltz, Basaglar) and antidepressants (Cymbalta, Strattera).

Eli Lilly's key competitive advantage is its strong position in innovative biomedical research. It spends over USD 5.5 billion a year on research and development. It has a strong pipeline of new drugs, e.g. for cancer, Alzheimer's disease, diabetes and migraines. Up to 30 products in development have the potential to become blockbusters.

Eli Lilly's stock has soared on the success of its new drugs. Analysts expect further growth due to the potential of new products. Eli Lilly also has a solid financial position and regularly increases its dividend. So, even at 1.16%, it probably won't knock you off your chair.

Risks include intense competition in the pharmaceutical sector, patent expirations on existing products, regulatory intervention, challenges in developing new blockbusters, and the business impact of the COVID-19 pandemic. Overall, this is one of the highest quality pharmaceutical companies with an attractive pipeline of innovative drugs, a stable business model and financial position, but also higher volatility. Eli Lilly stock is suitable for growth investors with a long-term horizon who want to benefit from biomedical innovation.

Sector

The pharmaceutical sector is very large and includes manufacturers of drugs, vaccines, generics and biotech products. It is a sector with high barriers to entry, high capital intensity, strong regulation, but also with the potential for high profits through intellectual property protection. Key trends that will define it include:

-Aging population and increase in chronic diseases - increasing demand for treatment.

-Advances in biotechnology, genetics and personalised medicine - enabling new innovative medicines.

-Reducing spending on drugs by governments and insurance companies - pushing down prices, increasing competition.

Competition

-Johnson & Johnson - diversified company but one of the largest pharma competitors, focused on drugs, devices and consumer goods. Has strong position in oncology, vaccines, autoimmune disease drugs and OTC products.

-Novartis - Swiss pharmaceutical company with strong position in oncology, cardiovascular diseases, neuroscience, gastroenterology, respiratory diseases. Invests in gene therapy and other innovations.

-Roche - Swiss pharmaceutical and diagnostics company, one of the leaders in oncology, virology, immunology. It has a very strong position in biotechnology and personalized medicine.

-Merck & Co - American pharmaceutical company with a focus on vaccines, oncology, immunology, infectious diseases, hospitalization. Invests in the development of new technologies such as mRNA, combination therapies, etc.

-Pfizer - America's largest pharmaceutical company. Has a very broad portfolio of drugs, including vaccines (e.g., COVID), oncology drugs, antivirals, cardiovascular drugs, antidepressants, and many others. It is strong in mRNA, gene therapy and other high-tech areas.

Overall, it is a highly competitive sector with a number of large, well-capitalised companies competing intensely for market share and investing heavily in research and acquisitions. For Eli Lilly, this presents a challenge to maintain its position as an innovator.

Current situation

Its well-known products include the depression drug Prozac and the diabetes drugs Humalog (insulin lispro) and Trulicity. The latter was Eli Lilly's largest source of revenue last year, generating about $7.4 billion.

In its recently released Q4 results, however, Trulicity missed estimates, posting revenue of $1.9 billion - representing ~3% year-over-year growth. Additionally, the COVID drug, which added only $38 million versus over $1 billion in the prior period, saw sales fall 9% year-over-year to $7.3 billion, missing estimates by $74 million. However, the company posted a significant beat on earnings, with EPS of $2.09 beating forecasts of $0.85.

EPS slightly beat expectations. Source

LLY also has an active drug development pipeline. With results from a Phase 3 study of an Alzheimer's disease candidate and a Phase 3 study of Mounjaro for obesity expected later in the year, analysts expect further EPS growth and earnings improvement.

The company seems great on all counts, but unfortunately, it's also quite expensive as a result. A high valuation is nothing special in this sector. But whether the price is justified for an investor is for each investor to weigh up.

Disclaimer: This is by no means an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.

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