By Sithembile Bopela
Eli Lilly, often simply known as Lilly, is a leading drug-maker primarily focused on discovering, developing, manufacturing, and selling pharmaceutical products. The company's portfolio includes a wide range of drugs, with a particular emphasis on diabetes care, cancer treatments, immunology, cardiovascular agents, and neuroscience, including psychiatric medications and treatments for neurodegenerative disorders.
Operations
Geographically, the company's products are sold across the world but most of its revenue comes from the United States (US) (~65% of revenue). Europe accounts for ~15% of revenue, Japan makes up roughly 5%, and China accounts for ~5%. The remaining revenue collectively comes from other foreign countries (~10%).
Lilly's operations span the entire pharmaceutical value chain, from research and development (R&D) to manufacturing and sales. The company has numerous R&D facilities across the US as well as in Spain and Singapore. It holds nine production and distribution sites in the US and Puerto Rico, with other major international production sites in Ireland, France, Italy, Spain, and China.
By segment, diabetes remains the largest contributor to group revenue with Trulicity the largest sales driver despite a recent slowdown - sales for the medication remain under strain due to competitive dynamics and supply constraints. For reference, Trulicity now accounts for 21% of FY23 revenue from 26% in FY22. Trulicity is used for the treatment of type 2 diabetes in adults and paediatric patients and to reduce the risk of adverse cardiovascular events in adult patients.
Other significant growth divers include new products Mounjaro and Zepbound, as well as growth products Verzenio, which used for the treatment of breast cancer, Jardiance, which is also used to treat type 2 diabetes, and Taltz, a treatment used for psoriasis.
Weight loss, gains
Eli Lilly's growth over the years has been fuelled by its strong portfolio of distinct drugs, with diabetes medication Trulicity being a key driver for revenue growth. Most recently, performance has been bolstered by insatiable demand for the company's blockbuster weight-loss and diabetes drugs Mounjaro and newly launched anti-obesity medication Zepbound, which received FDA approval in November 2023. This heightened demand positions the group well to compete with European drugmaker Novo Nordisk's Ozempic (diabetes) and Wegovy (obesity) drugs. The companies have been locked in a battle to dominate the weight-loss drug market, with both trying to accelerate output as demand continues to outstrip supply.
Lilly hiked its FY24 guidance, as did Novo, on strong sales of its diabetes and weight loss drugs. As per management, this was in part due to greater visibility into its production expansion of both major drugs for the rest of the year.
Both treatments remain in shortage, leading to heightened prices given the current supply-demand mismatch. However, management guided for an improvement later this year, alleviating investors' concerns about Lilly's ability to keep pace with demand. The company has invested in several manufacturing plants which are expected to begin producing for the market in the latter part of 2024, with others coming online at the start of 2025.
According to Bloomberg Intelligence, the market for obesity treatments could grow more than $80 billion by 2030, driving further bullish sentiment for the pharmaceutical giants as several markets remain significantly underpenetrated. Lilly's stock has generally outperformed industry players, bolstering investor confidence in the company's growth trajectory and its pipeline of new drugs.
Financial performance
Over the past five years, Lilly has shown a strong performance in several key areas particularly consistent revenue growth, driven by the success of its diabetes drugs, cancer treatments, and other medications. Growth has also been bolstered by the introduction of new drugs to the market. The company has maintained a strong commitment to R&D, to discover new therapeutic products and improve existing ones, investing billions annually to fuel its pipeline of future drugs. This investment has paid off with several major drug approvals recently.
Results for the first quarter showed a robust start to the year, bolstered by strong sales of new products, Mounjaro and Zepbound.
If the index is not above the initial value at any of the observation dates, the client will not receive the indicative return portion, but will receive 100% of their initial investment at maturity.
Investment case
Potential risks
Valuation
The stock is trading on a PE multiple of 49.1 times, which is elevated against its own history and peers. The rating is expected to unwind rapidly, however, to 41 times in 24 months' time and 31 times in 36 months' time. This reflects expected earnings growth of >100% this financial year, 41% in FY25, and 33% in FY26.
Consensus remains bullish on the stock, with 74% of analysts covering the stock maintaining a "buy" rating and target price denoting 12.5% upside potential from current levels.
