Are Financial Pros Wrong About Eli Lilly?

It’s hard to ignore a stock the size of Eli Lilly (LLY) that’s up almost 500% in a matter of years.

Yet, when a stock trades at 100x earnings and cash and revenue growth is barely into the double digits, it’s tough to understand why financial pros keep searching for the stock more than any other drug manufacturer.

We looked deeper

 into the stock and can honestly say it’s not worth its current share price.

Eli Lilly’s Business

One of the first companies to produce insulin, Eli Lilly is an American pharmaceutical giant with a global presence in 18 countries and products sold in around 125 nations.

The company really gained notoriety in the 1980’s when they introduced Prozac, one of the first antidepressants.

Since then, they’ve delivered a stream of blockbuster drugs from Cialis to Zyprexa.

Eli Lilly’s operations encompass a wide range of therapeutic areas, including diabetes, oncology, immunology, and neuroscience, among others.

Their current pipeline includes dozens of drugs in various phases across multiple treatment areas.

Mounjaro is expected to be the real top-line growth driver for Eli Lilly with its potential for obesity and other diabetes-related treatments. It falls in the same category as Ozeimpic – a diabetes drug now being used to treat weight loss.

Financials

Source: Stock Analysis

As a drug manufacturer, Lilly’s revenue growth has been remarkably steady, with only one YoY decline in the last decade.

However, if estimates for Mounjaro are correct, the $1.55 billion in sales could grow by over 200% per year for the next three years, putting it at a $44.6 billion in sales. However, even if 80% of that translated into straight cash flow, the company would still trade at almost 15x cash.

Yet, that’s what the stock price implies, even though the company carries $20.3 billion in total debt against $2.6 billion in cash.

Valuation

Source: Seeking Alpha

Eli Lilly’s valuation metrics are on another planet compared to its peers.

Pfizer (PFE) is struggling to handle the decline in Covid sales. None of the other companies, Johnson & Johnson (JNJ), Bristol Myers (BMY), or Abbvie (ABBV), have any drugs in their pipeline expected to deliver the blockbuster sales of Mounjaro. 

Big pharma, as a whole, is in a bit of a lull.

Growth

Source: Seeking Alpha

Taking this a step further, check out the revenue growth numbers listed above.

While Pfizer’s growth was substantial over the 3-year period, thanks to COVID-19 vaccines, its YoY and forward growth are negative. In fact, only Eli Lilly is forecasting YoY revenue growth.

Profitability

Source: Seeking Alpha

Profit-wise, Eli Lilly leads the way in many categories. However, it’s free-cash-flow margin isn’t as high as some of its peers. In fact, Eli Lilly’s FCF is half that of Johnson & Johnson, Bristol Myers, and a quarter of Abbvie’s.

That should increase if sales of Mounjaro take off. But they aren’t there yet.

Our Opinion 3/10

Betting on what hasn’t happened for a stock priced to perfection is a version of the greater fool theory.

You’re simply expecting someone else to buy at even higher prices because there’s no hidden value to be unlocked.

Eli Lilly is a great company. But we wouldn’t touch it with a 10-foot pole at these prices.