Should You Hold Eli Lilly (LLY)? - InvestingChannel

Should You Hold Eli Lilly (LLY)?

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Should You Hold Eli Lilly (LLY)?

Eli Lilly (LLY) is riding high.

Last week, the FDA approved Donanemab, an early-stage treatment for Alzheimer’s, one of the first in a vastly underserved community.

Current estimates put the drug’s annual revenues between $5-$7 billion annually.

Not bad for a company already seeing serious sales growth from its weight loss and diabetes treatment.

While it’s the number one drug company stock searched by financial pros according to our TrackStar data, many investors hesitate to jump in at all-time highs.

But here’s why you should reconsider.

Eli Lilly’s Business

Eli Lilly and Company, often simply referred to as Lilly, is a global pharmaceutical powerhouse dedicated to creating medicines that improve people’s lives worldwide. 

With a history spanning over 145 years, Lilly has been at the forefront of groundbreaking discoveries in various therapeutic areas, particularly in diabetes care.

The company’s portfolio includes innovative medicines in diabetes, oncology, immunology, and neuroscience, as well as a range of animal health products. 

Lilly’s commitment to research and development has created a pipeline of 50 new medicine candidates in clinical development or under regulatory review.


Source: Q1 2024 Earnings Presentation

The company segments its business into the following areas:

  • Diabetes and Obesity (62.7% of total revenues) – Includes blockbuster drugs like Mounjaro for type 2 diabetes and Zepbound for obesity.
  • Oncology (20.6% of total revenues) – Lilly’s oncology portfolio features targeted therapies for various types of cancer, such as Verzenio for breast cancer and Cyramza for gastric and lung cancers.
  • Immunology (9.5% of total revenues) – Key products in this segment include Taltz for psoriasis and psoriatic arthritis and Olumiant for rheumatoid arthritis.
  • Neuroscience (4.4% of total revenues) – This segment is anchored by Emgality for migraine prevention and Zyprexa for schizophrenia and bipolar disorder.
  • Other (2.8% of total revenues) – This segment includes various other products, such as Cialis for erectile dysfunction and Forteo for osteoporosis.

In Q1 2024, Lilly reported impressive financial results, with revenue jumping 26% year-over-year to $8.77 billion, driven primarily by Mounjaro, Zepbound, Verzenio, and Jardiance. 

Q1 2024

Source: Q1 2024 Earnings Presentation

Lilly also raised its full-year 2024 revenue guidance by $2 billion, reflecting its confidence in its current portfolio and pipeline.

Donanemab approval for Alzheimer’s is just one of several drugs with massive potential. Others in the pipeline include Mirikizumab for Crohn’s disease and Mirtobrutinib for chronic lymphocytic leukemia. 



Source: Stock Analysis

Outside of 2017 and 2022, Eli Lilly’s sales have risen rapidly, with a 5-year average rate of 10.7%.

Margins have compressed in recent years as new drugs come online. However, those will improve as production ramps.

In the meantime, operating cash flow has halved to $3.7 billion from $7.6 billion in 2021.

Capex more than doubled during that same period from $1.3 billion to $3.8 billion.

The company issued a small amount of debt to ensure it had enough cash to fund these activities and its $4.2 billion in dividends every year, a paltry 0.6% yield.

Current debt stands at $26.3 billion, rather high for the company. We expect that to decline in coming years as cash flows improve, or at least be rolled into lower interest rates.



Source: Seeking Alpha

Eli Lilly’s valuation isn’t on the same planet as its peers.

Company’s like Pfizer (PFE) are reeling from the plunge in Covid demand while Bristol Myers Squibb (BMY) faces a patent clifff.

The assumption is Eli Lilly will grow into its multiples as margins expand on higher sales.



Source: Seeking Alpha

None of Lilly’s peers match its revenue growth.

Every other company on this list saw and is forecasting flat or negative growth, while Lilly expects +20% sales in 2024.

This disparity accounts for the valuation gap between companies.



Source: Seeking Alpha

Don’t let the high cash flow margins for the other companies fool you. That happens when drugs are mature. Cash flows will dwindle as sales do when drugs go generic.

That’s why drug companies need growth to survive.

Our Opinion 8/10

It’s hard not to get behind Eli Lilly and its future.

Despite the stock hitting fresh all-time highs, the number of growth products coming to market and already underway put Lilly at the top of many categories.

We see a lot of room for the stock to keep pushing higher even from these prices.

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