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Now for today’s piece:

Eli Lilly & Co. – A Full Breakdown & Analysis

Key Metrics

EV/EBIT – 38.2x

D/E – 1.37

10-Year Dividend Growth Rate – 7.58%

Dividend Yield – 1.45%

Dividend Payout Ratio – 60.8%

FCF Yield – 1.8%

Earnings Per Share (TTM) – $6.91

Highlights

Company Profile

Eli Lilly & Co. is a drug manufacturing company headquartered in Indianapolis, Indiana. The company focuses on developing treatments for cancer, diabetes, autoimmune diseases, neuroscience disorders, and other conditions. They have a portfolio of well-known drugs including Trulicity, Jardiance, Cyalis, and Cymbalta.

Strengths

Diversified Product Portfolio

Eli Lilly offers a wide range of pharmaceuticals. Its best-selling drugs include Trulicity, Jardiance, Cyalis, and Cymbalta.

Eli Lilly’s drugs serve a variety of conditions including cancer, obesity, diabetes, autoimmune diseases, neuroscience disorders, and other conditions.

This diversified product offering should protect Eli Lilly’s business in the event one or two drugs decline in sales.

Strong Research & Development

Eli Lilly has a strong pipeline of future pharmaceutical products. The company recently announced that they are submitting regulatory applications for five products:

• Empagliflozin for chronic kidney disease in the U.S.

• Donanemab for early Alzheimer’s disease in the U.S., Europe and Japan

• Tirzepitide for obesity in the U.S. and Europe

• Lebrikizumab for atopic dermatitis in Japan

• Pirtobrutinab for mantle cell lymphoma

According to Eli Lilly's management, these drugs should drive revenue to between $30.3 and $30.8 billion in 2023.

Eli Lilly is also initiating six phase 3 trials in 2023. Phase 3 is the second to last step before a drug is fully approved so if all goes according to plan, Eli Lilly may have six additional drugs for sale on top of the five other drugs set to release in 2023.

These additional drugs could prove to be major drivers of growth.

Strong Partnerships

Eli Lilly's role in partnerships is a unique component of its business.

The firm acts as a Venture Capitalist and supplies research companies with strategic investments, shared innovation labs, R&D, and commercial capabilities.

The company states that they are committed to leveraging the might of its enterprise and global resourcing networks to amplify innovation.

In the last 20 years, Eli Lilly has committed over $2 billion through venture investing. 15 of their last 20 launches have come from innovators Eli Lilly invested in.

Who knows? Maybe just like a Venture Capitalist, one of Eli Lilly’s investments might prove to be a massive success.

Weaknesses

Dependence On Key Products

Eli Lilly gets a huge chunk of revenue from a handful of products.

In Q4 2022, Eli Lilly had sales of $7.302 billion. Its blockbuster drug Trulicity accounted for $1.936 billion, 26.5% of sales. Trulicity’s patent is expected to expire in 2027, opening up competition from generic competitors.

This means 26.5% of revenue could be wiped away, and something has to replace that in order to justify today’s valuation.

Patent Expirations

As I mentioned, Eli Lilly is subject to patent expirations on its drugs.

Its most successful drug Trulicity is set to lose its patent in 2027. It accounts for 26.5% of sales and this expiration is one of 3 major expirations Eli Lilly has faced in the past 20 years. Eli Lilly also lost its Cymbalta and Evista patents, each of which were incredibly successful products.

All drug manufacturers must overcome patent expirations, but each company handles them differently. It's worth paying attention to how the business plans to overcome them.

Pricing Pressure

Eli Lilly faced pressure for years from the public regarding the price of its insulin offering.

As of March 1, 2023, Eli Lilly has announced a $35 price cap for monthly out-of-pocket purchases of its insulin products Humalog and Rezvoglais

This is great for people suffering from diabetes, I’m glad they’re able to get the insulin they need at an affordable price.

But if you’re looking at this through the lens of an investor, this results in a lower profit for the business.

Other insulin manufacturers have decided to lower insulin prices too, starting a race to the bottom for prices. This is never good from a business standpoint.

Is there a possibility that this type of pressure forces other products from Eli Lilly into lower price points?

Definitely something worth watching.

(I want to again reiterate that I believe it's great for people to be able to afford their much-needed treatments. This is purely business analysis.)

Opportunities

Growing Demand For Biologic Drugs

In 2021, the global biologics market size was valued at $366.43 billion. In 2030, that number is expected to grow to $719.84 billion according to Precedence Research.

A biologic drug is a drug that is made with live organisms and is often used to treat conditions such as cancer and Alzheimer’s. Eli Lilly manufactures these sorts of drugs and with the demand for biologic drugs growing, Eli Lilly should be poised to grab more market share.

Expansion Into Emerging Markets

Eli Lilly has room to expand into emerging markets. In 2022, China and the rest of the world (RoW) combined for only 16% of sales.

The demand for biologics in emerging markets is expected to grow by a CAGR of 12.2% during the forecast period, according to market data from Technavio.

Eli Lilly is positioned to take advantage of this increase in the total addressable market.

Mounjarno Approved To Treat Type 2 Diabetes In The U.S.

Type 2 diabetes is on the rise in the U.S. and Eli Lilly’s new drug Mountjarno has been approved to treat it. It has been shown to lower A1C (the measure of blood sugar used by diabetics) more than any other diabetes drug.

So far the rollout has been a success. Users have reported strong efficacy and Eli Lilly has only reached just above 50% of the total addressable market.

Mounjaro has also seen success in treating obesity, something drug manufacturers have struggled with treating for years. This could dramatically increase Mounjaro’s total addressable market if the success continues.

Plenty of room for growth, especially since unfortunately diabetes and obesity are becoming more common.

Threats

Regulatory Risk

The Pharmaceutical industry is subject to heavy regulations by governments around the world.

Most recently, The Inflation Reduction Act of 2022, signed into law by President Biden on August 16, 2022, includes several requirements to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government.

This legislation comes after recent public outrage regarding rising drug prices. The drug pricing requirements in the law are estimated to reduce the federal deficit by $237 billion over 10 years (2022-2031).

Recent legislation and a decrease in federal spending could hamper the business’s profitability.

Competition

Eli Lilly exists in a very competitive market space.

Competitors include Johnson & Johnson, Abbvie, Merck, GlaxoSmithKline, Pfizer, Novartis, AstraZeneca, Roche, and Bristol Meyers Squibb.

These companies all outsold Eli Lilly in 2022 and offer competing drugs to Eli Lilly.

Will Eli Lilly’s new offerings and pipeline be enough to compete?

Recent Financial Performance

Key Financial Metrics And Ratios

Eli Lilly reported Q4 and FY 2022 earnings on February 2, 2022.

Here are the highlights:

• 1% revenue growth year over year

• 12% increase in net income

• 13% increase in earnings per share

• 12% increase in operating income year over year

Guidance remains strong with revenue projected to fall within $30.3 and $30.8 billion for 2023. Earnings Per Share has been revised higher and is expected to be between $7.90 and $8.10 and the Tax Rate is now expected to be a lower rate of 13%.

The Dividend Breakdown

Eli Lilly’s 10-year Dividend Growth Rate (CAGR) is 7.58%, slightly higher than the Healthcare sector median of 7.44%. Eli Lilly did raise their dividend by a commanding 15% in the most recent raise. Their raises have been higher in recent years so I’ll be looking for the 10-Year Dividend Growth Rate to be steadily increasing.

Their Dividend Payout Ratio is 60.8%, which is much higher than the median Healthcare sector rate of 31.2%. This is a slightly concerning number for me. Net income must increase in order to bring the Dividend Payout Ratio down. The five upcoming drugs could grow sales and net income, but that will be something we’ll have to wait and see.

Its Dividend Yield is 1.45%, which is lower than its 4-year average yield of 1.63%. Compared to the median yield of 1.33% in the Healthcare sector, Eli Lilly’s 4-year average yield is slightly higher.

Lastly, Eli Lilly has been paying a dividend for 33 years & has raised it for 8 consecutive years.

The Thesis

Eli Lilly & Co. is a diversified pharmaceutical manufacturer and an under-the-radar venture capital fund.

Its combination of flagship drugs and newer drugs from its R&D pipeline should service the fast-growing population of people with medical conditions such as diabetes, cancer, Alzheimer’s, and obesity.

In addition, Eli Lilly’s strong partnerships and growing demand for biologic drugs worldwide should fuel years of growth for the company.

Valuation

Eli Lilly is trading at a 38.2x forward EV/EBIT ratio.

Here’s how it stacks up to competitors:

I’m using Eli Lilly’s 5-year average EV/EBIT of 24.4x for my calculations.

I’m choosing to do this because Eli Lilly is a company with plenty of growth in front of it and has consistently traded at a premium compared to competitors.

After applying Eli Lilly’s 5-year average multiple of 24.4x, I arrived at a price per share of $192.15.

Today, Eli Lilly trades at $318.98 per share, meaning it is overvalued by 39.76%.

I’d like to buy shares at $172.93, which gives me a 10% margin of safety. Pharmaceutical companies bring an extra level of uncertainty, they may have drugs that don’t make it to the market or patents that expire on key revenue-producing drugs.

In addition to that uncertainty, recall Eli Lilly’s high Dividend Payout Ratio of 60.8%. For those reasons, I’ve decided that I need to build in an extra margin of safety.

Final Thoughts

Eli Lilly provides a compelling investment opportunity for investors looking for a diversified pharmaceutical manufacturer.

Their current product offerings are strong and diversified across geographies and therapeutic areas. There’s also plenty of growth ahead for Eli Lilly. It has a strong pipeline of drugs ready to take over after its flagship drugs have their patents expire.

New drugs and the expanding demand for biologic drugs should propel Eli Lilly to future growth, however, the valuation and Dividend Payout Ratio is too high for me to buy shares right now.

I’ll be waiting for the price to come down before I grab shares of this quality company.

What do you think about Eli Lilly?

Do you own it? Would you like to? What price would you buy it?

Let me know by hitting me up on Twitter or replying to this email!

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Until next time,

Dr. Dividend

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Links And Memes

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