Eli Lilly Remains Well Positioned for Industry-Leading Growth, Buoyed by Cardiometabolic Drugs

Sector Director

Damien Conover

Revenue segments as reported by the company.

Diabetes

Oncology

Immunology

Neuroscience

Other

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Eli Lilly's innovative culture and strong financial commitment to developing the next generation of drugs set the company apart from its peers and fuel its long-term growth. Following a very steep patent cliff in 2014, Lilly's growth prospects have improved as the company is launching several new blockbusters and patent losses are fading.

Lilly's internal pipeline is well positioned to mitigate the patent losses during the next decade. The company tends to spend a low- to mid-20s percentage of its sales on financing the development efforts of new drugs, much higher than the high-teens industry average. The robust pipeline is a result of Lilly's strong commitment to research. We believe cardiometabolic drugs Mounjaro, Trulicity, and Jardiance and immunology drug Taltz along with cancer drug Verzenio hold the highest sales potential of Lilly's currently launched drugs. Further, pipeline drugs lebrikizumab (atopic dermatitis), mirikizumab (immunology), and donanemab (Alzheimer's) hold major blockbuster potential. 

Lilly's strong entrenchment in insulin production should also help the company deal with patent losses. Unlike traditional drugs, Lilly's insulin drugs are very hard to copy by generics and create barriers to entry for noninsulin producers because of the large up-front investments needed to create scale efficiencies. A new weekly insulin in late-stage development offers another avenue of growth in this mature market.

The company is taking a hard look at its bottom line. Through a combination of cost savings and expected top-line growth, Lilly aims to expand operating margins over the next several years, which we believe is achievable. Lilly expects to increase gross margins through productivity initiatives and greater capacity utilization. Overall, we view the strong traction of recently launched high-margin drugs in several indications as supporting the overall profitability gains.

Business Strategy & Outlook

Patents, economies of scale, and a powerful distribution network support Eli Lilly’s wide moat. Lilly's patent-protected drugs carry strong pricing power, which enables the firm to generate returns on invested capital in excess of its cost of capital. Further, the patents give the company time to develop the next generation of drugs before generic competition arises. Lilly’s diversified product portfolio means the company’s top drugs represent only a moderate amount of total sales, with the largest drug, Trulicity, representing almost 20% of total sales, which sets up manageable cash flow declines as new products mitigate the generic competition. Also, Lilly’s operating structure allows for cost-cutting after patent losses to reduce the margin pressure from lost high-margin drug sales. Overall, Lilly's established product line creates the enormous cash flows needed to fund the average $800 million in development costs per new drug. In addition, the company's powerful distribution network sets up the company as a strong partner for smaller drug companies that lack Lilly's resources. Lilly's entrenched insulin franchise creates an added layer of competitive advantage, as interchangeable insulin competition seems many years away due to the complexity of gaining generic approval for insulin and the high cost to build the needed economy of scale for insulin production. Also, Lilly's recently launched biologic drugs create higher hurdles over traditional small molecule for biosimilars to gain market share following the eventual patent expirations.

We think the firm does face environmental, social, and governance risks, particularly related to potential U.S. drug price-related policy reform (close to 60% of total sales are generated by prescription drugs sales in the U.S.) to increase access by lowering drug prices. Ongoing product governance issues (including litigation related to side effects and patents) also weigh on the company. While we have factored these threats into our analysis, we don't see them as material to our moat rating for Eli Lilly.

Wide

Economic Moat

Eli Lilly

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Cialis

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Eli Lilly & Co. engages in the discovery, development, manufacture, and sale of pharmaceutical products. The firm's products consist of diabetes, oncology, immunology, neuroscience, and other products and therapies. The company was founded by Eli Lilly in May 1876 and is headquartered in Indianapolis, IN.

Earnings data Q3 2023

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