Going Into Earnings, Is Eli Lilly Stock a Buy, a Sell, or Fairly Valued?

Eli Lilly LLY is set to release its first-quarter earnings report on April 30. Here’s Morningstar’s take on what to look for in Eli Lilly’s earnings and stock.

Key Morningstar Metrics for Eli Lilly

• Fair Value Estimate: $500.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Earnings Release Date

• Tuesday, April 30, before the start of trading

What to Watch for In Eli Lilly’s Q1 Earnings

• Sales of key drugs: Weight loss drug Zepbound, diabetes drugs Mounjaro, and Trulicity are all vital. Zepbound sales will be a particularly important indicator of whether high demand continues for weight loss drugs.
• Supply capacity: We expect growth for Zepbound/Mounjaro (these are the same drug, but Zepbound is for weight loss and Mounjaro is for diabetes), as we believe they’ll be limited by supply capacity for the rest of the year.
• Insurance: We anticipate coverage gains for Zepbound, as its out-of-pocket cost is too high for most patients, meaning insurance coverage will be needed for the drug to reach its peak potential.
• Other drugs: It would be helpful to see any mid-stage pipeline data for next-generation weight loss drugs, such as the oral drug orforglipron and triple mechanism drug retatrutide.

Fair Value Estimate for Eli Lilly Stock

With its 2-star rating, we believe Eli Lilly’s stock is overvalued compared with our long-term fair value estimate of $500. Our assumptions for overall biopharma GLP-1 sales in 2031 are close to $170 billion across diabetes ($50 billion), obesity ($85 billion), and overweight ($35 billion). We think more than 25% of obese adults and 15% of overweight adults in the United States will receive treatment in 10 years, with the vast majority receiving branded GLP-1 therapies. US prices could fall substantially as volumes increase (in line with payer contracts) and new entrants launch (beginning in 2026-27), with average net prices falling from roughly $8,000 annually to $3,000 in 10 years.

Read more about Eli Lilly’s fair value estimate.

Economic Moat Rating

Patents, economies of scale, and a powerful distribution network support Eli Lilly’s wide moat. The firm’s patent-protected drugs carry strong pricing power, letting it generate returns on invested capital over 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 25% of total sales, which sets up manageable cash flow declines as new products mitigate the generic competition. However, we believe increasing dependence on Lilly’s new GLP-1 drugs (including Mounjaro and Zepbound) will eventually mean close to two-thirds of the firm’s sales will be from this class of drugs by 2032.

Read more about Eli Lilly’s economic moat.

Financial Strength

With strong cash flows from a stable and diversified product portfolio, Eli Lilly remains on solid financial footing. We expect the company’s debt/EBITDA level to fall from close to 1.9 times in 2022 to close to 1.3 times by 2024, and for its debt/capital ratio to go from almost 60% in 2022 to 40% in 2025 as cash flows accrue. With its strong growth prospects, we don’t expect Lilly will need to make any major acquisitions to drive growth. Nevertheless, we expect tuck-in acquisitions will augment growth over the next decade.

Read more about Eli Lilly’s financial strength.

Risk and Uncertainty

We maintain Eli Lilly’s High Uncertainty Rating, based on a highly variable outcome for several key drug launches. Mounjaro and Zepbound are likely to develop into major new drugs. However, their cone of uncertainty is higher, since several variables affect the sales potential, especially for the weight loss indication, including level of insurance coverage and pricing. Alzheimer’s drug donanemab holds the potential to become another major new drug, but its outlook also has a wide range of outcomes, since the market potential could be large but the visibility on market uptake is less clear.

With donanemab and Mounjaro/Zepbound representing close to two-thirds of Lilly’s projected sales by the end of the next 10 years, we believe a High Uncertainty Rating is appropriate. Most big biopharma firms tend to have Medium ratings. Beyond product-specific uncertainties, Lilly faces tough competition from generics manufacturers and brand-name drugmakers. The company encounters considerable regulatory and legal risks, including product approvals, patent challenges, and liability lawsuits.

Read more about Eli Lilly’s risk and uncertainty.

LLY Bulls Say

• Lilly is developing a new Alzheimer’s drug, donanemab, that could become a major blockbuster, especially because the FDA appears to have a lower threshold for approval for this disease.
• Lilly’s cancer drug Verzenio reported strong data in early-stage breast cancer, opening up the potential to be the first CDK4/6 drug to launch in this multi-billion-dollar market.
• Lilly is creating the next generation of diabetes and weight loss drugs that hold major market potential, given the high prevalence of these diseases.

LLY Bears Say

• The risks around Alzheimer’s drug donanemab remain high, both in clinical development and insurance coverage.
• Several of Lilly’s next-generation diabetes drugs could cannibalize its currently approved drugs.
• Increasing competition for weight loss drug Zepbound could significantly increase over the next three years.

This article was compiled by Sokhoeun Noeut.