Eli Lilly’s Insulin Price Cut Should Address Government's Critical Eye, but No Impact on FVE

We don’t expect Eli Lilly’s decision to cut insulin prices by 70% to have a significant impact on our $289 fair value estimate for the company. Even though insulins represent over 15% of total sales for Lilly, we believe the announced price reduction will not materially hit the firm’s cash flows, largely due to the pricing structure around insulin, which is heavily rebated. While the exact level of insulin rebates is unclear, we believe rebates represent close to 80% of insulin list prices. The level of rebating that will occur following the 70% price cuts (to be enacted in the fourth quarter) will likely shrink, leaving Lilly less affected than the price cuts would suggest.