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

Eli Lilly is set to release its third-quarter earnings report on Oct. 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: $580.00
• Morningstar Rating: 1 star
• Economic Moat: Wide
• Morningstar Uncertainty Rating: High

Earnings Release Date

• Wednesday, Oct. 30, before the start of trading

What to Watch for in Eli Lilly’s Q3 Earnings

• The biggest question is how quickly sales of Mounjaro and Zepbound (both using the same tirzepatide molecule) are growing in diabetes and obesity. It seems like a good sign that Zepbound supply shortages have been resolved. Our total revenue estimate for 2024 for Lilly is right in the middle of their updated guidance from the second quarter at $46 billion. We assume more than $18 billion of that will be from tirzepatide. It will be interesting to see whether they raise guidance if they have more confidence in supply.
• Lilly is also expected to release data from a head-to-head study against Novo Nordisk’s NVO Wegovy (semaglutide) in obesity. We expect Zepbound is the more potent of the two drugs, which could further benefit them in negotiations with pharmacy benefit managers and physician preference.
• We’re awaiting updates on the timing of the sleep apnea launch for tirzepatide; we anticipate a possible launch late this year. This could be a critical way for Lilly to get coverage of the drug for obese patients with Medicare. Medicare won’t cover drugs specifically for obesity, but obesity and sleep apnea have a significant overlap (almost half of obese patients suffer from significant sleep apnea). So far, Novo has not been pursuing this indication.
• Liver disease is an area where Novo and Lilly could also face off. Novo is expecting phase 3 data in metabolic dysfunction-associated steatohepatitis later this year, while Lilly is still at the start of phase 3 trials but had excellent phase 2 data.
• We’re looking for the first updates on Lilly’s new Alzheimer’s drug Kisunla and how it is faring with hurdles to uptake in the US market. Biogen’s Leqembi has been paving the way, but it has been a tough road, with bottlenecks from diagnosis to treatment.

Fair Value Estimate for Eli Lilly

With its 1-star rating, we believe Eli Lilly’s stock is significantly overvalued compared with our long-term fair value estimate of $580 per share. Our assumptions for overall biopharma GLP-1 sales in 2031 surpass $200 billion across diabetes, obesity, and overweight patients, with Lilly capturing close to $75 billion of the market. 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 $7,000 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 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 Kisunla 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.

Read more about insert company’s risk and uncertainty.

LLY Bulls Say

• Lilly’s strong leadership in weight loss should drive industry-leading growth with both its approved drugs and the well-positioned next-generation drugs in its pipeline
• 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 multibillion-dollar market.
• Lilly is developing a new Alzheimer’s drug (Kisunla/donanemab) that could become a major blockbuster, especially since few treatment options exist for the disease.

LLY Bears Say

• The risks to success for Kisunla remain high because of bottlenecks in patient diagnosis, required scans, and monitoring, as well as competition.
• Several of Lilly’s next-generation cardiometabolic drugs could lead to cannibalization of current approved Lilly drugs.
• Increasing competition for Zepbound could significantly increase over the next three years, both from established competitor Novo Nordisk and new entrants.

This article was compiled by Kayleigh Hall.