Eli Lilly: A Review from the Supply side of the equation

Summary:

We have all heard about these obesity drugs which help with weight loss and have many other health benefits.? The Market leader and the first mover advantage goes to a company called “Novo Nordisk”.? But we will be discussing Eli Lilly in this review. The demand for these drugs is covered quite extensively and we know the potential market is around USD 100 Billion. But we are going to review the supply side of the equation when it comes to these drugs in this review and in particularly from Eli Lilly’s perspective. Eli Lilly is a pharmaceutical company based in the U.S. and has delivered blockbuster returns for its investors in the past few years.? This company is known for its GLP-1 diabetic drugs which also help with the weight loss process.? These GLP-1 drugs (Mounjaro, Trulicity, and Zepbound) account for almost 40% of the total sales of this company.

Background:

Currently, these medications are delivered via a plastic injection (Pen) and both Eli-Lilly and Novo Nordisk cannot keep up with the demand.? It is thought that Eli Lilly and Novo cannot produce enough plastic Pens to meet the demand.? It takes a few years to get a new production facility up and running including getting FDA to inspect and approve the new facility.

So, what is already priced into the current share price?? Demand and plenty of it and the company’s speculator profit margin are already priced into the valuation.?

Let us review some key matrices for this company to get a better understanding of how much growth and demand is already priced into the valuation.

Earnings and EPS numbers:

We can see from the below table that annual growth in the EPS numbers is forecasted to be around 39% for 2025 and 34% for 2026.

Multiples:

How do the current multiples look for the company?? Looking at the below table they look very rich based on the current earnings and forecasted earnings as well.? Price to Sales( P/S) is currently at 18.89 and over the next few years comes down to around 13.? Enterprise Value to EBITDA( EV/EBITDA) is around 81.81 and over the next few years comes down to around 33.39. Most of the below multiples are high compared other the company’s historical record and the sector in general. A small miss in the earnings in the future might make the company shares vulnerable to a sharp sell-off.

Summary of Current Multiples (Based on Forecasted Earnings) vs Bloomberg GL Large Pharma Sector

No company can operate in the industry without being compared to the sector, even when you have a Blockbuster drug that will profoundly impact the industry. ??We see from the below table (first half of the table) how the company's multiples compare to the industry. The median forecasted P/E of the sector is around 14.16 compared to 48 for Eli Lilly.? A premium of 139%.? Even comparing it to its closest competitor Novo which has forecasted a P/E of 35 the company’s valuation looks a little rich.? The current Market cap of Eli Lilly is roughly around U$ 795 billion which is greater than the sum of Merck and Johnson& Johnson( second half of the table).

Looking at the second half of the table most of the pharmaceutical companies are well-established and have strong R&D operations embedded within their company culture.? They will not allow Eli Lilly to take the market share of this exciting new area of weight loss without providing an alternative solution.

Obesity Pipeline Analysis:

There are potentially 70 drug makers looking to develop their obesity drugs and currently, there are close to 100 drugs that are in clinical development.

GLP-1 Drugs & Combo in Development for Obesity

Looking at the above table some well-established pharmaceutical companies are experts in developing new drugs.? Amgen AMG 133 results have been promising and Roche has shown some interesting data in their development as well.? Viking’s Early obesity data looks competitive as well.? It looks like there will be some competition entering the market for Eli Lilly next year and by 2026/2027 potentially a lot more drugs getting approved for the weight loss/obesity market.

Bull Case:

·???????? Eli Lilly has a strong distribution network within the world’s largest market, and they might take the largest market share of the U.S. market in the future.

·???????? Eli Lilly’s drugs are more effective in weight loss and faster compared to the market leader Novo.

·???????? Eli Lilly will have a lot more of their own data by 2026 to stay ahead of the competition in terms of improving other benefits with the obesity drugs.

·???????? Eli Lilly might develop its own drug in the oral format which can increase production quickly and meet the supply a lot quicker than other competitors.

Bear Case:

·???????? Novo has the first-mover advantage in developing its own manufacturing capacity compared to Eli Lilly.

·???????? Novo Nordisk has purchased Catalent which prevents Eli Lilly from utilizing Catalent’s capacity to increase its production.? This also provides Novo a greater foothold in the U.S.

·???????? A new entrants might manage to develop an oral alternative to increase production rapidly and meet the demand.

·???????? Increasing competition (if out of 70 drug companies in the development phase, even if only 4/5 companies get FDA approval, which is a huge increase on the supply side) might reduce the margins currently enjoyed by Eli Lilly and future cashflows.

·???????? Eli Lilly may cannibalise its existing range of drugs and reduce the margin in the medium term.

·???????? A change in regulation might make it more challenging to charge high rates for their drugs in the future.? Currently, the cost is around U$ 8,000 per patient per annum.? We know that outside the U.S. this is a lot cheaper around GBP 195 per month from normal suppliers in the U.K.? NHS in the U.K. have negotiated cheaper rates compared to the U.S.

Conclusion:

Eli Lilly has delivered strong returns over the last few years, and it might perform well in the short term.? But the valuation looks rich compared with its peers( based on P/E, EV/EBITDA and P/S ratios) and on the balance of probabilities the share price doesn’t reflect any potential increase on the supply side but it’s all based on the future demand only……