Thematic evaluation
Back to company overview

Eli Lilly & Co. (LLY)

September 21, 2024

Compared to: Johnson & Johnson (JNJ) | Pfizer Inc. (PFE) | Health Care Select Sector SPDR Fund (XLV)

Our reasoning

Eli Lilly's current valuation appears moderately overvalued based on its high P/E and EV/EBITDA ratios compared to industry averages, despite strong financial performance and growth prospects. While the company's robust pipeline and market leadership in key therapeutic areas justify a premium valuation, current levels seem to be pricing in overly optimistic outcomes, leaving little room for potential setbacks or increased competition.

Key takeaways
  • Eli Lilly & Co. (LLY) is a leading global pharmaceutical company with a strong financial position, a robust R&D pipeline, and a commitment to growth.
  • LLY's revenue growth is driven by the success of its new products, particularly Mounjaro, Zepbound, and Verzenio.
  • LLY's profitability is strong, with significant increases in operating income and net income.
  • The company's cash flow generation is strong, supporting debt repayment, dividend growth, and investments in organic growth opportunities.
  • LLY's future prospects are positive, driven by its strong financial performance, successful product launches, and expanding pipeline.
  • However, the company faces risks related to its reliance on debt financing, dependence on a few key products, and the uncertainty surrounding its pipeline and acquisitions.
  • LLY's valuation is currently above the industry average, reflecting the company's strong financial performance and growth prospects.
  • LLY's stock price has consistently outperformed the Health Care Select Sector SPDR Fund (XLV) over various time periods, suggesting that LLY has been a strong performer within the healthcare sector.
  • LLY's management team appears optimistic about the company's long-term growth prospects, emphasizing its ability to impact human health on a global scale.
Overvalued
Ask a question about Eli Lilly & Co. (LLY)
Evaluation summary

  1. Company Overview:

    • Eli Lilly & Co. (LLY) is a global pharmaceutical company focused on discovering, developing, manufacturing, and marketing innovative medicines across various therapeutic areas. Its core business model revolves around research and development (R&D) to create new drugs, followed by commercialization and sales through a network of distributors and healthcare providers.
    • LLY's key products include Trulicity, Mounjaro, Verzenio, Jardiance, Taltz, Olumiant, Tyvyt, and Ebglyss, which cater to various therapeutic areas like diabetes, oncology, immunology, and neuroscience. These products generate a significant portion of LLY's revenue, with Mounjaro, Zepbound, and Verzenio driving recent growth.
    • LLY targets a broad market encompassing patients, healthcare providers, and payers worldwide. The company's strategic focus areas include diabetes, oncology, immunology, and neuroscience, with a growing emphasis on the obesity market.
    • For comparative analysis, we are using the Health Care Select Sector SPDR Fund (XLV) as a benchmark and Pfizer Inc. (PFE) and Johnson & Johnson (JNJ) as industry peers.

  2. Financial Performance:

    • LLY has demonstrated strong financial performance in recent years, with consistent revenue growth driven by the success of its new products. Revenue grew 36% in Q2 2024, driven by strong performance of Mounjaro, Zepbound, and Verzenio.
    • LLY's profitability has also been robust, with significant increases in operating income and net income. Gross margin has expanded due to favorable product mix and higher realized prices.
    • LLY's profitability ratios are significantly higher than the industry average, indicating strong profitability relative to assets, equity, and capital. ROA, ROE, and ROIC have all shown positive trends, reflecting efficient asset utilization and strong returns on invested capital.
    • Compared to its peers, LLY has consistently outperformed both PFE and JNJ in terms of revenue growth, profitability, and key financial metrics.

  3. Operational Efficiency:

    • LLY's balance sheet analysis reveals a strong liquidity position, with a Current Ratio slightly above 1, indicating ample short-term resources to meet obligations. The company's short-term liquidity position is strong, with consistent operating cash flow generation.
    • LLY's working capital management appears efficient, with a consistent positive working capital balance. However, there have been fluctuations in recent quarters, indicating potential areas for optimization.
    • LLY's cash flow generation is strong, with a high Cash Flow / Total Debt ratio, indicating ample capacity to service debt obligations. The company's FCF margin is improving, indicating a growing ability to generate free cash flow for future investments.
    • LLY's asset quality appears strong, with a significant portion of assets tied to tangible assets and a relatively low level of goodwill and intangibles.
    • LLY's capital expenditure analysis reveals significant investments in manufacturing capacity and acquisitions, driving revenue and profit growth. Depreciation trends are consistent with these investments, indicating a focus on expanding production capabilities.
    • LLY's dividend and share repurchase activities are sustainable, supported by strong cash flow generation and a healthy financial position.
    • Compared to its peers, LLY exhibits higher operational efficiency, with stronger cash flow generation, better asset utilization, and more sustainable dividend and share repurchase policies.
    • LLY's short-term and long-term liquidity ratios are strong, indicating a healthy financial position and ample resources to meet obligations.
    • LLY's debt-to-equity and leverage ratios have been increasing, indicating a reliance on debt financing for growth. However, the company's strong profitability and cash flow generation provide a buffer against potential risks.

  4. Growth Opportunities:

    • LLY is actively pursuing market expansion opportunities through a combination of organic growth initiatives and strategic acquisitions. The company is investing heavily in the obesity market, with 11 new molecules currently in the clinic across multiple indications.
    • LLY's M&A strategy has been successful in recent years, with acquisitions like DICE, Versanis, Emergence Therapeutics AG, and POINT Biopharma Global Inc. expanding its capabilities and product portfolio.
    • LLY's R&D pipeline is robust, with several promising candidates in various stages of development. The company is focusing on areas like diabetes, oncology, immunology, and neuroscience, with a particular emphasis on developing innovative treatments for Alzheimer's disease and other neurological disorders.
    • LLY is expanding its geographic reach, targeting emerging markets with high growth potential. The company is also investing in manufacturing capacity to meet the growing demand for its products.
    • LLY's strategic focus areas include expanding its presence in the obesity market, advancing its R&D pipeline, and expanding its geographic reach. The company is also investing in digital technologies to enhance its operations and customer engagement.
    • LLY's management team has a track record of successfully executing strategic plans, with a focus on innovation, growth, and shareholder value creation.

  5. Risks and Threats:

    • LLY faces several risks and threats, including intense competition, pricing pressures, regulatory changes, patent expirations, and the inherent uncertainties associated with pharmaceutical innovation.
    • The company's reliance on debt financing for growth could increase its financial risk.
    • The success of LLY's pipeline and acquisitions remains uncertain, given the inherent risks and costs associated with pharmaceutical innovation.
    • LLY's dependence on a few key products for revenue could expose it to risks related to competition, patent expirations, and regulatory changes.
    • The pharmaceutical industry is subject to various regulatory risks, including changes in reimbursement policies, safety concerns, and potential legal challenges.
    • LLY's operations are subject to various macroeconomic risks, including fluctuations in currency exchange rates, interest rates, and global economic conditions.

  6. Valuation Analysis:

    • LLY's valuation metrics, such as P/E, EV/EBITDA, and price-to-sales, are currently above the industry average, reflecting the company's strong financial performance and growth prospects.
    • Compared to its peers, LLY's valuation is higher, indicating a premium valuation based on its strong financial performance and growth potential.
    • Potential catalysts for LLY's valuation include the continued success of its key products, the advancement of its R&D pipeline, and the expansion of its geographic reach.

  7. Price Performance:

    • LLY's stock price has consistently outperformed the Health Care Select Sector SPDR Fund (XLV) over various time periods, including year-to-date, one year, two years, and three years. This suggests that LLY has been a strong performer within the healthcare sector.
    • LLY has exhibited higher volatility than XLV, indicating a greater degree of price fluctuations and potentially higher risk. The maximum drawdown for LLY has also been larger than XLV's, further supporting the notion that LLY carries a higher risk profile.
    • Despite its higher volatility, LLY has generally offered a better risk-adjusted return than XLV, as evidenced by its consistently higher Sharpe Ratio. This suggests that LLY has been able to generate higher returns for the level of risk taken.
    • Compared to its peers, LLY has consistently outperformed both PFE and JNJ over the past three years, with higher annualized returns and strong performance across all time periods analyzed.

  8. Future Outlook:

    • LLY's management team is optimistic about the company's future prospects, highlighting its strong financial performance, successful product launches, and expanding pipeline.
    • The company's guidance for 2024 reflects its confidence in the continued momentum of its business, with a $3 billion increase in revenue guidance and improved EPS outlook.
    • Analyst estimates for LLY's future performance are generally positive, with consensus expectations for continued revenue growth and profitability.

  9. Summary:

    • Eli Lilly & Co. (LLY) is a leading global pharmaceutical company with a strong financial position, a robust R&D pipeline, and a commitment to growth. The company's revenue growth is driven by the success of its new products, particularly Mounjaro, Zepbound, and Verzenio.
    • LLY's profitability is strong, with significant increases in operating income and net income. The company's cash flow generation is strong, supporting debt repayment, dividend growth, and investments in organic growth opportunities.
    • LLY's future prospects are positive, driven by its strong financial performance, successful product launches, and expanding pipeline. However, the company faces risks related to its reliance on debt financing, dependence on a few key products, and the uncertainty surrounding its pipeline and acquisitions.
    • LLY's valuation is currently above the industry average, reflecting the company's strong financial performance and growth prospects. The company's stock price has consistently outperformed the Health Care Select Sector SPDR Fund (XLV) over various time periods, suggesting that LLY has been a strong performer within the healthcare sector.
    • LLY's management team appears optimistic about the company's long-term growth prospects, emphasizing its ability to impact human health on a global scale.
    • Overall, LLY presents an attractive investment opportunity for investors seeking growth potential with a slightly higher risk tolerance. However, it is important to monitor the company's recent volatility and consider the potential impact of market conditions on its performance.
Peer fundamentals 
Fundamentals
Insights
  • LLY is a leading global pharmaceutical company with a strong financial position and a commitment to growth.
  • The company's revenue growth is driven by the success of its new products, particularly Mounjaro, Zepbound, and Verzenio.
  • LLY's profitability is strong, with significant increases in operating income and net income.
  • The company's cash flow generation is strong, supporting debt repayment, dividend growth, and investments in organic growth opportunities.
  • LLY's future prospects are positive, driven by its strong financial performance, successful product launches, and expanding pipeline.
  • However, the company faces risks related to its reliance on debt financing, dependence on a few key products, and the uncertainty surrounding its pipeline and acquisitions.
Analysis
  • Revenue - LLY's revenue growth is driven by the success of its new products, particularly Mounjaro, Zepbound, and Verzenio. - The company's revenue growth is linked to its strategic initiatives, including investments in the obesity market and the launch of Kisunla for Alzheimer's disease. - LLY's revenue growth is expected to continue, driven by the continued success of its new products and its expanding pipeline.
    • Profitability
      • LLY's profitability is strong, with significant increases in operating income and net income.
      • The company's gross margin expansion is a positive sign of effective cost management and pricing power.
      • LLY's profitability ratios are significantly higher than the industry average, indicating strong profitability relative to assets, equity, and capital.
    • Liquidity
      • LLY has a strong liquidity position, with a Current Ratio slightly above 1, indicating ample short-term resources to meet obligations.
      • The company's short-term liquidity position is strong, with consistent operating cash flow generation.
    • Solvency
      • LLY's financial leverage is significant, with a high Total Debt to Total Equity Ratio. However, the company's strong profitability and cash flow generation provide a buffer against potential risks.
      • LLY's long-term solvency is supported by strong FCF generation and a high Cash Flow / Total Debt ratio, indicating ample capacity to service debt obligations.
    • Operational Efficiency
      • LLY's asset utilization efficiency is improving, as evidenced by increasing profitability ratios.
      • The company's CapEx efficiency is high, with investments in manufacturing capacity and acquisitions driving revenue and profit growth.
    • Cash Flow Analysis
      • LLY's cash flow generation is strong, with a high Cash Flow / Total Debt ratio, indicating ample capacity to service debt obligations.
      • The company's FCF margin is improving, indicating a growing ability to generate free cash flow for future investments.
      • LLY's future cash flows are expected to remain strong, driven by continued revenue growth and investments in manufacturing and acquisitions.
    • Risk Factors
      • LLY's reliance on debt financing for growth could increase its financial risk.
      • The company's dependence on a few key products for revenue could expose it to risks related to competition, patent expirations, and regulatory changes.
      • The success of LLY's pipeline and acquisitions remains uncertain, given the inherent risks and costs associated with pharmaceutical innovation.
    • Future Outlook
      • LLY's future prospects are positive, driven by its strong financial performance, successful product launches, and expanding pipeline.
      • The company's ability to navigate the complex and evolving pharmaceutical landscape, successfully launch and grow its key products, and manage the various risks facing its business will be crucial for its future success.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-09-20)
Health Care Select Sector SPDR Fund (XLV)
  • Performance Comparison: Eli Lilly & Co. (LLY) has consistently outperformed the Health Care Select Sector SPDR Fund (XLV) over various time periods, including year-to-date, one year, two years, and three years. This suggests that LLY has been a strong performer within the healthcare sector. However, LLY has underperformed XLV in the past month and three months, indicating some recent weakness.
  • Risk and Return Analysis: Eli Lilly & Co. (LLY) has generated higher annualized returns than the Health Care Select Sector SPDR Fund (XLV) over the past one, two, and three years. This suggests that LLY has been a more profitable investment than the benchmark. However, LLY has also exhibited higher annualized volatility than XLV, indicating a greater degree of price fluctuations and potentially higher risk. The maximum drawdown for LLY has also been larger than XLV's, further supporting the notion that LLY carries a higher risk profile.
  • Risk-Adjusted Performance: Despite its higher volatility, Eli Lilly & Co. (LLY) has generally offered a better risk-adjusted return than the Health Care Select Sector SPDR Fund (XLV), as evidenced by its consistently higher Sharpe Ratio. This suggests that LLY has been able to generate higher returns for the level of risk taken. The beta values for both LLY and XLV have been consistently below 1, indicating that both instruments have a lower risk profile compared to the overall market.
  • Overall Assessment: Eli Lilly & Co. (LLY) has demonstrated strong historical performance, outperforming the Health Care Select Sector SPDR Fund (XLV) over various time periods. However, LLY has also exhibited higher volatility and a larger maximum drawdown than XLV, suggesting a higher risk profile. Despite this, LLY has consistently offered a better risk-adjusted return than XLV, as indicated by its higher Sharpe Ratio. The beta values for both LLY and XLV have been consistently below 1, indicating that both instruments have a lower risk profile compared to the overall market. Investors considering LLY should carefully weigh the potential for higher returns against the increased risk associated with the stock.
Peers Price History(as of 2024-09-04)
Johnson & Johnson (JNJ)Pfizer Inc. (PFE)
  • Performance Comparison: Eli Lilly & Co. (LLY) has consistently outperformed both Pfizer Inc. (PFE) and Johnson & Johnson (JNJ) over the past three years. This is evident in its higher annualized returns and strong performance across all time periods analyzed. LLY's outperformance is particularly notable in the longer timeframes, with a 3-year annualized return of 56.5% compared to -11.6% for PFE and 1.9% for JNJ.
  • Risk and Return Analysis: While LLY has delivered higher returns than its peers, it has also exhibited higher volatility, particularly in recent quarters. This is reflected in its higher annualized volatility and more frequent drawdowns. However, LLY's maximum drawdown of 18.76% is still lower than PFE's maximum drawdown of 54.82%, suggesting that LLY's risk profile is not significantly worse than PFE's.
  • Risk-Adjusted Performance: Despite its higher volatility, LLY has consistently offered a better risk-adjusted return than its peers, as evidenced by its higher Sharpe ratio. This indicates that LLY's returns have been more attractive relative to its risk compared to PFE and JNJ. LLY's beta, while slightly higher than its peers, still remains below 1, suggesting that it is less volatile than the overall market.
  • Overall Assessment: Eli Lilly & Co. (LLY) has demonstrated strong performance, consistently outperforming its peers in terms of returns. However, it has also exhibited higher volatility, particularly in recent quarters. Despite this, LLY's risk-adjusted performance remains superior to its peers, as indicated by its higher Sharpe ratio. LLY's beta suggests a slightly higher risk profile than its peers, but it remains less volatile than the overall market. Investors seeking growth potential with a slightly higher risk tolerance may find LLY attractive. However, it is important to monitor LLY's recent volatility and consider the potential impact of market conditions on its performance.
Peers Fundamentals(as of 2024-06-30)
Johnson & Johnson (JNJ)Pfizer Inc. (PFE)

  1. Market Position and Size:

    • LLY is the largest company in the peer group, with a market cap significantly exceeding its peers.
    • LLY's market cap is significantly larger than its peers despite having lower revenue and EBITDA than JNJ.
    • LLY's net income is closer to JNJ's, suggesting that LLY's profitability is driving its higher valuation.

  2. Profitability and Efficiency:

    • LLY exhibits significantly higher profitability compared to its peers and industry averages.
    • LLY's profitability is impressive considering its larger market cap than PFE.
    • LLY demonstrates superior efficiency in generating returns compared to its peers and industry averages.
    • LLY's strong return metrics, particularly considering its size, highlight its effective asset and capital management practices.

  3. Financial Health and Stability:

    • LLY's liquidity and solvency metrics are generally in line with its peers and industry averages, although its higher debt levels warrant monitoring.
    • LLY's strong profitability and cash flow generation capabilities provide a cushion against potential risks associated with its leverage.

  4. Valuation and Market Perception:

    • LLY's valuation metrics are significantly higher than its peers and industry averages, reflecting its strong financial performance and growth prospects.
    • This premium valuation suggests that the market is optimistic about LLY's future potential.

  5. Cash Flow and Capital Management:

    • LLY's cash flow generation is strong, exceeding its peers despite its larger market cap.
    • This highlights its efficient cash management and capital allocation strategies.

  6. Growth and Future Prospect:

    • LLY exhibits consistently higher growth in sales, EBITDA, and net income compared to the peer group average.
    • LLY's year-over-year growth rates have shown significant fluctuations, particularly in free cash flow and free cash flow margin.
    • LLY's longer-term growth trends are generally positive, with higher growth in sales, EBITDA, and net income compared to the peer group.
    • LLY's competitive position appears strong in terms of revenue growth and profitability.
    • Its volatile free cash flow and free cash flow margin raise concerns about its ability to sustain its growth and generate value for shareholders.

  7. Potential for Investment:

    • LLY presents an attractive investment opportunity due to its strong profitability, efficient operations, and consistent growth.
    • Its high valuation reflects the market's confidence in its future potential.
    • Investors should be aware of the volatility in its free cash flow and its high debt levels.

  8. Key Risks and Considerations:

    • Volatility in free cash flow and free cash flow margin could pose challenges to LLY's ability to sustain its growth and generate value for shareholders.
    • High debt levels could increase financial risk and limit LLY's flexibility in the future.

  9. Overall Assessment:

    • LLY exhibits strong financial health and performance relative to its peer group and industry averages.
    • Its strong profitability, efficient return generation, and consistent growth in key metrics highlight its financial strength and competitive advantage.
    • However, its volatile free cash flow and high debt levels warrant monitoring.