Stock of the Week - Eli Lilly (05.12.2024)

Eli Lilly, the global biopharmaceutical leader, continues to strengthen its position in the rapidly growing GLP-1 market while navigating manufacturing challenges and increasing competition. The company's recent head-to-head trial results demonstrating Zepbound's superiority over Wegovy reinforce its leadership in the obesity treatment space, though supply constraints and high market expectations create near-term execution risks.

Q3 FY24 Results 

In its third quarter, Eli Lilly reported revenue of $11.44 billion versus estimates of $12.18 billion, Adjusted EPS of $1.18 compared to estimates of $0.10, Mounjaro revenue of $3.11 billion versus estimates of $3.62 billion, and Zepbound revenue of $1.26 billion against estimates of $1.63 billion.

Overview of Q3 Performance 

Eli Lilly's third quarter results showed mixed performance, with revenue growing 20% year-over-year to $11.44 billion but falling short of expectations. Key metrics included:

• Revenue: $11.44 billion vs estimate $12.18 billion
• Adjusted EPS: $1.18 vs estimate $0.10
• Mounjaro revenue: $3.11 billion vs estimate $3.62 billion
• Zepbound revenue: $1.26 billion vs estimate $1.63 billion
• Verzenio revenue: $1.37 billion vs estimate $1.39 billion
• Trulicity revenue: $1.30 billion vs estimate $1.21 billion
• Taltz revenue: $879.6 million vs estimate $839.4 million

The company maintained its full-year revenue guidance range of $45.4-46.0 billion but adjusted its EPS outlook to $13.02-13.52, primarily due to acquired IPR&D charges. While quarterly results were impacted by inventory management challenges, underlying demand for key products remains strong.

Earnings vs Estimates. Source: Bloomberg

Clinical Superiority and Market Position 

Recent head-to-head trial results showed Zepbound achieving superior weight loss (20.2%) compared to Novo Nordisk's Wegovy (13.7%) over 72 weeks. This data strengthens Lilly's competitive position in the obesity market, where it faces intense competition from Novo Nordisk. The company's expanded manufacturing capacity, including the resolution of tirzepatide shortages, positions it well for accelerated market share gains.

Growth Strategy and Manufacturing Expansion 

Lilly continues to invest heavily in manufacturing capacity, with $2 billion in additional investments beyond its $4.5 billion Lilly Medicine Foundry commitment. The company's focus on U.S. market penetration, introduction of single-dose vials, and strategic capacity expansion demonstrates its commitment to meeting the explosive demand for GLP-1 products. The resolution of tirzepatide shortages also limits competition from compounded alternatives.

Pipeline and Innovation 

The company maintains a strong pipeline in the obesity/diabetes space, including promising candidates like retatrutide (achieving 24% weight loss at 48 weeks) and orforglipron (nearly 10% weight loss at 36 weeks). These next-generation products could help Lilly maintain its leadership position as the GLP-1 market evolves and new competitors emerge.

Product Pipeline Source: Company Q3 Earnings Presentation 

Market Challenges and Risks 

Lilly faces several key challenges in executing its growth strategy. Supply chain constraints and inventory management issues continue to impact near-term results. The potential impact of compounded alternatives and policy responses to drug shortages create uncertainty around pricing and market access. Additionally, high market expectations reflected in Lilly's premium valuation leave little room for execution missteps.

Investment Perspective 

While Lilly's fundamental growth story remains compelling, investors must weigh the company's strong competitive position and market leadership against its premium valuation (trading at ~38x 2025 earnings estimates). The successful resolution of manufacturing constraints and continued innovation in the GLP-1 space will be crucial for justifying current valuations and delivering sustained growth.

The company's focus on manufacturing expansion and recent clinical validation of Zepbound's superiority provide support for continued momentum. However, inventory challenges and potential competitive pressures from both established players and new entrants warrant careful monitoring.

Analyst Commentary 

Analysts maintain a generally positive outlook despite near-term challenges. BMO Capital Markets sees the recent earnings miss as driven by temporary inventory dynamics rather than underlying business weakness. Barclays notes that while supply constraints are easing, upcoming competitor updates could challenge near-term stock performance. The consensus view suggests that while execution risks exist, Lilly's strong position in the growing GLP-1 market supports a positive long-term outlook.

Valuation

We based our projections on historical averages and company projections, while maintaining conservative scenario. This results in a 27% revenue growth and a 37% operating margin across the 5-year forecast. Considering the substantial influence of terminal value in DCF analysis, especially for shorter forecast periods, we’ve applied a 5% revenue growth and 8.5% terminal WACC same as used in forecast years.

Under these assumptions, our model suggests an intrinsic value of $793,39 per share, indicating a downside of less than 5% to current share price. It’s important to note the high sensitivity of DCF-derived intrinsic values to input assumptions. Below, two sensitivity matrices illustrate different Operating Margin and Revenue Growth scenarios, as well as Terminal WACC and Terminal Revenue Growth variations.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

To evaluate Lilly's performance relative to its peers, we analyzed a group of three comparable companies with similar growth trajectories: Novo Nordisk, Amgen, and AbbVie. Across all key metrics, Eli Lilly outperforms the peer group average, as reflected in the mean, median, and cap-weighted multiples we calculated.

However, three separate valuations for Eli Lilly, based on these multiples, indicate overvaluation. It's important to note that multiple-based valuation reflects market perceptions of comparable companies. In a "winner-takes-all" scenario, Eli Lilly's valuation might still align with its dominant market position and growth potential.

Source: Bloomberg Finance LP, XTB Research

Recommendations: Eli Lilly has 35 recommendations, with 28 "buy" and highest price of $1250, 6 “hold” and one “sell” with the price of $580. The 12-month average stock price forecast is $998.74, implying a 20.3% upside potential from the current price.

Technical analysis (Daily interval): 

The stock is currently trading just below the 200-day SMA, which aligns with the 50-day SMA, creating a key resistance zone. For bulls, the primary target is the 61.8% Fibonacci retracement level at $871.96, near the 100-day SMA. Achieving this level would also close the price gap from late October. RSI indicates bullish divergence with higher highs and lows, while the MACD recently issued a buy signal, supporting upward momentum.

For bears, the first target is the 23.6% Fibonacci retracement level. A break below this could pave the way for a retest of recent lows around $700, signaling a potential continuation of the bearish trend.