In October 2024, the leading market cap in pharmaceuticals is just a step away from reaching one trillion dollars! How does eli lilly and co's performance look?

In the US stock market, companies with a market cap exceeding tens of billions of dollars include Apple, Nvidia, Microsoft, all of which are technology giants. However, outside the technology sector, there is a pharmaceutical giant challenging the trillion-dollar club, and that is Eli Lilly and Co.

Since 2017, $Eli Lilly and Co (LLY.US)$ its stock price has been on the rise for 8 consecutive years, with an annual increase of over 30% in the past five years. Its market cap once exceeded $900 billion this year, just a step away from the trillion-dollar mark.

On October 30, Eli Lilly and Co. will release its third-quarter report, which may test the attractiveness of its stock. At the same time, every earnings release by the company may also signal a good trading or investment opportunity. Prior to that, investors need to understand how to interpret its performance.

So, how do we understand Eli Lilly's performance? We can pay attention to three aspects: performance growth, changes in profitability, and shareholder returns.

1. Performance growth

At present, Eli Lilly's market cap is close to a trillion dollars, and the corresponding P/E ratio is more than 100 times. Such a high valuation requires very high performance growth to support it. Therefore, Eli Lilly's performance growth may be the potential focus of the market's utmost concern.

Currently, Eli Lilly's drug layout is mainly in four areas, including diabetes, tumors, autoimmune and neurological diseases, etc. Among them, diabetes-related drugs are the most important source of revenue for Eli Lilly, accounting for more than 60%.

Before 2023, Eli Lilly's performance growth was relatively mediocre, although its overall performance was growing. Taking the period from 2013 to 2022 as an example, its revenue increased from $23.11 billion to $28.54 billion over a ten-year period, with an increase of only over 20%. Adjusted net profit increased from $4.5 billion to about $7.2 billion during the same period, an increase of about 60%. If it maintains such a low growth rate, the market may not give such a high valuation to Eli Lilly.

The turning point in Eli Lilly and Co's performance growth occurred in the second quarter of 2023. In this quarter, with Eli Lilly's blockbuster drug Tirzepatide for diabetes under the brand Mounjaro continuing to accelerate shipments, its revenue reached nearly the 1 billion dollar level in 2023Q2. At the same time, Tirzepatide's brand Zepbound for weight loss also officially commercialized in 2023Q4. Starting from 2023Q2, Eli Lilly's revenue growth rate in every quarter has exceeded 25%. In terms of net profit, except for a significant drop in net profit in 2023Q2 due to a one-time fee exceeding 2 billion dollars, Eli Lilly's adjusted net profit growth rate even exceeded 80% in 2024Q2.

So, can Eli Lilly maintain such a high performance growth rate in the future? It mainly depends on two points.

Firstly, in the short- to medium-term, the key is Mounjaro's and Zepbound's sales volume and output. Here, we need to observe two aspects.

On one hand, Eli Lilly's production capacity improvement is progressing. Currently, both of these blockbuster drugs are still in the accelerated shipment stage, with the constraints on their sales growth not being consumer demand, but rather production bottlenecks. Eli Lilly previously announced in its performance that it would invest billions of dollars in new production capacity to meet the production demand of these two drugs.

On the other hand, it is the change in market share. Currently, Eli Lilly's main competitors in the field of diabetes and weight loss drugs are Novo Nordisk. Novo Nordisk is a pharmaceutical giant in the US stock market second only to Eli Lilly, and more than 90% of its revenue is also from diabetes-related drugs. Take weight loss drugs as an example. Novo Nordisk's Wegovy was commercialized earlier and occupies a first-mover advantage. Later, we can observe whether Eli Lilly can accelerate its growth and capture more market share.

Taking weight loss drugs as an example, Novo Nordisk's Wegovy was commercialized earlier, occupying the first-mover advantage. In the future, we can observe whether Eli Lilly can accelerate its growth and thereby capture more market share.

Secondly, looking at the medium to long term, the progress of the new drug R&D pipeline. When the sales of Mounjaro and Zepbound reach higher basic levels, they may transition from explosive growth to stable growth. If Eli Lilly's valuation has not come down by then, new blockbuster drugs will be needed to take the baton. In terms of the new product pipeline, the company's latest progress mainly includes initiating phase I clinical trials for the second weight loss drug GLP-1-GIP, positive results in the phase III clinical trial of Tirzepatide for treating obstructive sleep apnea, and applications for the market approval of the new Crohn's disease drug mirikizumab in the US and Europe. The company's Alzheimer's new drug donanemab is also expected to be approved for listing this year. In the future, we can continue to observe Eli Lilly's core new drug R&D progress and commercialization.

2. Profitability

In addition to observing Lilly's revenue growth, we can also focus on the improvement of its profitability. As a pharmaceutical giant with annual revenue of hundreds of billions of dollars, it is not realistic to expect its revenue to continue to grow explosively. However, if Lilly's profitability can continue to improve and thus improve its net profit level, it will be an important support for its valuation level.

We can observe Lilly's profitability from two perspectives.

The first perspective is to look at Lilly's various profitability indicators, including gross margin, net profit margin, and return on equity (ROE).

From the perspective of gross margin, Eli Lilly's gross margin has been mostly above 75% with some fluctuations. Starting from Q2 of 2023, the gross margin has shown a more significant improvement, rising from 76.6% in Q2 2024 to around 80.8%.

Looking at the net profit margin, Eli Lilly's adjusted net profit margin has been mostly above 20% due to the instability caused by one-time expenses. In recent quarters, there has been an overall increase, reaching around 31.3% in Q2 2024.

From the perspective of ROE, Lilly's ROE level has declined in recent years, but still remains relatively high at nearly 50%.

From another perspective, comparing with its biggest competitor Novo Nordisk. Over the past decade, Eli Lilly's gross margin and net profit margin have been lower annually compared to Novo Nordisk. The return on net assets is also lower in most years than that of Novo Nordisk's level. Meanwhile, Novo Nordisk's profitability is relatively more stable. However, in the second quarter of this year, Novo Nordisk's net profit margin dropped below 30% for the first time due to a sharp increase in short-term research and development expenses, but this may just be a short-term phenomenon.

In future earnings reports, we can continue to observe whether Lilly can further improve its profitability level and narrow the gap with Novo Nordisk.

3. Shareholder Returns

For pharmaceutical giants like Lilly and Novo Nordisk, R&D spending is generally stable, and production capacity construction is also gradually advancing. With the money earned, there is naturally sufficient cash flow to return to shareholders.

The ways in which listed companies reward shareholders mainly include two aspects: dividends and share buybacks. Among them, dividends directly give cash to shareholders, which is the most direct way to reward shareholders, while share buybacks can increase the company's return on equity and earnings per share, and inject additional liquidity into the market, which can be said to be killing two birds with one stone and is also very popular among shareholders.

As the market leader of US pharmaceutical stocks, Lilly is also generous in rewarding shareholders. From 2013 to 2023, Lilly's cumulative dividend and buyback amounted to US$ 45.5 billion, while the total net profit was about US$ 46.8 billion during the same period. Dividend and buyback amount accounted for 97% of net profit, which is higher than Novo Nordisk's 88%. This shows Lilly's generosity in returning value to shareholders.

In the future performance, we can continue to observe whether novo-nordisk a/s can maintain its generous shareholder return policy as usual.

By now, you may have some new insights into how to read Lilly's performance. It is worth mentioning that for many star companies, every performance release may mean a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

Finally, to summarize,

For Lilly's performance, we can focus on three key points: revenue growth, profitability, and shareholder returns.

In terms of revenue growth, we can focus on the sales volume of Mounjaro and Zepbound, as well as the progress of new drug R&D and commercialization.

In terms of profitability, we can focus on the improvement of key profitability indicators such as gross margin and net profit margin, as well as the comparison with competitor Novo Nordisk.

In terms of shareholder returns, we can focus on whether Lilly can continue to maintain its relatively generous shareholder return policy.

Every time a company releases its business performance, it may bring potential trading opportunities. Investors can consider suitable trading varieties based on their personal risk tolerance.