In 2023, the most notable company in the Medical Industry is Eli Lilly (Eli Lilly, stock code: LLY), a U.S. pharmaceutical company.

In May, Eli Lilly's Market Cap surpassed Johnson & Johnson (stock code: JNJ), becoming the highest valued pharmaceutical company globally. In the following months, Eli Lilly's Market Cap continued to rise, exceeding the $500 billion mark, firmly sitting on the throne of the 'king of drugs.'

Why has this 147-year-old established pharmaceutical company experienced rapid growth in recent years? Is there still room for growth in the future? At the same time, what potential risk factors need to be considered?

This article will introduce Eli Lilly from multiple perspectives, including product layout, R&D capabilities, financial data, potential growth opportunities, and risks.

Product Layout: Diversification strategy

From Eli Lilly's drug product portfolio, it can be seen that the company understands well the saying ‘don't put all your eggs in one basket.’

Unlike some companies that focus solely on one field, Eli Lilly's products span various areas, such as diabetes, oncology, autoimmune diseases, and neurological disorders.

In terms of performance, the diabetes business can be considered as Eli Lilly's trump card, contributing up to $9.2 billion in revenue in the first half of 2023, accounting for 60% of total revenue. Furthermore, the revenue of the new diabetes drug Mounjaro (Tirzepatide) skyrocketed by an astonishing 9576% year-on-year in the first half, reaching $1.5 billion. In the long run, the growth potential of Eli Lilly's diabetes business may not have peaked yet. Since Tirzepatide currently only has approval for the treatment of diabetes, if it gets approved for treating obesity in the future, its potential will be further unleashed. Therefore, this drug is generally seen as a strong competitor for the next king of drugs.

In addition, the Oncology Business has also shown strong momentum, contributing $3 billion in revenue in the first half of 2023, accounting for 20% of total revenue.

At the same time, Eli Lilly and Co is also incubating a Neuroscience Business; although this sector only contributed $0.748 billion in revenue in the first half of the year, potential Alzheimer's drugs could become future revenue growth points.

Overall, Eli Lilly and Co is thriving under a diversification strategy, consolidating its leadership in the diabetes market while finding growth opportunities in other areas.

Research and Development Capability: 20 new drugs launched in 10 years

One important reason why Eli Lilly and Co can claim the title of "King of Drugs" is its strong research and development capabilities.

According to Investopedia, it generally takes up to 10 years and an investment of up to $2.6 billion to develop a new drug until it is finally marketed. After successful development, pharmaceutical companies can profit within the 20-year patent period, but if the development fails, the huge investment may be lost.

Therefore, investors pay special attention to whether pharmaceutical companies have a record of continuously launching new drugs, which is also an important indicator of research and development capability.

Although Eli Lilly and Co has been relatively successful in research and development over the past decade, its path has also been fraught with challenges. From 2005 to 2013, Eli Lilly's R&D progress was slow, launching only two new drugs in eight years. In 2016, the expiration of patents for several best-selling drugs led to a sharp decline in the company's revenue.

After a series of failures and reflections, David Ricks was appointed as the new CEO in May 2016, and Eli Lilly began to significantly reform its historically unsatisfactory R&D model. The company raised $1.7 billion in cash for R&D by selling a 20% stake in its animal health division and focused on five therapeutic areas: diabetes and obesity, neurodegenerative diseases, cancer, immunology, and pain management.

Subsequently, Eli Lilly's R&D efficiency improved significantly. According to Eli Lilly's 2021 Investor Report, between 2014 and 2021, Eli Lilly successfully launched 16 new drugs and continued to steadily progress toward its goal of launching 20 new drugs in a decade. Additionally, the company has also successfully bet on several fields, with many new drugs becoming market hits, and Wall Street predicts that the peak sales of several new drugs may exceed $3 billion.

Potential opportunities: Obesity + Alzheimer’s + Pain management

According to analysis by The Motley Fool, Eli Lilly has significant growth potential because the new drugs it recently launched and will launch in the future target three highly promising areas: obesity, Alzheimer’s disease, and pain management.

1. Obesity: Weight loss drugs have become the focal point of the market, with some likening them to AI in the medical field. Currently, Novo-Nordisk A/S (stock code: NVO) dominates the weight loss drug sector, with its drug Wegovy achieving great success. However, Eli Lilly and Co also has strong reserves in the weight loss drug field to ensure that it can secure a considerable market share. Eli Lilly's diabetes drug Mounjaro (Tirzepatide) is currently undergoing regulatory review to expand its application range, including the treatment of obesity. Since its launch in May last year, this drug has become one of Eli Lilly's star products.

2. Alzheimer's: There was a time when Alzheimer's disease (commonly known as dementia) was considered incurable until Biogen (stock code: BIIB) launched two drugs for Alzheimer’s treatment in the past few years, revitalizing this field. Research company GlobalData predicts that by 2030, the Alzheimer’s treatment market could reach $13 billion. Eli Lilly is expected to become a strong competitor, currently having four Alzheimer’s drugs in clinical trials, the most notable of which is donanemab, which the company plans to launch by the end of 2023.

3. Pain Management: The field of pain management is also receiving a lot of attention. According to a report by Allied Market Research, the global painkiller market is expected to reach $51 billion by 2030. Currently, Eli Lilly does not have any painkillers on the market, but the company has four pain management projects underway, two of which are in phase II clinical trials and two in phase I clinical trials.

As shown in the table below, Eli Lilly has a rich portfolio of drugs covering various fields.

In the future, with the dual advantages of 'Alzheimer's + weight loss drugs,' Eli Lilly is expected to see continued revenue growth.

FactSet analysts predict that the upcoming weight loss drug and Alzheimer’s drugs from Eli Lilly may double the company’s revenue scale. As of 2022, Eli Lilly's total revenue was $28.5 billion, and FactSet forecasts that by 2028, Eli Lilly's revenue could approach $60 billion.

Financial Data

Eli Lilly and Co's Earnings Reports performance in Q2 2023 was very impressive.

In Q2, revenue grew by 28% year-on-year, reaching 8.3 billion USD, while EPS increased by 85.7%, reaching 1.95 USD per share.

In the long term, Eli Lilly and Co's performance growth momentum may continue. Analysts believe that Eli Lilly and Co has a sufficient drug product line reserve, which will be a key reason for sustained growth over the next five years.

According to analysts at The Motley Fool, Eli Lilly and Co's adjusted diluted EPS is expected to grow at a compound annual growth rate of 24.8%. This growth rate is significantly higher than the average growth rate of 9.3% in the Pharmaceutical Manufacturing Industry.

Potential Risks: Overvaluation

Based on an optimistic expectation for Eli Lilly and Co's future growth, its stock price has increased by 65.83% this year (as of October 11, 2023), reaching $605.28.

According to Futu, 94.44% of 18 Analysts have given a "Buy" rating, while 5.56% have given a "Hold" rating. The average target price for Eli Lilly in the next 12 months among Analysts is $604.75, with the highest target price at $700 and the lowest at $470.

However, despite the company's outstanding performance, Eli Lilly's stock PE valuation has reached an astonishing 84.30 times (as of October 12, 2023), far exceeding the industry average of 23.19 times and also well above the overall market's average valuation of 17.86 times.

This indicates that the risk facing Eli Lilly is that the expectations for future strong performance may already be fully reflected in the company's stock price, resulting in limited upside potential. Therefore, investors need to carefully assess these risks and make decisions based on their own risk tolerance and investment strategy.

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