Eli Lilly’s second-quarter revenue grew by 36% to $11.3bn, led by a strong performance in its diabetes care and obesity care medicines Mounjaro and Zepbound, as well as breast cancer therapy Verzenio. The growth was mainly volume-led, but average prices increased too, due to a reduction in company-funded subsidies for Mounjaro.
Revenue included a one-off $0.6bn benefit from the sale of rights to Baqsimi, an emergency treatment for low blood sugar events in diabetics.
Operating profit increased 75% to $3.7bn. This was driven by an improvement in gross margin and relatively slow growth in R&D and other expenses when compared to revenue.
Eli Lilly expressed increasing confidence around its plans to overcome manufacturing bottlenecks and has raised the mid-point of full year revenue guidance by $3bn to $46bn. The mid-point of underlying earnings per share (EPS) guidance has been increased to $16.35 per share.
The quarterly dividend was raised by 15% to $1.30 per share.
The shares were up 10.1% in pre-market trading.
Our view
Investor sentiment towards Eli Lilly received a shot of renewed enthusiasm, following the company’s second earnings upgrade of this financial year.
The global pharmaceutical company is one of the trailblazers revolutionising treatments for hormone deficiencies such as diabetes. But sales of these treatments (namely a class of medicine known as GLP-1) have been grabbing attention for their effectiveness as a weight management tool.
Obesity’s reached epidemic proportions in the modern era. In the UK alone the economic cost of obesity could be close to £100bn. There’s growing evidence that these medicines can effectively reduce and treat the associated health risks.
One example is recent clinical data showing that Eli Lilly’s lead GLP-1 compound tirzepatide, (current trade names are Mounjaro and Zepbound) reduces sleep apnea severity in certain patients. Lilly wasn’t the first to market, and there are competing products in development, but the products look sufficiently differentiated to hold their own. Currently, demand is outstripping production capacity.
Supply disruptions remain a risk, but the company is making good strides towards increasing capacity. There are also concerns about the high price tag, particularly in the United States where Zepbound costs $1,059 per month. There have been steep discounts for those who aren’t covered by insurance, but most plans now accept Zepbound prescriptions. Employers are also increasingly footing the bill. But there remains intense political pressure for prices to fall.
Lilly certainly doesn’t have all its eggs in one basket though. Its breast cancer treatment Verzenio for one, is also proving to be a key growth driver. The company’s relatively aggressive when it comes to its Research & Development budget and that’s helped to create a robust pipeline. There’s blockbuster potential in complementary drugs in the cardiometabolic space, but also in the skin condition atopic dermatitis and Alzheimer’s disease, where it has recently been approved in the US.
However, drug development is a high-risk activity and there’s no guarantee of further product launches or commercial success. That would compound the industry-wide pressure of patent expirations where manufacturers eventually lose exclusivity over medicines. However, this is not as big an issue as it has been for Lilly. Its dominant positioning in certain disease areas and expertise in manufacturing also provide a competitive edge.
Eli Lilly’s strong cash flows, and comfortable net debt position, give it the flexibility to keep pushing the bar in research & development while continuing to invest in manufacturing and distribution capabilities. It also supports a modest dividend yield although further payouts can never be guaranteed.
Overall we’re excited by the growth prospects for the company. But with a valuation that tops the peer group by some margin, there is arguably better value elsewhere in the sector.
Environmental, social and governance (ESG) risk
The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk.
According to Sustainalytics, Eli Lilly’s management of ESG risks is strong. Executive pay is linked to climate-related targets, but the exact mechanism is unclear. Similarly, there are no targets or deadlines set for improving employee diversity and engagement. Its initiatives related to value-based healthcare, as well as ensuring access to its medicine in developing countries, are considered adequate. Disclosure of clinical trial data is strong, but information about quality control in medical manufacturing could be clearer. The company is the subject of several lawsuits alleging anti-competitive practices in the pricing of insulin.
Eli Lilly key facts
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