Eli Lilly (LLY) USD (CDI)

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Eli Lilly now expects to report revenue of around $45bn in its forthcoming 2024 results. That’s some 32% ahead of the prior year, but about 3% lower than the reduced guidance issued in October.

The miss was driven by lower than expected fourth quarter growth in the market for hormone-based diabetes and obesity treatments, that include Lilly’s Mounjaro and Zepound.

In 2025, revenue is expected to land between $58-$61bn, growth of 32% at the midpoint, a little better than analysts had been forecasting.

The shares closed down 6.6% on the day.

Our view

The demand picture for Eli Lilly’s star performers is proving to be a little weaker than expected, leading to two downgrades in the run-up to 2024’s results. That said, market growth of 45% for these treatments in the final quarter is an enviable position to be in.

The global pharmaceutical company is one of the trailblazers helping to revolutionise treatments for hormone deficiencies such as diabetes. But sales of these treatments (namely a class of medicine known as GLP-1) have also 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.

The boom in demand led to pressure on the firm’s manufacturing facilities, but attention is now turning to how quickly demand will take to catch up with recent expansions in capacity. Launches in new markets and approvals for use in other disease areas are significant opportunities for Lilly’s lead GLP-1 compound tirzepatide, (current trade names are Mounjaro and Zepbound). But both of these growth levers carry a high level of execution risk.

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, and expects a growing contribution from a handful of new medicines this year. The company’s relatively aggressive when it comes to its Research & Development budget, and that’s helped to create a robust pipeline.

While there are no guarantees of further research success, it does provide a route to mitigate 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 help provide a competitive edge.

Eli Lilly’s strong cash flows, and comfortable net debt position, give it 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 payouts can never be guaranteed.

Overall, we’re excited by the company's growth prospects. But despite recent setbacks, the valuation is at the top of its peer group, leaving it vulnerable to disappointments.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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