Eli Lilly (LLY) USD (CDI)

Eli Lilly’s first quarter revenues were up by 26% to $8.8bn.

Volume increases in several medicines were the main driver, but price increases for diabetes injection Mounjaro also drove up sales.

Operating profit was up 68% to $2.5bn, benefitting from both the higher revenues and an improved gross margin.

Full-year revenue guidance has been improved by $2bn, due primarily to the strong performance of Mounjaro and Zepound, which contain the same active ingredient and are prescribed for obesity.

The shares were up 5% in pre-market trading.

Our view

Eli Lilly has raised full-year guidance despite coming up a little short of first-quarter revenue expectations. 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 patient groups. Lilly wasn’t the first to market and there are competing products in development, but the products looks sufficiently differentiated to hold their own. Demand is outstripping Lilly’s production capacity and that looks set to be the case for some time to come.

The acquisition of Nexus Pharmaceutical may go some way to alleviate this but production there won't start till the end of 2025. l Supply disruptions remain a risk to be mindful of. Lilly certainly doesn’t have all its eggs in one basket though. It’s recently launched products to treat certain blood cancers and ulcerative colitis. And its breast cancer treatment Verzenio is also proving to be a key growth driver as it gets uptake in different forms of the disease.

Lilly is 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. However, drug development is a high-risk activity and there’s no guarantee that these will ever make it to market.

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 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. Net debt has been creeping up but at under 2x forecasted cash profits, we’re not too concerned.

Overall we’re excited by the growth prospects for both the existing product range and the pipeline. But with a valuation that tops the peer group by some margin, there is arguably better value elsewhere in the sector.

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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