After Earnings, Is Eli Lilly Stock a Buy, a Sell, or Fairly Valued?

Eli Lilly LLY released its first-quarter earnings report on April 30. Here’s Morningstar’s take on Eli Lilly’s earnings and the outlook for its stock.

Key Morningstar Metrics for Eli Lilly

• Fair Value Estimate: $540.00
• Morningstar Rating: 2 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Eli Lilly’s Q1 Earnings

• We increased our fair value estimate of Lilly to $540 per share from $500 following stronger-than-expected results. However, we still view the stock as overvalued, as the market doesn’t seem to properly account for expected price declines and competition for the firm’s key cardiometabolic drugs, Mounjaro and Zepbound, as well as the risk of patients discontinuing therapy due to tolerability, cost, or long-term safety issues.
• Pricing drove 10 percentage points of the 26% top-line growth seen in the quarter, which is expanding gross margins faster than we expected. We believe Mounjaro’s strong pricing power supported many of these gains. While Lilly expects a deceleration here in the second half of the year as discounts related to saving cards annualize, it showcases the strength of the firm’s wide moat.
• Cardiometabolic GLP-1-related sales (Mounjaro, Trulicity, and Zepbound) remain the key to Eli Lilly’s growth. The group represents over 40% of total sales and posted almost 50% growth in the quarter. Given the strong efficacy of Mounjaro (diabetes) and Zepbound (weight loss), we expect the drugs to grow rapidly and reach peak annual sales of over $60 billion. We expect additional indications in sleep apnea (positive data in the first quarter), heart failure (data in 2024/2025), and renal disease (2026) to support the robust outlook. We also expect positive mortality data for the drugs in diabetes (2025) and obesity (2027) to reinforce the company’s strong positioning.
• We expect Lilly to partly elevate capacity constraints for Mounjaro/Zepbound in the second half of the year. Lilly anticipates increasing production of the drugs by 50% by the end of the year. With demand outstripping supply, we expect Lilly to sell what it can produce. We believe the strong demand, supply constraints, and lack of significant competition outside of Novo’s drugs lets Lilly secure strong pricing, driving sales and margins higher.
• The remaining parts of Lilly are performing well. Its third-largest drug, Verzenio (breast cancer), grew 40% as the adjuvant setting approval gained traction. However, we expect deceleration, as Novartis’ Kisqali will likely gain an adjuvant approval later in the year.

Fair Value Estimate for Eli Lilly Stock

With its 2-star rating, we believe Eli Lilly’s stock is overvalued compared with our long-term fair value estimate of $540. Our assumptions for overall biopharma GLP-1 sales in 2031 are close to $170 billion across diabetes ($50 billion), obesity ($85 billion), and overweight ($35 billion). We think more than 25% of obese adults and 15% of overweight adults in the United States will receive treatment in 10 years, with the vast majority receiving branded GLP-1 therapies. US prices could fall substantially as volumes increase (in line with payer contracts) and new entrants launch (beginning in 2026-27), with average net prices falling from roughly $8,000 annually to $3,000 in 10 years.

Read more about Eli Lilly’s fair value estimate.

Economic Moat Rating

Patents, economies of scale, and a powerful distribution network support Eli Lilly’s wide moat. The firm’s patent-protected drugs carry strong pricing power, letting it generate returns on invested capital over its cost of capital. Further, the patents give the company time to develop the next generation of drugs before generic competition arises. Lilly’s diversified product portfolio means the company’s top drugs represent only a moderate amount of total sales, with the largest drug, Trulicity, representing almost 25% of total sales, which sets up manageable cash flow declines as new products mitigate the generic competition. However, we believe increasing dependence on Lilly’s new GLP-1 drugs (including Mounjaro and Zepbound) will eventually mean close to two thirds of the firm’s sales will be from this class of drugs by 2032.

Read more about Eli Lilly’s moat rating.

Financial Strength

With strong cash flows from a stable and diversified product portfolio, Eli Lilly remains on solid financial footing. We expect the company’s debt/EBITDA level to fall from close to 1.9 times in 2022 to close to 1.3 times by 2024, and for its debt/capital ratio to go from almost 60% in 2022 to 40% in 2025 as cash flows accrue. With its strong growth prospects, we don’t expect Lilly will need to make any major acquisitions to drive growth. Nevertheless, we expect tuck-in acquisitions will augment growth over the next decade.

Read more about Eli Lilly’s financial strength.

Risk and Uncertainty

We maintain Eli Lilly’s High Uncertainty Rating, based on a highly variable outcome for several key drug launches. Mounjaro and Zepbound are likely to develop into major new drugs. However, their cone of uncertainty is higher, since several variables affect the sales potential, especially for the weight-loss indication, including level of insurance coverage and pricing. Alzheimer’s drug donanemab holds the potential to become another major new drug, but its outlook also has a wide range of outcomes, since the market potential could be large but the visibility on market uptake is less clear.

With donanemab and Mounjaro/Zepbound representing close to two-thirds of Lilly’s projected sales by the end of the next 10 years, we believe a High Uncertainty Rating is appropriate. Most big biopharma firms tend to have Medium ratings. Beyond product-specific uncertainties, Lilly faces tough competition from generics manufacturers and brand-name drugmakers. The company encounters considerable regulatory and legal risks, including product approvals, patent challenges, and liability lawsuits.

Read more about Eli Lilly’s risk and uncertainty.

LLY Bulls Say

• Lilly’s strong leadership in weight loss should drive industry-leading growth with both its approved drugs and the well-positioned next-generation drugs in its pipeline
• Lilly’s cancer drug Verzenio reported strong data in early-stage breast cancer, opening up the potential to be the first CDK4/6 drug to launch in this multibillion-dollar market.
• Lilly is creating the next generation of diabetes and weight-loss drugs that hold major market potential, given the high prevalence of these diseases.

LLY Bears Say

• The risks around Alzheimer’s drug donanemab remain high, both in clinical development and insurance coverage.
• Several of Lilly’s next-generation diabetes drugs could cannibalize its currently approved drugs.
• Increasing competition for weight-loss drug Zepbound could significantly increase over the next three years.

This article was compiled by Krutang Desai.