This old stock still has a lot of potential. Eli Lilly and Co. is one of the oldest companies in the United States and one of the global leader in the pharmaceutical industry. After facing more than 50 wars, the company remains among the most innovative and influential in its industry.
The company is structured around five business segments: - Endocrinology with products to treat osteoporosis, diabetes and growth problems. - Oncology - Veterinary medicine - Cardiovascular diseases - Neurology with drugs to treat depression and schizophrenia.
Since 1876 - when the company was founded - Eli Lilly has been developing its business and distributing products in 125 countries with offices in 18 countries. With a dozen blockbuster products such as the world's first insulin, the first polio vaccine and a pill to treat depression, Eli Lilly has continued to expand its product line, resulting in a 443.13% increase in market capitalization between 2013 and 2022.
MarketScreener : Static chart – Share price evolution between June 2012 & June 2022
The company has a diverse portfolio of products including Zyprexa (for schizophrenia and bipolar disorder), Gemzar (pancreatic cancer), Evista (osteoporosis), Cymbalta (depression), Cialis (erectile dysfunction), Strattera (attention deficit hyperactivity disorder), Erbitux (cancer) and Alimta (chemotherapy).
A real focus on R&D
With globalization and excessive population growth, awareness of health needs is increasingly necessary. The world's population is getting older, pushing laboratories to develop new drugs. To illustrate this point, only 9% of the world's population is 65 years or older, but this is expected to rise to 16% by 2050, according to Statista. The aging population will influence the group's sales, and the massive investments in research and development (R&D) suggest that the group will gain market share in the years to come.. The group is growing faster than its eight main competitors - Sanofi, Johnson & Johnson, AstraZeneca, Merck, Roche Holding, Bristol-Myers Squibb, GSK and Pfizer - who are also major players and leaders in certain areas of the pharmaceutical sector. You can see from the table below that Eli Lilly is the company with the highest proportion R&D investments since 2019. Moreover, in 2021, these investments represented 25% of Eli Lilly's sales, almost twice as much as Pfizer’s - whose growth model is oriented on the acquisition of external companies, generally used by "big pharma" to ensure sustainable growth -. R&D investments were $83 billion in 2019 which is ten times what the industry spent per year in the 1980s. Today, these investments represent a very significant portion of pharmaceutical companies' revenue and are driven by three distinct factors: anticipated lifetime global revenues from a new drug, expected costs to develop a new drug, and policies and programs that influence the supply of and demand for prescription drugs.
A solid balance sheet and good growth momentum
Despite the covid-19 pandemic, Eli Lilly's EBITDA – perhaps the best indicator to gage the level of profitability of the operating process and to identify the wealth creation produced by a company – is set to continue to grow in 2022 to $10,206 million. Especially since with net cash expected to be up 30.25% and net debt down 26.73% this year, there is no doubt that the company will be able to use these resources to further position itself. The pandemic has not disrupted either the cash inflow or the dynamics of the company, which has remained at the same growth rate. Despite the current macroeconomic turmoil and rising interest rates, the company's balance sheet policy is to reduce its debt and leverage. It is also interesting to look at the change in operating and net margin. Between 2012 and 2021, Eli Lilly's operating margin increased by 68.6%, slightly below Johnson & Johnson (71.7%), which is the industry leader. Net margin grew 36.5% over the same period for Eli Lilly, almost 2.5 times that of Merck (13.7%).
Source: MarketScreener – Income Statement Evolution (Annual data)
At the same time, Eli Lilly's turnover is lower than its peers, but its compound annual growth rate (CAGR) is good and in line with its industry average. However, we can highlight the fact that the three companies with the highest increase since 2017 are those that most benefited from the covid pandemic. Indeed, Pfizer and AstraZeneca were among the first to provide a vaccine, and Bristol-Myers Squibb developed many treatments. But in the coming years, their growth rate is likely to decline in favor of other companies like Eli Lilly. Despite this potential downfall, these companies have gained a lot of trust from people with the implementation of vaccines, care, or personal assistance. This quick reaction at the beginning of the pandemic was beneficial for some but "destructive" for others such as Sanofi, which was unable to find a vaccine in time, thus losing consumer confidence.
The company's results and very strong balance sheet make it easy for investors to understand its results. With its large capitalization, the company offers significant visibility on its future results. Analysts are numerous and offer important coverage to investors. It can therefore be interesting to position yourself for a long-term investment, but it is essential to invest with full knowledge of the facts and to make rational decisions.
Eli Lilly is positioned as one of the leaders in its sector with a complete range of services thanks to a century of know-how and a strong history, which convinces investors and creditors that the business model is proven. Since its IPO, the group has been able to finance numerous acquisitions, including Promoter Technologies in 2O21. It has maintained operating margins and is trying to improve cash flow to allow the integration of new businesses. Eli Lilly sells products through wholesalers and distributors such as hospitals, pharmacies and healthcare professionals allows - maintain a high level of activity during economic shocks – in more than 125 countries, with more than 8,300 employees engaged in research and development.
Nevertheless, the group faces several types of competitors: small, more agile players and large groups that also have a multi-service branch. Its balance sheet and revenue growth are mainly due to external acquisitions and the development of new drugs, treatments, etc. These two strategies presuppose that the company can find suitable targets to acquire under acceptable conditions without opposition from competition authorities, and that it has sufficient resources to carry out the development of new products, which may require nearly 10 years of research.