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

Eli Lilly LLY released its second-quarter earnings report on Aug. 8. 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: $580.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Eli Lilly’s Q1 Earnings

• Cardiometabolic-GLP-1-related sales (Mounjaro, Trulicity, and Zepbound) almost doubled in the quarter. While wholesaler stocking and reduced discounting significantly helped in the quarter, the drugs remain well-positioned, and we project combined peak annual sales of over $65 billion (up from $12 billion in 2023). We expect additional indications for Mounjaro/Zepbound in sleep apnea and heart failure, following positive data already reported in 2024. Moreover, a head-to-head study of Zepbound versus Novo Nordisk’s Wegovy in obesity patients should be reported later this year, and we expect slightly more positive data for Zepbound based on cross-trial comparisons of previously reported studies.
• Lilly’s rapid ramp in manufacturing GLP-1 drugs is largely meeting current demand, but supply could be limited if demand significantly increases quickly.
• On the pipeline, we remain most bullish on Lilly’s next-generation weight-loss drug orforglipron (pivotal data in 2025), which could offer the convenience of oral dosing versus current injectable drugs.
• Outside cardiometabolic, Lilly’s third-largest drug, Verzenio (breast cancer drug), grew 44% as the adjuvant approval gained traction. However, we expect deceleration, as Novartis’ NVS Kisqali will likely gain an adjuvant approval later in the year. Also, the recent launch of the Alzheimer’s drug Kisunla should develop into a major blockbuster, but we expect a slower ramp-up.
• We increased our fair value estimate to $580 per share from $540 following better-than-expected second-quarter results, largely driven by Mounjaro and Zepbound. However, we believe the stock still looks overvalued. While we project significant sales for Mounjaro and Zepbound, the market seems too bullish on the drugs and is not likely fully accounting for expected price declines, high cost burden for some patients, eventual competition beyond Novo Nordisk NVO, tolerability issues, and potential long-term safety issues

Fair Value Estimate for Eli Lilly

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 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 economic moat.

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 developing a new Alzheimer’s drug (Kisunla/donanemab) that could become a major blockbuster, especially since few treatment options exist for the disease.

LLY Bears Say

• The risks around 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.