Eli Lilly Expects Enduring Growth, Despite Immediate Challenges

Key Points

• Supply shortages have complicated the pharmaceutical industry.
• Eli Lilly & Co are making the right pivots.
• New partnerships aimed at new products show great promise.
• The dividend is healthy, and long-term growth looks good.

Heading into the week before Christmas, the United States Food and Drug Administration flagged Eli Lilly & Co. NYSE: LLY for a shortage of their new diabetes drug, Mounjaro. They are also having supply issues with their previous diabetes medicine, Trulicity, which is the pharmaceutical company's best-selling drug of all time.

It should be noted that Eli Lilly is not the only drugmaker flagged for shortages by the US health regulators. Mounjaro happens to be the most recent addition to the list. Danish drugmaker Novo Nordisk A/S NYSE: NVO, for example, has also experienced similar issues with their rival diabetes drug, Wegovy; they plan to boost manufacturing capacity to address this.

In fact, Lilly anticipated the challenges by flagging their own awareness of potential difficulty meeting demand, which is particularly difficult since Lilly processes six dosage forms of Mounjaro (as well as four dosage forms of Trulicity). Perhaps this kind of awareness and flexibility is why analysts have given LLY a Moderate Buy rating.

Supply Side Complications Are Not Slowing Them Down

Shortages aside, Lilly expects they will deliver strong performance in 2023, both financially and operationally. These successes will likely feature volume-driven revenue growth, especially following the launch of several drugs. These include donanemab, mirikizumab, lebrikizumab, and pirtobrutinib. They are also expected to submit regulatory filings for a new obesity drug, the yet-unnamed tirzepatide.

In addition to new products, Lilly plans to move forward on a handful of other projects in the existing pipeline. Most notably, they will progress with Phase 3 clinical trials for the obesity drug retatrutide (a GGG tri-agonist) as well as the type-2 diabetes/obesity drug orforglipron (an oral GLP-1 NPA). They will also release essential phase 3 readouts for donanemab and mirkizumab, which treat early Alzheimer's disease and Crohn's disease, respectively.

Of their recent notable ventures, Eli Lilly also has a new partnership that should help to open up new avenues. Last week, the drugmaker inked a new $730 million deal with Sosei Heptares, who will focus on small molecules aimed at modulating G protein-coupled receptor (GPCR) targets. For the deal, Lilly will pay $37 million at first, and Sosei could be responsible for upwards of $694 million, which will go towards things like development and royalties.

Eli Lilly is not the first major pharmaceutical firm to collaborate with Sosei. Indeed, other big names include AstraZeneca PLC (Nasdaq: AZN), Novartis AG (NYSE: NVS), Pfizer Inc (NYSE: PFE), and the Genentech unit of Roche Holding AG (OTCMKTS: RHHBY). Furthermore, just a few days prior to Lilly's Sosei announcement, AbbVie made a similar declaration, though it was only for $10 million.

Earnings are Up, and Growth Should Continue

All of this certainly lends to the large-cap pharmaceutical firm's current analyst rating of Moderate Buy. While they may have only a small upside of 4.0%, Eli Lilly is up more than +30% YTD, with 17.78% projected earnings growth. Sure, the stock is down a little on the month, but it is up +16.50% over the last quarter; its 12-month performance is also up +34.57%.

LLY expects 2023 revenue to register between $30.3 billion and $30.8 billion, driven mainly by the sale of key growth products. In addition, they expect an earnings per share (EPS) range of $7.65 to $7.85 (reported basis) and $8.10 to $8.30 (non-GAAP basis). Most importantly, perhaps, the company reaffirmed its financial guidance for the end of the year (both reported and non-GAAP).

Moving forward, analysts set a price target for LLY stock at $374.19, representing just a small upside of 4.0%. While that may not be cause for a major celebration, the stock is also up more than +30% YTD, with 17.78% projected earnings growth. Sure, the stock is down a little on the month, but it is up +16.50% over the last quarter, and its 12-month performance is also up +34.57%.

Their Dividend Suggests Long-Term Stability

Most important, perhaps, LLY shares offer a fair dividend yield of 1.09% with an annual dividend of $3.92. These may seem a bit conservative, but they are crucial for a stock with a remarkably high Price-to-Earnings ratio (P/E) of 54.03. However, an annualized dividend growth rate of 14.81%, coupled with an exceptional 58.86% dividend payout ratio, indicates long-term stability.

At the end of the day, the promising news outweighed the complications, and the average daily trading volume more than doubled to more than 6.6 million shares changing hands. And for investors, this could be representative of piquing interest in the stock, certainly in line with its moderate BUY rating.