Drug Pricing Reforms And Patent Expiry Will Constrain Outcomes

Key Takeaways

• Potential drug pricing reforms and wider pricing parity efforts threaten future profitability and limit pricing power, especially for high-profile obesity and diabetes products.
  
• Heavy revenue reliance on a few core drugs and rising R&D demands increase vulnerability to competition, patent loss, and adverse data, risking future growth and margins.
  
• Strong demand for key treatments, manufacturing scale-up, diverse late-stage pipeline, expanded market access, and accelerated R&D position Eli Lilly for sustained growth and reduced risk.

Catalysts

Eli Lilly and Company discovers, develops, and markets human pharmaceuticals in the United States, Europe, China, Japan, and internationally.

• The likelihood of significant drug pricing reforms in the U.S., combined with initiatives to increase pricing parity between the U.S. and Europe, threatens to sharply limit Eli Lilly's future pricing power and compress both future revenue growth and net margins, especially for its blockbuster diabetes and obesity portfolio.
  
• Heavily concentrated revenue in a narrow set of leading drugs, including Mounjaro, Zepbound, and Trulicity, makes Lilly especially vulnerable to the loss of market share from patent expiry, biosimilar and generic entrants (including Canadian and compounded generics) and possible adverse data, which could rapidly erode top-line growth and earnings momentum as competition intensifies.
  
• Demographic shifts, such as the slowing population growth and increasing focus on preventative public health, mean that the addressable patient pool for chronic metabolic disease drugs may fail to grow at the currently projected rates, dragging down volume growth and tempering the future earnings potential that is currently priced into the stock.
  
• Intensifying global scrutiny around drug costs, as well as the probable expansion of value-based reimbursement and mandatory discounts, is poised to further pressure realized pricing, reduce operating leverage, and drive lower profitability industry-wide-including for Lilly's high-margin products.
  
• Escalating R&D intensity and rising requirements for safety, efficacy, and post-market surveillance-notably in high-profile areas like obesity and metabolic disease-could drive up costs and increase the risk of late-stage pipeline failures, leading to downward pressure on net margins if new therapies do not consistently outperform competitive alternatives.

Eli Lilly Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Eli Lilly compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Eli Lilly's revenue will grow by 13.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 25.9% today to 36.2% in 3 years time.
• The bearish analysts expect earnings to reach $28.2 billion (and earnings per share of $31.19) by about August 2028, up from $13.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 25.2x on those 2028 earnings, down from 40.7x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 18.4x.
• Analysts expect the number of shares outstanding to decline by 0.07% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

Eli Lilly Future Earnings Per Share Growth

Risks

• Robust global demand for chronic disease and obesity treatments-coupled with an aging population and rising obesity rates-positions Eli Lilly's leading brands (Mounjaro, Zepbound, and orforglipron) for continued volume growth and market expansion, potentially driving sustained revenue increases.
  
• Strong execution in manufacturing scale-up and new facility investments allow Lilly to meet and capitalize on soaring demand for incretin therapies, which could enable above-market revenue and profit growth as supply constraints ease.
  
• Lilly's diversified late-stage pipeline and recent approvals in high-value therapeutic categories such as oncology (Jaypirca, Verzenio), immunology (Ebglyss, Omvoh), and neuroscience (Kisunla) provide additional growth engines that could drive earnings higher and reduce exposure to single product risks.
  
• Expansion of access, insurance coverage, and new pricing models (such as LillyDirect's direct-to-consumer channel and increasing international launches) may mitigate U.S. reimbursement headwinds and bolster both revenue and operating margins across geographies.
  
• Accelerated R&D productivity, positive clinical readouts, and successful business development-illustrated by continued investment and promising advances in areas like pain and cardiovascular disease-set up multiple opportunities for long-term margin improvement and future earnings growth.

Valuation

• The assumed bearish price target for Eli Lilly is $650.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Eli Lilly's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $1190.0, and the most bearish reporting a price target of just $650.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $77.8 billion, earnings will come to $28.2 billion, and it would be trading on a PE ratio of 25.2x, assuming you use a discount rate of 6.8%.
  
• Given the current share price of $625.65, the bearish analyst price target of $650.0 is 3.7% higher. The relatively low difference between the current share price and the analyst bearish price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.