US Manufacturing Investments And Tariff Risks Will Constrain Margins While Pipeline Trials Will Open Prospects

Key Takeaways

• Strategic U.S. investments could secure long-term supply chain efficiency, but may reduce net margins and profitability.
  
• Increased R&D and regulatory hurdles could delay market entry and affect earnings if products falter or face setbacks.
  
• Eli Lilly's focus on product innovation and strategic investments supports robust revenue growth and strong margins, with promising signs from international and pipeline advancements.

Catalysts

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

• Eli Lilly's increased operating expenses due to substantial investments in U.S. manufacturing, totaling over $50 billion by 2025, could impact net margins and overall profitability despite the strategic intention of securing long-term supply chain efficiency.
  
• The potential expansion of tariffs and retaliatory tariffs in geographies outside the U.S. represents a significant risk to Eli Lilly's revenue by increasing manufacturing costs and complicating international trade dynamics.
  
• A competitive pricing environment, particularly in the obesity treatment market, may lead to pricing pressures as payers like CVS shift formularies, potentially impacting its revenue growth in the long term by reducing market share for products like Zepbound.
  
• Eli Lilly's R&D expenses have increased by 8%, reflecting higher costs for developing late-stage assets. This expense could affect earnings if new products do not meet market success or regulatory challenges delay market entry for key pipeline assets such as orforglipron.
  
• Regulatory challenges, such as the withdrawal of the U.S. application for tirzepatide for heart failure, indicate possible setbacks in pipeline advancement. Additional trials could extend time to market and increase R&D expenses, thus delaying potential revenue streams.

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 16.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 22.7% today to 36.1% in 3 years time.
• The bearish analysts expect earnings to reach $28.1 billion (and earnings per share of $31.08) by about July 2028, up from $11.1 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 25.4x on those 2028 earnings, down from 64.6x today. This future PE is greater than the current PE for the US Pharmaceuticals industry at 18.1x.
• Analysts expect the number of shares outstanding to decline by 0.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.4%, as per the Simply Wall St company report.

Eli Lilly Future Earnings Per Share Growth

Risks

• Eli Lilly's revenue grew by 45% in Q1 2025 compared to the previous year, driven by strong performance from key products like Mounjaro and Zepbound. This strong revenue growth, particularly from high-demand products, suggests potential for continued robust revenue performance in the future.
  
• The company's gross margin improved to 83.5% due to better production costs and favorable product mix. This indicates potential for maintaining strong net margins.
  
• Eli Lilly is advancing its pipeline, with recent success in the ACHIEVE-1 trial for orforglipron in type 2 diabetes, and plans for more Phase III trial readouts and regulatory submissions. Successful pipeline advancements could lead to increased future earnings from new product launches.
  
• The company is making significant U.S. manufacturing investments, totaling over $50 billion, which indicates potential long-term operational cost management and improved supply chain efficiency, possibly benefiting future profit margins.
  
• Eli Lilly reported strong international revenue growth, with Europe's constant currency revenue increasing by 71% and China's revenue by 21%. Strong international performance offers potential for sustained revenue growth across diverse markets.

Valuation

• The assumed bearish price target for Eli Lilly is $666.27, which represents two standard deviations below the consensus price target of $952.27. 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 $77.6 billion, earnings will come to $28.1 billion, and it would be trading on a PE ratio of 25.4x, assuming you use a discount rate of 6.4%.
• Given the current share price of $798.89, the bearish analyst price target of $666.27 is 19.9% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.