Eli Lilly Discounted Cash Flow Model
Comprehensive valuation analysis using DCF with Free Cash Flow to Firm (FCFF) and Equity (FCFE) methodologies, alongside relative valuation metrics.
Executive Summary
My valuation analysis, using both Discounted Cash Flow (DCF) with Free Cash Flow to the Firm (FCFF) and Equity (FCFE) and relative valuation methods, suggests Eli Lilly's current stock price of $579 aligns closely with our target range of $595 to $671 and a target price of $632, making this a buy. Key factors impacting this valuation include:
Inflation Reduction Act's Impact
Upcoming drug price negotiations by the U.S. Department of Health and Human Services, affecting Eli Lilly's pricing dynamics by 2026 (Medicare Drug Price Negotiation | CMS, n.d.).
Development of a Weight Loss Drug
The promising trial results of Eli Lilly's patent-pending weight loss drug significantly influence its market value.
Advancements in Cancer Treatment
Eli Lilly's progress in Retevmo's (RETs) cancer therapy contributes to its positive valuation.
Eli Lilly reached its 52-week high in November following these developments, indicating strong market confidence in its prospects.
Eli Lilly (LLY)
Valuation Methodology
Our target price for Eli Lilly is primarily derived from a Discounted Cash Flow (DCF) model, emphasizing Free Cash Flow to the Firm (FCFF) and Equity (FCFE), yielding intrinsic values of $634 and $620, respectively. However, when juxtaposed with our relative valuation analysis, which includes metrics like EV/Sales, EV/EBIT, EV/EBITDA, P/E, and P/B, a lower valuation range of $136 to $211 per share emerges.
The discrepancy is largely due to Eli Lilly's multiples being statistical outliers compared to its industry peers. Despite the companies being chosen for similarities in business strategy, industry, logistical capability, and financial management similarities, the recent expected weight loss drug anticipation has created the extensive difference in the multiples.
Capitalize Momentum in Valuation
Eli Lilly's R&D efforts are showing promise, especially with its anticipated 2024 weight loss drug. Additionally, diabetes treatments Mounjaro, Trulicity, and Basaglar are expected to contribute to a sales increase. Crucially, in 2025, the company is projected to experience an overall 38% sales growth. Within this, Retevmo stands out, expected to individually generate $4.4 billion in sales. These projections, particularly Retevmo's significant patented revenue potential, are central to Eli Lilly's valuation.
DCF - FCFF
Free Cash Flow to the Firm approach assessing the company's prospects for future profitability after accounting for working capital variations, depreciation, amortization, and capital expenditures.
Valuation: $634
DCF - FCFE
Free Cash Flow to Equity method provides an equity-specific viewpoint by emphasizing cash flows that remain available to shareholders following all costs and reinvestments.
Valuation: $620
Relative Valuation
Comparative analysis using EV/Sales, EV/EBIT, EV/EBITDA, P/E, and P/B metrics against industry peers, showing statistical outlier status due to weight loss drug anticipation.
Range: $136 - $211
Key Valuation Drivers
Economic Moat: Wide | ESG Rating: Medium | Sector: Healthcare | Beta: 0.29
Target Price Range: $595 - $671 with a target price of $632, representing a BUY recommendation.
Business Overview
Founded in 1876, Eli Lilly is an esteemed American pharmaceutical company headquartered in Indianapolis, Indiana. With a global presence in 18 countries and product availability in over 125 nations, the company specializes in neuroscience, cardiometabolic, cancer, and immunology fields.
Leadership Team
Primary Revenue Sources
Currently, Eli Lilly's primary revenue sources are its diabetes medications, Humalog (insulin lispro) and Trulicity (dulaglutide). The company is also renowned for its significant pharmaceutical contributions across multiple therapeutic areas.
Key Pharmaceutical Products
Historical Achievements
Eli Lilly's historical achievements include pioneering the mass production of insulin and the Jonas Salk polio vaccine. It was one of the first to use recombinant DNA technology for human insulin production, leading to breakthroughs like Humulin, Humalog, and Basaglar, the latter being the first biosimilar insulin product approved in the U.S.
Current Market Position
Aside from being a market leader in weight loss drugs and having large potential in the use of their Retevmo drugs, Eli Lilly has become a market leader in weight loss, second only to Novo Nordisk, a Swedish multinational pharmaceutical company dominating this market.
While the weight loss sector is expected to grow at 4% CAGR for the next 5 years, the overall biopharmaceuticals industry is expected to grow at 8% CAGR.
Therapeutic Focus Areas
The company specializes in four primary therapeutic areas:
Excel Dashboard
Economic Moat | Competitive Positioning
Eli Lilly's patented goods and solid client ties, together with its steady and dependable pharmaceutical reputation, are the major reasons why the company's competitive edge is still strong. The business is in a strong position to hold onto its market share and possibly grow it, even if the patents for two diabetic medications are set to expire in 2024.
Tirzepatide was originally developed as an anti-diabetic medication, and it plays a major role in this vision. A study showcasing its potential for weight loss with phase 3 trials showing an average weight loss of 26.6% sparked a wave of interest. This presents tirzepatide as a product that could revolutionize the diabetes and weight reduction markets.
Core Competitive Advantages
Key Pipeline Products
Market Position: Eli Lilly has a substantial competitive edge when you take into account its broad portfolio of patents, scalable distribution networks, powerful pricing power, high return on invested capital, and a diverse product range. Eli Lilly's market position is further reinforced by the high obstacles to entry in the pharmaceutical business.
Corporate Governance
The board of directors of Eli Lilly, consisting of 12 out of 13 members, is largely autonomous and has significant influence over the company's strategy, risk management, and human resources. The key to the board's efficient governance is its varied membership, which represents a range of experiences and expertise.
Complementing the 10-13 directors with above 75% independence on the board are specialty committees including audit, talent and remuneration, corporate governance, and science and technology. These committees are essential in helping the business achieve operational excellence and its strategic objectives.
The company's governance places a strong emphasis on advancing diversity in the workforce, expanding access to healthcare, and fostering innovation in medication research. Aligning CEO compensation with business success and shareholder interests is part of the board's monitoring responsibilities.
Environmental Objectives
Since 2020, greenhouse gas emissions have been reduced by nearly 20%. By 2030, 100% of electricity comes from renewable sources, and operations must be carbon neutral. The corporation also wants to see no waste going to landfills and 100% of plastic waste being reused by 2030.
Social Responsibility
- Improve 30M people's healthcare access by 2030
- US insulin out-of-pocket expenses capped at $35
- 70% insulin price reduction in 2023
- Women occupy over half of management positions worldwide
- Minority groups hold 25% of US management
- 13% Black American workforce target in US
Diversity, Equity, Inclusion & Belonging
Eli Lilly prioritizes diversity, equity, inclusion, and belonging, implementing several important initiatives. These include leadership development initiatives designed especially for US minority and LGBTQ+ employees, as well as Employee Resource Groups (ERGs) for participation and mentoring that are matched with executive committee members.
By 2022, the corporation spent $358 million with Black suppliers, a major increase over the 5,800 mentorships it enabled earlier. Lilly also uses a research-based methodology to comprehend employee experiences and provides managers with training in cultural literacies and conscious inclusion to combat bias.
