With markets looking toppy, we’ve been hunting for stocks that have had good steady price gains over the past year. Eli Lilly & Co – a pharmaceutical company known for a range of medicine for diabetes, cancer and depression – has been an outstanding performer.
Let’s dig deeper into what’s attracting investors and analysts alike to Eli Lilly.
$US6.44 billion in sales
Given the healthy sales figures ($US6.44 billion) it generated for the period ending December 2018, it’s not surprising that a number of market analysts tracking the pharmaceutical industry have been bullish on Eli Lilly.
According to Wall Street analysts, the December 2018 figures were 2.40% higher than the average estimate of $US6.29 billion. Analysts believe Eli Lilly has the potential to generate a high return on investment (ROI) in the long run.
An analyst from JP Morgan Securities in the US wrote: “Eli Lilly is better positioned than its large-cap peers thanks to a strong drug pipeline, as well as the potential to expand margins and benefit from a number of catalysts in the near term.”
With a market cap of more than $US132 billion, Eli Lilly has seen its share rise by around 70% over a 12-month period, with gains of more than 12% already achieved in the first three months of this year.
When it comes to profitability, Eli Lilly’s numbers are also looking good. Based on company data: operating margin sits at 25.19% while gross margin is at 73.81%. Net margin is at 13.20%, which according to industry measurements indicate that the company is generating considerably more profit compared to its peers.
Eli Lilly has reported a suite of convincing figures that can only be welcomed by investors. Here are some recent numbers:
• Return on Total Capital is 25.25%
• Return on Invested Capital is at 14.70%
• Return on Equity is 30.18%
• Return on Assets is 7.27%
From a fundamental point of view, these metrics show a solid and strong use of capital to generate returns.
In January 2019, UBS analysts issued a “buy” recommendation for Eli Lilly with a target of $US131 which has already been achieved. In early March, JP Morgan issued a research note on Eli Lilly setting the stock price target at $US140.
US focus on healthcare cost
Given the US Senate’s and government’s focus on the cost of healthcare and medicine, pharmaceutical companies are now in the limelight.
Recently Eli Lilly announced it will sell a generic version of its insulin injection product at half the price of the original brand – Humalog.
The rebranded product called Insulin Lispro would be $137.35 per vial. Humalog accounts for approximately $3 billion in annual sales for Eli Lilly.
Eli Lilly: a global pharmaceutical company
Though ranked just outside the top 10 global pharmaceutical companies in the world, Eli Lilly has a long history – more than 140 years – of producing medicine for a wide range of medical conditions including diabetes, depression and cancer.
Founded in 1876 by Col. Eli Lilly, a pharmaceutical chemist and veteran of the American Civil War, the company now has a global presence and employs approximately 38,000 people worldwide. More than 8000 of its employees are involved in research and development.
At any one time, the company has clinical research being conducted in more than 55 countries worldwide. It has manufacturing plants in eight countries and its products are sold in 120 countries.
Eli Lilly also has significant market share in the field of oncology (cancer treatment).
According to the most recent industry report, the global pharmaceutical industry was estimated to be worth about $US1.11 trillion in 2018. This is estimated to reach $US1.43 trillion in 2020.
As a research-driven industry, it is estimated that pharma companies spend about $US150 billion annually on research and development projects. It is definitely a capital-intensive industry that involves long years of research, drug development, testing and patenting.
The industry is also known for strict regulatory approval regime with only a small number of medicines getting to the final stage of approval and eventual use by patients.
Nevertheless, pharma giants continue to develop new medicines as they search for (profitable) treatments for a wide range of diseases. Despite the high price of all this research and the medicines that are developed as a result, pharmaceutical companies and their products will remain in high demand as people search for a treatment for their ailments and good quality of life.
Eli Lilly share price chart
A look at Eli Lilly’s share price movement over the past five years shows a slow and long sideways movement from around $US60 – $US90 from 2015 to mid-2018.
But in August 2018, the share price has moved toward the $US100 mark and from there has gradually and steadily risen to $US120 at the start of March 2019.
Given all the industry developments, US government efforts to boost healthcare and continuing product developments at Eli Lilly, it looks like this company has a lot of growth potential for investors.
We see it as a buy.