Earnings Report Preview | Riding the wave of weight loss drugs, can Eli Lilly's Q4 performance still amaze the market?

Zhitong App has learned that Eli Lilly will announce its fourth-quarter earnings before the opening of the US stock market on February 6th. According to data from Zacks Investment Research, analysts generally expect Eli Lilly's Q4 revenue to be $8.86 billion, a YoY increase of 21.4%, and earnings per share to be $2.76, a YoY increase of 32.1%.

As a major player in the weight loss drug market, the growth trajectory of Eli Lilly's Mounjaro and Zepbound will undoubtedly be closely watched by investors. Previously, Eli Lilly's biggest competitor, Novo Nordisk (NVO.US), stated that its sales and profits have been soaring due to the popularity of its weight loss drug, Wegovy.

In addition, investors are also paying attention to other products, including any updates on the approval timeline for donanemab (for Alzheimer's disease) and lebrikizumab (for atopic dermatitis); and how Verzenio, which has stronger effects, performs in breast cancer compared to Pfizer's (PFE.US) Ibrance.

Weight Loss Drugs

Currently, Eli Lilly's Zepbound and Novo Nordisk's Wegovy are the only two drugs approved by the US Food and Drug Administration (FDA) for the treatment of obesity. In the past 12 months, due to the investment frenzy sparked by weight loss drugs, the valuations of Eli Lilly and Novo Nordisk have surged by approximately 87% and 65% respectively.

Last Wednesday, Novo Nordisk announced its Q4 2023 earnings, which exceeded market expectations. The company also predicted that it would achieve double-digit sales growth this year, with Wegovy being the biggest contributor.

Novo Nordisk stated that as the company continues to launch its popular weight loss drug Wegovy globally, sales and profits will soar again this year.

As the world's largest pharmaceutical company and a major participant in the weight loss drug market, Eli Lilly's performance in the previous quarter has also received a significant boost. In the third quarter, Eli Lilly's reported revenue exceeded Wall Street's expectations, mainly thanks to its heavyweight diabetes drug Mounjaro and its promising obesity drug series. The sales of this popular product in Q3 increased to $1.41 billion, a QoQ increase of 44%, surpassing analysts' expected $1.26 billion.

Recently, Gemma Game, the strategic director of the healthcare division at Norway's Bank Investment Management (NBIM), stated that the safe and effective weight loss drugs launched last year have helped Novo Nordisk and Eli Lilly become well-known brands. Novo Nordisk's Ozempic and Wegovy, as well as Eli Lilly's Zepbound, have become familiar to many people.Game said that the story is far from over, and it is truly exciting for the billions of obese people in the world today. However, so far, less than 1% of people have received treatment, so we are still in the early stages of takeoff.

According to Barclays Bank's estimate, the rapidly growing weight loss drug industry could reach a scale of $200 billion in the next 10 years.

Based on various previous research reports, Game also pointed out that she will closely monitor the data on whether GLP-1 drugs can effectively treat chronic kidney disease, obstructive sleep apnea, and Alzheimer's disease.

However, Morningstar analyst Damien Conover believes that based on the current valuation, Eli Lilly's stock price is overvalued compared to this analyst's long-term fair value estimate.

Conover stated that based on its updated long-term GLP-1 model, the firm has raised its fair value estimate for Eli Lilly from $368 to $450. Overall, the analyst assumes a larger proportion of patients will receive (and adhere to) treatment, despite increased competition and lower prices.

The analyst expects that over 25% of obese Americans and 15% of overweight Americans will receive treatment within 10 years, with the majority receiving branded GLP-1 therapies. As sales increase and new entrants emerge (starting from 2026-27), the price of GLP-1 therapies in the United States may significantly decrease, with the average net price dropping from approximately $8,000 per year to $3,000 per year within 10 years.

However, Conover still believes that Eli Lilly is in a favorable position to drive revenue growth. The firm predicts that annual sales will increase by nearly 22% over the next five years, as the launch of new drugs offsets patent losses. Mounjaro, Zepbound, Jardiance, Trulicity, Verzenio, and Taltz are expected to remain significant drivers of cash flow. After the expected approval this year, Donanemab is also expected to achieve substantial sales.

Furthermore, Conover stated that another important factor driving Eli Lilly's valuation is cost control and the operational leverage of new drugs. While the outcome of cost control will depend on the success associated with recently launched drugs and the product pipeline, Eli Lilly is expected to significantly improve its operating profit margin, with a weighted cost of capital of approximately 7%.

MoatAt the same time, patents, economies of scale, and a strong distribution network continue to support Eli Lilly's wide moat. The company's patented drugs have strong pricing power, allowing it to generate returns that exceed the cost of capital. These patents also give the company time to develop next-generation drugs before facing competition from generic drugs.

Eli Lilly's diversified product portfolio means that its top drugs account for only a small portion of total sales, with the largest drug, Trulicity, representing nearly 25%. While this has resulted in a manageable decline in cash flow due to competition from generic drugs, Morningstar predicts that by 2032, reliance on Eli Lilly's new GLP-1 drugs will increase, meaning that nearly two-thirds of sales will come from this category of drugs.

Eli Lilly's operating structure allows for cost reductions after patent losses to mitigate the profit pressure from the loss of high-profit drug sales. Overall, the company's existing product line generates significant cash flow, providing funding for the average $800 million development cost of a new drug. Additionally, Eli Lilly's strong distribution network makes it a powerful partner for small pharmaceutical companies lacking resources.