Investing in the right biotech stocks can lead to huge profits over time. With just a few successful drugs, these companies can flourish and become market leaders. A classic example is biotech company Moderna (MRNA), whose market cap exploded from $6.5 billion in 2019 to $103 billion in 2021 after it launched the COVID-19 vaccine in 2020.
Biotech firms that use cutting-edge techniques to combat hard-to-treat diseases will always be in demand, regardless of the state of the economy. In this article, we will discuss the drugmaker Eli Lilly and Company (LLY), whose wide array of products treats life-threatening conditions such as cancer, autoimmune diseases, obesity, diabetes, Alzheimer's, and skin diseases.
More recently, Lilly's weight-loss drugs have grabbed the market’s attention, driving its stock price up by 59% in 2023, compared to the S&P 500 Index’s ($SPX) gain of 25%.
Investing in biotech firms can be risky. As a result, evaluating a company's financial health is critical before making investment decisions. Let’s find out if Eli Lilly is a good biotech stock to buy in 2024.
The Bull Case for Eli Lilly
Over the past few years, Eli Lilly has shown strong financial performance, backed up by consistent revenue streams and prudent financial management. While patent expirations and competition are industry challenges, the company's portfolio diversification assists in mitigating potential revenue declines.
Two of Lilly's weight-loss drugs, Mounjaro and Zepbound, are catching everyone's attention right now. The drugs compete with Novo Nordisk's (NVO) type 2 diabetes and weight loss drugs, Wegovy and Ozempic.
Market research firm Evaluate predicts Eli Lilly and Novo Nordisk will dominate the market with the highest global new sales in 2024. While Novo's sales may be in the $8 billion range, Lilly's global sales may exceed $5 billion.
Notably, Mounjaro - which is also used to treat type 2 diabetes - garnered $2.96 billion in sales for the nine months ended Sept. 30. In the third quarter of 2023, Lilly's total revenue of $9.5 billion increased by 37%, mostly driven by Mounjaro, Verzenio (used to treat advanced or metastatic breast cancers), and Jardiance (used for type 2 diabetes). According to management, new products added $1.44 billion to total revenue in Q3.
While the company reported an adjusted profit of $0.10 per share, it was significantly lower than the year-ago quarter's profit of $1.98 per share. Gross margin increased to 80.4% from 77.3% in the prior-year quarter. To advance its pipeline, the company spent $2.41 billion on research and development (R&D) in the quarter.
More Green Flags
The company's cash and cash equivalents totaled $2.4 billion, which should help fund pipeline development and future acquisitions. Eli Lilly made several acquisitions during the quarter to expand its pipeline. In December, it completed the acquisition of POINT Biopharma Global, adding "clinical and preclinical-stage radioligand therapies in development for the treatment of cancer" to its diverse product portfolio.
Another green flag is that Eli Lilly is a dividend-paying stock. While its yield is low at 0.84%, compared to the sector average of 1.58%, the company has paid dividends consistently for the past 34 years. It has also increased its dividends for the past 10 years in a row. More recently, Lilly hiked its quarterly dividend by 15% to $1.13 per share in Q1 2023.
However, a red flag to note is that its debt-to-equity ratio is quite high at 1.6. While it is not uncommon for biotech companies to have high levels of debt, investors should keep an eye on whether the company is paying off its debts and keeping up its dividend payments.
Eli Lilly had $2.17 billion in free cash flow in the quarter that should contribute to dividend payments and clearing off debts, among other purposes.
Looking ahead, management anticipates that the company's adjusted EPS for the full year will be in the $6.50 to $6.70 range. Analysts' EPS estimates fall in the same range, on expected revenue of $33.6 billion. Furthermore, earnings could increase by 87.1% to $12.30 per share in 2024, with revenue increasing by 15.7% year-on-year to $38.9 billion.
What is Wall Street Saying About Eli Lilly?
On Jan. 4, Bank of America named Eli Lilly stock as its top pharma pick for 2024. Additionally, Argus also named the stock its best bet for 2024.
Analysts, on average, have a “strong buy” rating for Eli Lilly stock. Out of 20 analysts covering the stock, 17 have a “strong buy” rating, one has a “moderate buy,” and two have a “hold” rating.
With the market favoring the stock now, Eli Lilly is trading close to its mean target price of $633.50, which is just 2.5% overhead. Its high target price of $727, however, indicates a 14.8% potential upside in the next 12 months.
The Verdict
All in all, Eli Lilly, with its legacy of innovation, diverse portfolio, and commitment to R&D, presents an intriguing investment opportunity in the pharma sector. Its robust pipeline, global presence, and financial stability position it favorably for potential long-term growth.
Trading at 50 times forward 2024 earnings, Eli Lilly seems pretty expensive to investors. However, Eli Lilly’s growth is not limited to 2024. It has an extensive pipeline of already successful products and potential candidates, which, once approved and commercialized, should help the company thrive in the coming years. As a result, I believe Eli Lilly is an excellent buy now, even at this lofty valuation.
On the date of publication, Sushree Mohanty did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
