Question: Why would you pay 81 times earnings for AbbVie stock when you can buy LLY for a similar valuation of 76 times earnings? You wouldn’t, especially when you consider three simple facts:
- Growth: Eli Lilly’s growth rate is accelerating at over 30%, dwarfing AbbVie’s under 5%. Over the last three years, Eli Lilly’s average growth rate stands at a strong 17%, vastly superior to AbbVie’s less than 1%.
- Margins: Eli Lilly’s profitability is evident in its three-year average margins of 34%, ensuring a greater portion of revenue flows to shareholders. This is superior to AbbVie’s 26% average margins.
- Financial Stability: Eli Lilly’s balance sheet is more robust, with debt making up only 4% of equity, considerably less than AbbVie’s 20%. Although both companies maintain a similar cash position (4% of total assets), Eli Lilly’s lower debt-to-equity ratio signals a healthier financial standing.
Safe Bet? While Eli Lilly (LLY) might not be a traditional “safe haven” stock, its past performance during market shocks offers some perspective. During the 2022 inflation shock, LLY stock saw a 19% decline, and it fell 23% during the 2020 COVID-19 pandemic market correction.
However, when compared to the broader market, LLY has demonstrated relative resilience. The S&P 500 index experienced a more significant peak-to-trough decline of 25% during the 2022 inflation shock and a 34% fall during the COVID-19 pandemic correction.
Furthermore, LLY stock has already absorbed some significant impact, having fallen over 20% from its 52-week high of over $970 to current levels below $750. In contrast, if you’re more even handed, consider the Trefis High Quality strategy, has outperformed the market with more than 91% returns since inception – as evident in HQ performance metrics. Separately, see – Merck Stock’s Ticking Keytruda Time Bomb
Winner In Obesity Drugs: If you generally believe the obesity is here to stay and with or without healthcare policy changes, Eli Lilly may not be a bad long-term bet, given its current position. Layer on the fact that Lilly, with its superior efficacy, is a leader in this obesity treatment race. The market for GLP-1 drugs is expected to grow to $150 billion by 2030, with Eli Lilly and Novo Nordisk currently dominating through their GLP-1 drugs that have collectively generated over $40 billion in sales last year. Worry about whether daily pills, weekly injections, or combination therapies will win the battle. The race may be too early to call, but Lilly is positioning itself across multiple fronts with both injectable Zepbound and promising oral GLP-1 formulations showing nearly 8% weight loss in trials.
What Could Go Wrong? Eli Lilly’s earnings could disappoint, and its rapid growth might slow from 30% to around 20% in the coming years. This potential slowdown could be due to increased competition in the obesity treatment market, as more pharmaceutical companies are achieving success with their clinical trials. Notably, Boehringer Ingelheim, Amgen, Viking Therapeutics, and Roche are all developing promising therapies that could challenge Eli Lilly’s market position.
Then there is the unexpected, unimagined. Definitely do not touch this if you can’t stand more downside from here. Worse thing you could do is sell at that point. Instead talk to an adviser who’s seen four bear markets in the last 30 years about Trefis HQ strategy plus other clever ways you can take advantage in the current market. Clue: much money is made in this market, if you don’t lose your nerve. All said, if you’re a long term investor and want to invest and forget for the next 3-5 years, Eli Lilly right now could be an interesting entry point.