Eli Lilly (LLY -1.00%) is getting a lot of Wall Street attention again. Its stock has skyrocketed 180% in the last three years, with a slew of its medicines hitting the market and a flurry of promising readouts from late-stage clinical trials.
But smart investors know that past performance doesn't necessarily predict future returns. That's why if you're thinking about buying the stock, you should first appreciate these three key insights about this pharmaceutical giant.
1. Lilly is on the verge of entering some huge markets
Eli Lilly's drug development pipeline is as big as they come, and that means plenty of new medicines are likely to hit the market in any given period. In fact, right now the business has four different drugs are in the last stage of regulatory approval, and each of them could find traction in huge markets.
Within the next year, Lilly could commercialize tirzepatide for obesity, donanemab for Alzheimer's disease, empagliflozin for chronic kidney disease, and lebrikizumab for atopic dermatitis. And that's not counting the 21 late-stage programs in the pipeline. True, there will be powerful competitors in all of the markets it's seeking to enter, including giants like AbbVie, Novo Nordisk, Biogen, and AstraZeneca. But that hasn't stopped it from competing successfully in the past, and it probably won't this time, either. In short, smart investors see that growth is on the horizon, and in a big way.
2. Eli Lilly's debt load isn't nearly as scary as it seems
Owing billions of dollars to creditors is common among big pharma players. Still, it's easy to see why, at first glance, even veteran investors might balk at Eli Lilly's $18.8 billion in long-term debt. The company's ratio of total debt to equity is 159, far higher than that of juggernauts like Johnson & Johnson, which has a ratio of 53. That means it's comparatively much more indebted.
But upon closer inspection, smart investors appreciate that Eli Lilly isn't actually under much financial pressure from its borrowing. In the trailing-12-month period, it had free cash flow (FCF) of $4.6 billion, and it spent around $1.5 billion on repaying its debt -- about as much as it spent on buying back shares of its stock to return capital to investors. It could have easily thrown more money toward paying off its liabilities without changing anything about its business or its broader capital allocation strategy.
Don't worry about this pharma's debt load for now. While it's possible that a combination of aggressive continued borrowing and lax repayment could threaten growth in the future, it's quite unlikely.
3. Eli Lilly's shares are on the pricier side
Smart investors tend to be value-conscious, even if they don't focus on hunting for deals. And in that vein, they know that Eli Lilly isn't exactly a stock that you'd find in the bargain bin.
Its trailing price-to-earnings (P/E) ratio of 54 is much higher than the pharma industry's average P/E of 38, and far higher than the market's average P/E of 24. The reason for its meaty valuation is that it's expected to continue to add to its revenue and its earnings quite rapidly over the next couple of years.
Thanks to Lilly's impending new drug launches, Wall Street analysts estimate (on average) that its revenue could grow by as much as 19% next year, reaching $36.6 billion. Given the expected instability in the economy and the market between now and the end of 2024, 19% isn't half bad.
Still, this stock's valuation is a bit of a risk, and for die-hard value investors, probably a dealbreaker. For most others, its price tag is on the high side, but perhaps ultimately tolerable given the quality of the underlying company.
