Investing in big pharma can sometimes produce big gains in your portfolio. With the total return of Eli Lilly (LLY +2.82%) shares clocking in at an impressive 186% over the last three years compared to the market's return of 52%, it's easy to understand why investors are keen to know whether Lilly can repeat its market-crushing feat in the next three years.
Still, the world's biggest businesses can also be among the clunkiest and most prone to disruption. Will Eli Lilly continue to innovate and outperform, or are there warning signs of trouble sometime soon? Let's take a closer look and find out.
NYSE: LLY
Key Data Points
2026 should be a good year for shareholders
Overall, Eli Lilly's future looks quite similar to its recent past. Medium-range revenue and earnings growth is close to guaranteed, and the company is likely to maintain or perhaps slightly expand its decent profit margin of 20%. Here's why.
According to management's plan, over the medium term, Eli Lilly will focus on developing its portfolio of medicines that treat conditions such as various cancers, obesity, autoimmune diseases, and Alzheimer's disease. As of today, it has one medicine for Alzheimer's awaiting regulatory approval, with a pair of others in phase 3 clinical trials. It also has seven drugs in various states of development to treat obesity; one is its molecule tirzepatide, which regulators are currently reviewing, and one is a drug Eli Lilly already markets for diabetes under the trade name Mounjaro. And that's not even mentioning its 12 oncology therapies in phase 3 trials, or any of its numerous immunology programs.
So Lilly hopes to drive significant revenue growth via commercializing at least a handful of new medicines in each of those disease areas, and it's very likely that the company will succeed. By the end of its 2025 fiscal year, Wall Street analysts predict (on average) that its top line will be worth roughly $43.5 billion, compared to 2022's $28.5 billion. In particular, its recently launched medicines, like Mounjaro, are expected to increase their market share and delivering plenty of sales.
Expect ongoing attempts to attain additional regulatory approvals for its medicines already on the market, to increase the number of indications that they can be marketed for. That will allow Lilly to continue to hike its dividend as much as its earnings allow while continuing to return capital to shareholders.
It should also be generating plenty of cash to funnel into research and development (R&D). Over the last 10 years, Lilly's annual free cash flow (FCF) rose by an average of 13.6% per year, reaching a total of $4.6 billion in 2022, and there's little reason to expect that rate to decelerate sharply anytime soon. It currently has $3.7 billion in cash, so expect management to be on the prowl for promising young biotechs to acquire.
Risks may grow, but they aren't high
There is one key element that management's plan for the next three years doesn't mention: the company's debt and capital lease obligations of $19 billion. Eli Lilly repaid more than $1.5 billion in debt in 2022 and seems to have plenty of cash flow to continue that at roughly the same pace for now. But it has a debt-to-equity ratio of 168, which is on the high side.
That means if it wants to go big on acquisitions using debt, it probably won't be able to borrow at a low rate. So while the consequences of that borrowing won't be crimping growth in 2026, its balance sheet might look substantially more indebted. And in the years that follow, the debt could become a drag on its growth investments, or perhaps on the pace of its dividend hikes.
Other risks include having to enter its new therapies into crowded markets. Powerful competitors like Novo Nordisk and Biogen are already offering treatments for diabetes, obesity, and Alzheimer's disease. In a worst-case scenario, competition would throw a wrench into management's ambitions to grab big slices of market share, and investors could react quite negatively to the perception of competitive headwinds.
Nonetheless, there's little reason to suspect that Eli Lilly's stock will do much of anything besides go up in the near term. Though it might not beat the market consistently through 2026, there's a pretty good chance that it will, especially given the stock's total return over the last five years. If you're looking for a relatively safe growth stock to invest in, this one isn't a bad idea.
