As everyone who follows equity markets knows, stocks are feeling the heat from President Donald Trump's macroeconomic policies. On April 3, the president announced sweeping tariffs on goods imported into the U.S. from basically every country on planet Earth.
Some industries have escaped these moves by the administration, at least for now. One of them is the pharmaceutical industry. However, some major executives in the sector are not optimistic, including Eli Lilly's (LLY +0.72%) CEO, David Ricks.
Let's see what he had to say about the potential impact of tariffs, and what they could mean for those thinking about investing in the company.
A bleak picture of the future
First, let's review the impact that tariffs could have on companies and the economy. According to experts recently interviewed by The Motley Fool, tariffs -- essentially a tax imposed by the government on imported goods -- are generally passed on to importers and consumers.
In other words, they could increase prices for many goods and services. That's not good for consumers, and could be especially problematic when it comes to lifesaving products like pharmaceutical drugs. Perhaps that's why this industry was exempted for now. But Ricks has little confidence things will stay this way, per a recent exclusive interview he gave to the London-based BBC News.
NYSE: LLY
Key Data Points
Ricks went further than opining that the current U.S. administration could eventually impose tariffs on pharmaceuticals, saying: "I think it's a pivot in U.S. policy and it feels like it'll be hard to come back from here." He explained that governments in the U.S. and Europe cap the prices of medicines, which would give drugmakers little room to pass the costs of tariffs on to consumers, so they'll have to make adjustments and cuts elsewhere.
Perhaps the first affected area will be research and development (R&D), meaning companies could develop fewer drugs. That's bad for practically every stakeholder involved, including Eli Lilly, its shareholders, and patients who might need those medications.
With this bleak picture in mind, should investors avoid the pharmaceutical industry in general, or Lilly specifically? I believe the answer is a resounding "no." Here's why.
A terrific long-term investment
Eli Lilly is a veteran of the industry. It has been around -- and thrived -- for decades across multiple administrations, changes in regulatory regimes, recessions, and more. No company can accomplish that by accident.
In its current situation, there's little doubt that Lilly will seek ways to get around the problem. In fact, it's already doing so. Lilly recently announced construction projects in the U.S. -- it will build four new manufacturing facilities. That's one way to avoid tariffs imposed by the government: shoring up local manufacturing capacity, so there will be fewer imported goods to tax.
Though these new projects might have been a response to Trump's stated plans to impose tariffs on imported goods, Lilly has been building new facilities in the U.S. (or improving existing ones) for years. The newly announced initiative would more than double its total spending on manufacturing capacity since 2020 to over $50 billion. And since then, Lilly has built new sites or expanded existing ones in North Carolina, Indiana, and Wisconsin.
Eli Lilly can afford it. Net income and adjusted earnings per share have soared in the past five years. While free cash flow hasn't moved in the right direction, that's likely in part due to these investments.
LLY Revenue (Annual) data by YCharts.
Eli Lilly is reaping the benefits from its innovation in diabetes and obesity management, with therapies like Mounjaro and Zepbound generating billions of dollars in annual sales. The company has several other key growth drivers, including newer medicines that should pull its top line in the right direction well into the next decade.
Lilly's pipeline is equally promising, with exciting candidates across many therapeutic areas: oncology, gene therapy, and, of course, its core diabetes and obesity business. That's another reason Eli Lilly has performed so well over the long run: It's an innovative company that's made many significant breakthroughs.
Though tariffs may be hard to come back from, as the CEO argued, the company is about as well-positioned as any of its peers in the industry to handle them. The U.S. is the most lucrative market for drugmakers, so most can't afford to suspend their operations here.
With a significantly expanded manufacturing capacity in the U.S. and proven innovative abilities, Eli Lilly should continue delivering excellent financial results and market-beating returns for a long time. I believe investors should stay put -- and even consider buying more shares while the stock market is in shambles.
