Eli Lilly and Company - Stock Valuation Report Eric Wu Eli Lilly and Company 7/14/18 Wu, E Stock Evaluation Report: Eli Lilly and Company, 7/14/18 SUMMARY Eli Lilly and Company (LLY) is a global healthcare leader that discovers, develops, manufactures, and markets pharmaceutical products worldwide. The company operates through two segments, Human Pharmaceutical and Animal Health products. Eli Lilly is the 16th largest company within the healthcare sector of the S&P 500, generating $22,781.3 million in revenue in FY2017, an 8% increase from FY2016.1 (all revenues noted in millions) Summary Recommendation BUY INVESTMENT THESIS Ticker LLY We are placing a BUY rating on LLY with a Sector Healthcare price target of $85.51. With the combination Industry Pharmaceuticals of 11 new products within their pipeline Price as of 7/15/18 $89.71 poised to launch by 2023, rapidly growing Target Price $108.24 products such as Trulicity, Taltz, Basaglar, Potential Upside 20.7% Cyramza, and Jardiance, and an aging and Dividend Yield 2.62% increasingly unhealthy demographic, Eli Lilly Total Projected Return 23.32% looks to weather the upcoming loss of Market Data domestic patent exclusivity for Cialis, Forteo, Market Cap 93.26B and Alimta Shares Outstanding 1,085,430,000 EPS (TTM) 1.97 RISKS TO THIS RECOMMENDATION P/E Ratio 19.89 • Pharmaceutical research and EV/EBITDA 14.23 development is costly and uncertain Beta 0.3 • Losing effective intellectual property Qtrly Revenue (YoY %) 9% protection on revenue generating Performance products will lead to rapid and severe 52 Week Price Low-HigH 73.69 - 89.87 revenue decline in those product lines 1 Year Return 6.77% • Human pharmaceutical business is subject to government price controls and unanticipated tax liabilities • Intense competition from lower-cost generic and biosimilar manufacturers1 Contact Information Fund SIM, OSU Instructor Royce West, CFA Name Eric Wu, PharmD Email [email protected] 1 | Page Eli Lilly and Company 7/14/18 Wu, E Table of Contents COMPANY OVERVIEW ............................................................................................................................ 3 General Overview ..................................................................................................................................... 3 Business Segments ................................................................................................................................... 3 Animal Health Products ........................................................................................................................ 4 Human Pharmaceutical Products ......................................................................................................... 5 Market Landscape .................................................................................................................................. 10 Patent Exclusivity Loss Summary ...................................................................................................... 13 INVESTMENT THESIS ............................................................................................................................ 14 Healthcare Sector Summary ................................................................................................................... 14 Financial Analysis .................................................................................................................................... 15 Valuation Analysis and Price Target ....................................................................................................... 16 Discounted Cash Flow Model ............................................................................................................. 17 Relative Multiples Valuation Model ................................................................................................... 18 RISKS ......................................................................................................................................................... 19 CONCLUSION .......................................................................................................................................... 20 APPENDIX ................................................................................................................................................ 21 Pipeline Summary ................................................................................................................................... 21 Estimated Product Revenue ................................................................................................................... 22 Discount Cash Flow Valuation ................................................................................................................ 23 Income Statement .................................................................................................................................. 24 REFERENCES ........................................................................................................................................... 25 2 | Page Eli Lilly and Company 7/14/18 Wu, E Company Overview GENERAL OVERVIEW Eli Lilly and Company (LLY) is a global healthcare leader headquartered in Indianapolis, Indiana that discovers, develops, manufactures, and markets pharmaceutical products worldwide. The company operates through two segments, Human Pharmaceutical Products and Animal Health Products. Established in 1876, LLY employs approximately 38,000 individuals worldwide with products marketed in 120 countries, leading them to be the 16th largest company per market cap within the healthcare sector of the S&P 500.5 The human pharmaceutical segment consists of several divisions: Endocrinology, oncology, cardiovascular, neuroscience, and immunology. Lilly’s animal segment operates through their Elanco division, focusing on both animals for consumption and companion animals.1 In 2017, LLY generated $22,871.3 million in revenue, an 8% increase from the prior year. LLY posted an earnings (loss) of $0.19 attributed to new U.S. tax laws and company restructuring. With 11 medications poised to launch by 2023 (9 total since 2014), LLY looks to continue increasing revenue trends.2 The stock has outperformed the industry this year thus far, however, competitive pressures are expected to increase as patent exclusivity for certain products such as Cialis are expiring. BUSINESS SEGMENTS Eli Lilly’s animal health products segment (operated through Elanco Animal Health) is a global company that has enjoyed a decade of growth. Elanco focuses on identifying and developing products that meet unmet veterinary, food producer, and pet owner needs. Additionally, Elanco also utilizes discoveries from the human health laboratories to develop products supporting the wellbeing of farm animals and pets. Elanco sells its products primarily to wholesale distributors. Unfortunately, it has underperformed as of late (-2.3% revenue between FY2016 and FY2017) and Lilly is reviewing strategic alternatives including a sale, merger, initial public offering, or retention of the business. They are hoping to make a decision about Elanco in mid-2018.2 Lilly’s human pharmaceuticals products segment drives the majority of revenues within the company. Of $22,871.30 million revenue, $19,785.60 originated from the human pharmaceutical products segment. This segment is further divided into 6 divisions: Endocrinology (Humalog®, Trulicity®, Forteo®, Humulin®, Trajenta®, Jardiance®, Basaglar®), oncology (Alimta®, Cyramza®, Erbitux®), cardiovascular (Cialis®, Effient®), neuroscience (Cymbalta®, Strattera®, Zyprexa®), immunology (Taltz®), and other.2 3 | Page Company Overview Investment Thesis Risks Eli Lilly and Company 7/14/18 Wu, E Revenue By Segment Revenue By Region Other Animal Health Foreign 13% Countries 16% Japan 11% United States 56% Human Pharmaceutical Europe 87% 17% FY2016 FY2017 Change% FY2016 FY2017 Change% Animal Health 3,158.20 3,085.60 -2.30% USA 11,506.20 12,785.10 11.11% Human Europe 3,768.10 3,943.20 4.65% 18,063.90 19,785.60 9.53% Pharmaceuticals Japan 2,330.90 2,419.70% 3.81% Total 21,222.10 22,871.30 7.78% Other 3,616.90 3,723.30 2.94% Lilly’s Animal health business operated through Elanco comprised 13% of total company revenue. Elanco reported $761.3 million in revenue in 2018 Q1, a 1% decrease from 2017 ($769.4 million). According to Lilly’s Q1 press release, this is due to worldwide food animal revenue decreasing by 7% driven by market access pressures. Companion animal revenue increased by 10%, however, primarily driven by higher realized prices and the favorable impact of foreign exchange rates.3 Lilly’s Animal Health Products include1: Food Animal • Rumensin®: a cattle feed additive that improves feed efficiency and growth and also controls and prevents coccidiosis • Coban®, Maxiban®, and Monteban®: an anticoccidial agent used in poultry • Posilac®: a protein supplement to improve milk productivity in dairy cows • Optaflexx® and Paylean®: leanness and performance enhancers for cattle and swine 4 | Page Company Overview Investment Thesis Risks Eli Lilly and Company 7/14/18 Wu, E • Tylan®: an antibiotic used to control certain diseases in cattle, swine, and poultry • Denagard®: an antibiotic for the control and treatment of respiratory and enteric diseases in swine and poultry Companion Animal • Trifexis®: a monthly chewable tablet for dogs that kills fleas, prevents flea infestations, prevents heartworm disease, and controls intestinal parasite infections