Introduction
Eli Lilly and Company is a global pharmaceutical company founded in Indianapolis, Indiana, in 1876 by Colonel Eli Lilly. The company has grown into one of the world’s largest pharmaceutical companies, focusing on developing innovative medicines across various therapeutic areas. As of 2021, Eli Lilly and Company employs approximately 38,000 people worldwide (Eli Lilly, 2024a). The organization is known for its research and development in diabetes, oncology, immunology, and neuroscience, among other areas.
Eli Lilly is committed to improving patient outcomes and has a long history of bringing essential medications to the global market. The company’s current advances aim to combat Alzheimer’s disease, reduce pain symptoms, and address obesity and other areas described above (Eli Lilly, 2024a). Eli Lilly also meets current social and environmental responsibility demands by developing sustainability activities (Eli Lilly, 2024b). This work offers a financial analysis of Eli Lilly, evaluating the latest available annual reports for 2022 and 2021.
Literature Review
Like any large global business, Eli Lilly is subject to numerous external key drivers of financial change that affect its financial performance and, in turn, its development policy. First, it is worth paying attention to the economic situation in the United States, where the organization’s headquarters and most of its employees are located. Recently, the country’s macroeconomic indicators have been characterized by an atypical crisis state, driven by extremely high inflation and, as a consequence, by a tight monetary policy with a high key rate (Trading Economics, 2024a, 2024b).
These high indicators accordingly reduce the purchasing power of end consumers and small businesses. The key rate at a high level complicates lending and, in the future, according to Keynesian economics, reduces the liquidity and solvency of even large companies (Chua and Tsiaplias, 2024; Saona, Vallelado, and San Martín, 2020; Xiao and Tao, 2021). As a result, Eli Lilly may have fewer funds available to implement promising projects, which could lead to market share losses to organizations with larger resource reserves.
The global economic situation is even more fraught with uncertainty and factors preventing entry into new markets. Firstly, conflicts in Eastern Europe and Asia necessitate the development of new logistics solutions and the expenditure of funds to build a new supply chain (Lim et al., 2022). Secondly, even though medical companies received several subsidies from states around the world during the pandemic, its impact on the post-Covid period is more damaging due to the consequences of the crisis, which led to bankruptcies of suppliers or key customers, a decrease in the purchasing power of end-users consumers or oversupply of demand with low supply at its peak (Ayati, Saiyarsarai, and Nikfar, 2020, Mullin, 2020). The overall market volatility has increased noticeably against this backdrop, complicating financial planning and budgeting for reporting periods.
Finally, the development of COVID-19 vaccines worldwide, although it promised vast demand and government support, also led to some economic issues for the companies involved. Pharmaceutical giants allocated all available funds to research and development, which could reduce their liquidity and their ability to continue operating as before (Liu et al., 2020; Schuhmacher et al., 2020). It created more significant short-term risks, compounded by closed borders and the possibility of immediate supply due to such policy restrictions (Guan et al., 2020; Newton et al., 2020; Ying, Qian, and Kun, 2021). Accordingly, although demand exceeded supply and, according to the classic demand-supply economic theory, promised potential excess profits for companies in this sector, supply was limited by companies’ current capabilities and by external factors that prevented the realization of those profits.
Critical Analysis
Income Statement
Figure 1 shows an excerpt from the company’s most recently available annual report. Eli Lilly has significantly increased revenue since 2020 while optimizing gross costs and gross profit for the production of its main products (Eli Lilly, 2022). Although the organization paid almost twice as much in taxes in 2020, the net profit, as the key performance indicator, in 2022 is slightly higher than in 2020, with negative dynamics in 2021. This fact is explained by the increased demand for medicines in the first year of the pandemic, when significant subsidies from higher authorities allowed adjusting this indicator, for example, through other net income as part of operating expenses.
However, the company has emerged from the post-pandemic crisis, restoring net profit growth and continuing to increase revenue and, as a result, earnings per share; however, the latter indicator also increases due to reduced shares. At current investment rates, described below, the company will maintain slight percentage growth, mirroring the dynamics of 2021-2022 in net profit and revenue. In the best-case scenario, if advances are made in critical areas of neurobiology, obesity, immunology, cancer, and Alzheimer’s, then the company will be able to increase profits in line with the dynamics of 2020-2021. However, in the most likely average forecasting scenario, Eli Lilly will gradually deleverage and maintain current profit levels over the next two years.
Balance Sheet
Over two years, the company has been losing its most liquid assets, cash, equivalents, and short-term investments, partly compensated by a slight increase in accounts receivable. However, this fact cannot be called comforting; the growth of this indicator, driven by the global economic crisis and the tightening of monetary policy, increases the expectation of immediate profit, which may negatively affect Eli Lilly’s liquidity.
At the same time, inventories are also growing. Although some medicines have a reasonably long shelf life, this increase signals overproduction or falling demand, which may be a correction after the surge in 2020. At the same time, in the long term, the item property, plant, and equipment increase noticeably, contributing to the company’s total assets and indicating development.
As receivables grow, payable accounts also grow, which can compensate for the load in the short term. In addition, short-term borrowings are also falling at Eli Lilly, a marker of the policy’s direction to restore liquidity. However, at the same time, taxes, dividends payable, sales rebates, and employee compensation are growing noticeably, which ultimately leads to an increase in current liabilities – against the backdrop of falling current assets, this fact is a signal either for debt restructuring shortly, or for the deployment of breakthrough projects or entry into new markets to increase profits significantly. However, dividend growth remains in place for investors, and liabilities still do not exceed current assets in 2022, generally keeping the company’s financial health at an acceptable level.
The concern is Eli Lilly’s capital structure, which relies heavily on debt. Although the company’s long-term debt is falling and equity is increasing, such dynamics are a positive signal for the reorientation of capital formation. Considering the above-described factors of high inflation and complex lending conditions due to the high key rate, Eli Lilly is on the right track to operate in the new reality. Shifting the focus to equity carries greater responsibility to shareholders, which the pharmaceutical giant has so far handled quite well, constantly increasing dividends.
Cash Flows
Net cash flow indicators are non-negative, although the company is actively engaged in investment activities and significantly contributes to common stock purchases and long-term debt repayments. These data indicate a sufficient margin of safety for the organization regarding financial resources. Investments in research and development have decreased slightly in recent years, following the significant increase during the pandemic.
However, Eli Lilly consistently invests in long-term projects and purchases property and equipment, which may indicate horizontal and vertical expansion of its operating activities. With vertical development, purchasing equipment for a pharmaceutical company enables high demand, while horizontal expansion involves entering new markets or optimizing the supply chain (Schuhmacher et al., 2022). As stated above, Eli Lilly promotes dividend growth to maintain investment attractiveness, which is entirely consistent with its policy of reforming its capital structure in its favor, as evidenced by strong indicators of long-term debt repayment.
Ratio Analysis
The company’s profitability is high and, no less important, has been growing over the past two years, as shown in Table A1 in Appendix A. Net profit margin growth of more than 2% provides an opportunity to maintain financial health in a global environment with high planning uncertainty. Revenue growth provides the company with stability and investor appeal, while net margin supports the current policy of reducing debt and maintaining investment cash flows. A similar positive assessment can be made regarding liquidity.
As mentioned above, the current ratio does not fall below 1 despite the downward trend, maintaining a positive balance in working capital and allowing excess funds to be allocated to net profit in cash flows. At the same time, one of Eli Lilly’s few critical financial problems is revealed here – the shortage and decrease in liquid assets, which is noticeable in the cash ratio. This risk poses a threat to the company’s performance, increasing the need to increase short-term debt during crises.
ROE falls slightly over the two periods, but this reveals the company’s policy of reorienting the capital structure – the denominator of the formula grows somewhat faster than net profit, so this ratio does not carry a negative connotation in the analysis. A decrease in long-term debt improves solvency. Against the backdrop of growth in long-term assets, the debt-to-assets ratio declines, indicating a stabilization of financial health over the long term (Lo and Siah, 2021).
At the same time, some efficiency indicators, such as the inventory turnover ratio, also exhibit negative or insignificant dynamics. Here, Eli Lilly faces demand adjustments and potential production-scale biases due to the pandemic surge (Bookwalter, 2021). Finally, the growth in investment attractiveness is confirmed by the ROA indicator, which shows that the company is more actively pursuing a policy of cost optimization and profit growth while reducing its dependence on borrowed funds.
Recommendations
The key recommendations for Eli Lilly are as follows: first, the company should focus on its growing current liabilities and actively reduce short-term borrowings, for example, by repaying long-term debt. However, with an increase in net profit, even in the context of 2021-2022, resolving this problem will not take long (Batrancea, 2021). Secondly, it is essential to allocate production resources to meet demand and adjust inventory growth. Such valuations occurred during the post-pandemic period, when demand outpaced supply. On the other hand, the availability of affordable medications is a positive predictor of a similar situation occurring in the future. Thus, perhaps Eli Lilly is implementing aspects of social responsibility.
Conclusion
The analysis in this work showed that the pharmaceutical company Eli Lilly is financially healthy and stable despite several aspects. The two identified problems with the growth of inventories and current liabilities are still within acceptable limits, not signaling potential risks for investors. Shareholders can rest assured that due to stable dividend growth, growing revenue and net profit, comfortable solvency, and constant investments in new projects, In many ways, Eli Lilly is growing and can serve as a financial model for other competitors and industries in making decisions, such as its reactionary policy of gradually reorienting its capital structure due to negative externalities that make borrowing more expensive.
Reference List
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Chua, C. L., and Tsiaplias, S. (2024) ‘The influence of supermarket prices on consumer inflation expectations‘, Journal of Economic Behavior & Organization, 219, pp. 414-433.
Eli Lilly (2022) 10-K Annual Report.
Eli Lilly (2024a) About Us.
Eli Lilly (2024b) Public policy.
Guan, D., et al. (2020) ‘Global supply-chain effects of COVID-19 control measures‘, Nature Human Behaviour, 4(6), pp. 577-587.
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Mullin, R. (2020) ‘COVID-19 is reshaping the pharmaceutical supply chain‘, Chemical & Engineering News, 98(16).
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Schuhmacher, A., et al. (2020) ‘The upside of being a digital pharma player‘, Drug Discovery Today, 25(9), pp. 1569-1574.
Schuhmacher, A., et al. (2022) ‘Open innovation: a paradigm shift in pharma R&D?‘, Drug Discovery Today, 27(9), pp. 2395-2405.
Trading Economics (2024a) United States Fed Funds Interest Rate.
Trading Economics (2024b) United States Inflation Rate.
Xiao, J. J., and Tao, C. (2021) ‘Consumer finance/household finance: the definition and scope‘, China Finance Review International, 11(1), pp. 1-25.
Ying, W., Qian, Y., and Kun, Z. (2021) ‘Drugs supply and pharmaceutical care management practices at a designated hospital during the COVID-19 epidemic‘, Research in Social and Administrative Pharmacy, 17(1), pp. 1978-1983.
Appendix A
Table A1 – Eli Lilly Ratio Analysis for 2021 and 2022
