Eli Lilly (LLY 0.37%) is a highly successful business, and as with any big corporate success story, some critics will offer a counter-narrative of stagnation and decay lurking in the background. However, frequently enough, such bearish overtures are missing key pieces of context, or interpreting important facts incorrectly.
In Eli Lilly’s case, there are (at least) three misleading tidbits that investors should know about and understand. Let’s dive in and analyze why each of these facts are less important than what the stock’s detractors assume so that you’ll have the full story when it’s time to evaluate whether to invest.
1. It’s heavily indebted
It’s easy to get the idea that Eli Lilly is an ailing corporate giant that’s over-leveraged and increasingly hobbled by its debt load. As of the third quarter of 2023, it owed over $20 billion in debt, its highest sum ever. More than $2 billion of that sum will be due within the next 12 months. What’s more, over the trailing-12-month period, it took out an additional $4 billion in long-term debt, while on a net basis repaying nothing other than $146 million of its short-term borrowing.
Large amounts of debt aren’t desirable for obvious reasons. Every dollar paid toward interest is a dollar that isn’t available to invest in growth or distribute to shareholders. And it’s true that borrowing a lot more on top of what it already owes could jeopardize its future financial flexibility.
However, fixating on Eli Lilly’s debt load is a mistake. It’s borrowing with the aim of expanding its capabilities such that it can make more revenue in the future than it does today by serving demand that it knows to exist.
For instance, over the last three years, the company invested $11 billion in expanding its manufacturing capacity around the world. Without the additional facilities investments like that will produce, it might see competitors take the lead in key markets by virtue of simply having enough medicine to sell. So don’t assume that its debt is a drag on growth just yet — if anything, it’s an enabler.
2. It doesn’t have much money at the ready
Part of the reason why Eli Lilly is using so much debt financing is that it simply doesn’t have that much cash on hand for a business of its size. Its $2.5 billion in cash, equivalents, and short-term investments as of Q3 isn’t sufficient to cover even a single quarter of its operating expenses.
While the company is profitable, indicating that it won’t need to dip into its hoard to pay for its routine costs, for a major biopharma company aiming to pursue extensive research and development (R&D) as well as significant business development activity in the form of acquisitions and collaborations, there does not appear to be enough gas in the tank to do what management wants.
But that appearance is not fully accurate because it doesn’t take into account the actual cash outlays associated with pursuing its strategic priorities for R&D. Take, for example, its recently announced collaboration with Fauna Bio, a private biotech pursuing novel approaches to treating metabolic diseases like obesity.
Eli Lilly committed to paying Fauna Bio up to $494 million in milestone payments over the course of their work together. While the sum was not disclosed, the up-front portion of the payment was likely a small fraction of the deal’s total value. Even if it wasn’t, the entire value would be well within the company’s ability to pay today.
Think about how many deals of that size it could make with upfront payments in the $100 million range. It isn’t under much pressure to be frugal right now.
3. It’s hemorrhaging cash
The final misleading fact about Eli Lilly is that it’s losing cash. Over the last 12 months, it registered an outflow of $165 million. If that becomes a trend, it’ll quickly run down its remaining reserves and be in trouble.
The catch, of course, is that its cash outflows are being spent to bolster capacity, as we’ve discussed. In Q3 alone, it reported capital expenditures of $4 billion. And given that its trailing 12-month net income is $5 billion, it’s clear that such expenditures won’t break the bank, nor will they lead to ongoing difficulties in generating free cash flow (FCF).
So don’t sweat its cash burn rate until its earnings or FCF start to persistently trend downward over time — something that is not likely to happen anytime soon given the company’s huge and growing success with Mounjaro and other products in the diabetes and weight-loss markets.
Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.