Title: Eli Lilly: From Insulin to Obesity King Show: Compounding Quality (Substack, paid post — compoundingquality.net) Guest: Pieter Slegers / Team Compounding Quality (author) Date: 2026-07-23 URL: https://www.compoundingquality.net/p/eli-lilly-from-insulin-to-obesity Length: written post — no timestamps Note: Paid-subscriber post captured via Stephen's logged-in session. Body text verbatim; UI chrome removed. Fiscal.ai chart panels noted inline as [Image — …]; the closing Total Quality Score table is published as an image and is transcribed below as a [Table image — …] block. The 15-step deep-dive template is the same one used for the HEICO deep dive of 2026-JUL-05.
One of the world's most valuable pharmaceutical companies? Eli Lilly.
They dominate the entire market for diabetic and obesity care together with Novo Nordisk.
Here's what a $10,000 would be worth since 1992:
S&P 500: $0.3 million
Eli Lilly: $1.8 million
Eli Lilly – General Information
Company name: Eli Lilly and Company ISIN: US5324571083 Ticker: LLY Type: Oligopoly Stock Price: $1,163.0 Market cap: $1.1 trillion Average daily volume: $3.7 billion
Onepager
Here's a onepager with the essentials of Eli Lilly:
[Image — Eli Lilly onepager]
15-Step Approach
Now let's use our 15-step approach to analyze the company.
At the end of this article, we'll give Eli Lilly a score on each of these 15 metrics, resulting in a Total Quality Score.
1. Do I understand the business model?
Eli Lilly develops and commercializes innovative drugs.
They focus on some of the most pressing chronic conditions in the world.
They are a market leader in treatments for diabetes, cancer, Alzheimer's disease, and obesity.
The company follows the Big Pharma formula:
Heavy R&D spending (~22% of revenue)
Long patent-protected blockbuster drugs
Global regulatory strategy
High-margin, brand-name drugs
What truly sets Eli Lilly apart is its leadership in two of medicine's biggest growth markets:
Obesity
Alzheimer's disease.
With Mounjaro and Zepbound, Eli Lilly has built the world's fastest-growing obesity franchise.
Analysts expect the obesity market to exceed $50 billion by 2030.
[Image — obesity market size. Source: Stock Analysis]
Last but not least, Eli Lilly is also betting big on Donanemab.
It's one of the most promising Alzheimer's drugs ever developed.
If approved, this could be the crown jewel of their neuroscience portfolio.
[Image — pipeline. Source: Eli Lilly Quarterly Earnings Report]
2. Is management capable?
CEO David Ricks took charge in 2017. Since then, shares are up over +1.400% (!).
What's even more impressive?
He shifted Eli Lilly's focus toward innovation, significantly expanded R&D, and oversaw the development of game-changing drugs like Mounjaro.
Under Ricks' leadership:
R&D efficiency improved
Late-stage pipeline has never looked stronger
Strategic partnerships with biotech startups exploded
Insider ownership isn't large (~0.2%), but compensation is heavily performance-linked.
This allows them to relentlessly think on the long term.
The result?
Market dominance in diabetes, growing obesity franchise, and Alzheimer's breakthrough potential.
[Image — CEO David Ricks]
3. Does the company have a sustainable competitive advantage?
Eli Lilly has a wide moat.
Their moat is based on 5 pillars:
Patents & Intellectual Property (IP): Patent protection on blockbuster drugs like Mounjaro, Trulicity, and potentially Donanemab gives them exclusivity for years
Regulatory approval barriers: Getting a drug through the FDA takes 10–12 years and billions of dollars
Brand trust & physician preference: Doctors trust Eli Lilly's efficacy and safety. Switching costs are high in pharma
Distribution & scale: Global sales and manufacturing presence in over 120 countries. Scale leads to better margins and market access
R&D Edge: Consistent reinvestment (25% of revenue) gives them an innovation pipeline that competitors struggle to match
And the cherry on top?
Eli Lilly's dominance in the GLP-1 market (diabetes/obesity drugs like Mounjaro and Zepbound) is hard to overtake.
Patients stay on these drugs long-term, making revenue extremely sticky.
Companies with a sustainable competitive advantage are often characterized by a high and robust Gross Margin and ROIC:
Gross Margin: 82.8% (Gross Margin > 40%? YES)
ROIC: 32.5% (ROIC > 15%? YES)
These numbers scream that the company has a moat.
High profitability + reinvestment opportunities = Compounding Machine
[Image — gross margin and ROIC. Source: Fiscal.ai]
4. Is the company attractive in an interesting end market?
Eli Lilly is active in three interesting end markets:
Obesity & Diabetes
Alzheimer's Disease
Oncology & Immunology
1. Obesity & Diabetes
Global obesity is an epidemic.
Over 1 billion people are overweight.
Governments, insurers, and consumers are desperate for solutions.
Eli Lilly's Mounjaro and Zepbound are revolutionary, leading the wave of metabolic disease management.
Analysts project the obesity drug market to grow by 27.0% per year, reaching $90 billion by 2035.
Eli Lilly is in pole position to benefit from this.
2. Alzheimer's Disease
Alzheimer affects over 55 million people worldwide.
A drug that slows cognitive decline could be very lucrative for Eli Lilly.
Eli Lilly's Donanemab has shown promising late-stage results.
If approved, it could generate $5 to 10 billion annually.
3. Oncology & Immunology
Cancer and autoimmune treatments are also high-growth markets.
Eli Lilly's Verzenio and pipeline drugs are targeting key subsegments.
The bottom line?
Eli Lilly benefits from multi-decade tailwinds that should allow them to keep growing at very attractive rates.
5. What are the main risks for the company?
Here are the key risks for Eli Lilly:
Patent expiration: Patents don't last forever. When they expire, cheaper generic drugs can enter the market. Trulicity, one of Eli Lilly's biggest drugs, is expected to lose patent protection around 2027
Clinical and regulatory risks: If a new drug fails a clinical trial or isn't approved by the FDA, Eli Lilly could lose billions in future sales
Competition: Eli Lilly faces strong competition from Novo Nordisk, the maker of Ozempic and Wegovy. The race to dominate the obesity and diabetes market is becoming more intense
Drug pricing: The U.S. government is putting more pressure on drug prices. Lower prices could hurt Eli Lilly's profit margins over time
Valuation: Eli Lilly trades at a premium valuation. That leaves little room for disappointment. Any setback could send the stock price lower
6. Does the company have a healthy balance sheet?
We look at 3 ratios to determine the healthiness of Eli Lilly's balance sheet:
Interest Coverage: 388.3x (Interest Coverage > 15x? YES)
Net Debt/FCF: 3.2x (Net Debt/FCF < 4x? YES)
Goodwill/Assets: 5.0% (Goodwill < 20%? YES)
[Image — balance sheet. Source: Fiscal.ai]
7. Does the company need a lot of capital to operate?
We prefer to invest in companies with CAPEX/Sales lower than 5% and CAPEX/Operating Cash Flow lower than 25%.
Eli Lilly:
CAPEX/Sales: 12.0% (CAPEX/Sales < 5%? NO)
CAPEX/Operating Cash Flow: 42.3% (CAPEX/Operating CF < 25%? NO)
It looks like Eli Lilly is capital intensive.
But wait…
High capital intensity is only bad when the company isn't investing in future growth.
That is why a distinction needs to be made between:
Maintenance CAPEX: Investments made in existing assets
Growth CAPEX: Investments made in new assets in order to grow
When a company invests a lot in future growth, its growth CAPEX is very high but these investments should create a lot of value in the long term.
As a rule of thumb, we state that the company's maintenance CAPEX equals Depreciation & Amortization.
CAPEX = Maintenance CAPEX + Growth CAPEX
Wherein Maintenance CAPEX = Depreciation & Amortization
Growth CAPEX = Total CAPEX - Depreciation & Amortization
When we only take Maintenance CAPEX into account, we get the following:
Maintenance CAPEX/Sales: 2.8% (CAPEX/Sales < 5%? YES)
Maintenance CAPEX/Operating Cash Flow: 10.0% (CAPEX/Operating CF < 25%? YES)
These numbers look very reasonable.
[Image — capital intensity. Source: Fiscal.ai]
8. Capital Allocation
Capital allocation is the most important task of management.
Look for companies that put shareholders' money to work at attractive rates of return.
Eli Lilly:
Return on Equity (ROE): 87.6% (ROE > 20%? YES)
Return on Invested Capital (ROIC): 32.5% (ROIC > 15%? YES)
Eli Lilly's ROE and ROIC look very attractive.
[Image — ROE / ROIC. Source: Fiscal.ai]
9. How profitable is the company?
The more profitable the company, the better.
Here's what things look like for Eli Lilly:
Gross Margin: 82.8% (Gross Margin > 40%? YES)
Net Profit Margin: 35.0% (Net Profit Margin > 10%? YES)
[Image — margins. Source: Fiscal.ai]
10. Does the company use a lot of Stock-Based Compensation?
Stock-based compensation is a cost for shareholders and should be treated accordingly.
Eli Lilly:
SBC as % of Net Income: 2.5% (SBC/Net Income < 10%? YES)
5-Year Avg. SBC as % of Net Income: 5.8% (SBC/Net Income < 10%? YES)
Eli Lilly doesn't seem to pay a lot of stock-based compensation.
[Image — SBC. Source: Fiscal.ai]
11. Did the company grow at attractive rates in the past?
We seek companies that managed to grow their revenue and EPS by at least 5% and 7% per year.
Eli Lilly:
Revenue growth past 5 years (CAGR): 20.6% (revenue growth > 5%? YES)
Revenue growth past 10 years (CAGR): 13.0% (revenue growth > 5%? YES)
EPS growth past 5 years (CAGR): 35.7% (EPS growth > 7%? YES)
EPS growth past 10 years (CAGR): 27.0% (EPS growth > 7%? YES)
Eli Lilly has demonstrated strong growth over the past decade.
[Image — historical growth. Source: Fiscal.ai]
12. Does the future look bright?
You want to invest in companies that manage to grow at attractive rates.
Why? Stock prices tend to follow EPS growth over time.
Eli Lilly:
Expected revenue growth next 2 years (CAGR): 23.1% (revenue growth > 5%? YES)
Expected EPS growth next 2 years (CAGR): 32.8% (EPS growth > 7%? YES)
Long-term EPS growth estimate (CAGR): 20.4% (EPS growth > 7%? YES)
An estimated growth rate of over 30% per year is very optimistic.
I think Eli Lilly should be able to grow its EPS by 10-15% per year in the long term.
[Image — forward estimates. Source: Fiscal.ai]
13. Does the company trade at a fair valuation level?
We always use 3 methods to look at the valuation of a company:
A comparison of the forward PE multiple with its historical average
Earnings Growth Model
Reverse Discounted-Cash Flow
A comparison of the Forward PE multiple with its historical average
Eli Lilly's current forward PE equals 32.2x, compared to its 10-year average of 30.3x.
This suggests the stock is trading at a modest premium to its historical valuation.
[Image — forward PE vs history. Source: Fiscal.ai]
Earnings Growth Model
This model shows you the yearly return you can expect as an investor.
Here are the assumptions I use:
EPS growth: 13% per year over the next 10 years.
Dividend Yield: 0.5%
Forward PE to decline from 32.2x to 27.0x
Expected yearly return = 13% + 0.5% - 0.1((27-32.2)/32.2) = 11.9%
Reverse DCF
Charlie Munger once said that if you want to find the solution to a complex problem, you should invert. Always invert.
Turn the problem upside down.
A reverse DCF shows you the expectations implied in the current stock price.
You try to determine for yourself whether these expectations are realistic or not.
You can learn more about a reverse DCF here: Reverse DCF 101.
For Eli Lilly, we use the Net Income as a proxy for Free Cash Flow because they are still heavily investing in future growth.
The expected Net Income for Eli Lilly in 2026 equals $26,000 million.
Today, Eli Lilly has 893.5 million shares outstanding.
Under these assumptions, our Reverse DCF indicates that Eli Lilly should grow its Net income by 18.9% per year to return 10% per year to shareholders.
This indicates the future growth estimates are very high.
There is no room for error (no margin of safety).
Eli Lilly:
Forward PE: 32.2x (lower than its 10-year average of 30.3x? NO)
Earnings Growth Model: 11.9% (Yearly return > 10%? YES)
Reverse DCF: 18.9% (Realistic growth expectations? NO)
We can conclude the valuation looks expensive.
14. How did Owner's Earnings evolve in the past?
Over time, stock prices tend to follow a company's Owner's Earnings (EPS Growth + Dividend Yield).
That's why we want to invest in companies that managed to grow their Owner's Earnings at attractive rates in the past.
Eli Lilly:
CAGR Owner's Earnings (5 years): 36.2% (CAGR Owner's Earnings > 12%? YES)
CAGR Owner's Earnings (10 years): 27.5% (CAGR Owner's Earnings > 12%? YES)
The Owner's Earnings of Eli Lilly grew attractively in the past.
[Image — owner's earnings. Source: Fiscal.ai]
15. Did the company create a lot of shareholder value in the past?
We want to invest in companies that have managed to compound at attractive rates in the past.
Ideally, the company returned more than 12% per year to shareholders since its IPO.
Here's what the performance of Eli Lilly looks like:
YTD: +7.6%
5-year CAGR: +39.3%
CAGR since IPO (1978): +14.1% (CAGR since IPO > 12%? YES)
Eli Lilly has been an extraordinary compounder.
There are only very few companies that can make the S&P 500 look like a flat line.
[Image — long-run performance. Source: Fiscal.ai]
Quality Score
Finally, let's bring everything together and give the company a Total Quality Score.
As you can see in the table below, Eli Lilly gets a Total Quality Score of 8.2/10.
[Table image — "Eli Lilly / Oligopoly" Total Quality Score, by Compounding Quality: Business model — develops and markets innovative pharmaceuticals; strong global presence for diabetes and obesity care drugs — 8.5/10 Capability management — David Ricks has been the CEO of Eli Lilly since 2017; insider ownership is only 0.2% — 7.5/10 Sustainable competitive advantage — patent moat, biologics dominance, and switching costs; global leader in diabetes and obesity markets — 9/10 Attractiveness of the industry — pharma has high barriers to entry; GLP-1 demand is surging — 7.5/10 Main risks — patent cliffs, regulatory pressure, pricing controls; medical trials — 8/10 Balance sheet — healthy; Interest Coverage 388.3x, Net Debt/FCF 3.2x — 8/10 Capital intensity — Maintenance CAPEX/Sales 2.8%, Maintenance CAPEX/OCF 10.0% — 8/10 Capital allocation — ROE 87.6%, ROIC 32.5% — 8.5/10 Profitability — Gross Margin 82.8%, Net Profit Margin 35.0% — 8.5/10 Usage of Stock-Based Compensation (SBCs) — average SBCs as a % of Net Income past 5 years 5.8% — 6/10 Historical growth — revenue and EPS CAGR past 10 years 13.0% and 27.0% — 9/10 Outlook — expected long-term EPS growth 20.4% — 9/10 Valuation — forward PE 32.2x (10-year average 30.3x); Reverse DCF requires Net Income growth of 18.9% per year — 6/10 Evolution owner's earnings — CAGR owner's earnings past 5 and 10 years 36.2% and 27.5% — 9/10 Historical value creation — CAGR since IPO (1978) +14.1% — 10/10 TOTAL SCORE — 8.2/10]
Today's takeaway? Eli Lilly is a phenomenal business. But we think it's too expensive right now.
We will wait patiently for a more attractive valuation.
We feel more comfortable with Novo Nordisk.
Everything In Life Compounds Team Compounding Quality
Book: Order your copy of The Art of Quality Investing here
Used sources: Interactive Brokers (portfolio data and executing all transactions); Fiscal.ai (financial data)