With the ozempic craze that's been happening, I’ve stumbled upon Eli Lilly and wanted to share an interesting dynamic I noticed regarding their move into the incretin market.
Their flagships are and Mounjaro and Zepbound, and I think the "volume vs. margin" trade-off here is interesting to analyze. Because these drugs are becoming such a massive part of their revenue (over 50%), the company is forced to scale production aggressively. This means significant manufacturing spending and "take or pay" contracts where they could face up to $10 billion in liabilities if they don't meet specific production targets.
At the same time, they are negotiating lower prices for Medicare and Medicaid access. The core of the investment case seems to be whether the sheer volume of patients will be enough to buffer these lower prices and the risks of their heavy infrastructure investments.
I’m still trying to work out if the current offering and improved production costs will be enough to protect margins if government-mandated prices continue to stay low. It's really just betting on scale vs. margin compression, but it depends entirely on the adoption rate in those government programs.
I put together a deeper dive into these specific manufacturing risks and the reverse DCF modeling here:
https://thebuffedmunger.substack.com/p/eli-lilly-can-volume-outrun-price?r=3ub1hc&utm_campaign=post&utm_medium=web&showWelcomeOnShare=true
Anyone here fluent in pharma, who can pitch in on this?
