Zugzwang describes the moment in a chess game where making any move will worsen a player’s position. That’s roughly where $1 trillion drugmaker Eli Lilly (LLY.N) now finds itself. The company’s blockbuster obesity treatments are inflating its valuation and bottom line as quickly as they’re shrinking waistlines. The problem, as many pharmaceutical giants have found out before, is that such windfalls are hard to put to good use.
Lilly will throw off some $17 billion of excess cash this year, according to analyst estimates collected by LSEG. That’s over three times as much as it produced prior to U.S. regulators’ approval of tirzepatide, the company’s marquee diabetes and weight loss drug. In 2027, Wall Street assumes this figure will soar past $31 billion.
The pressing question is what to do with all of it. Lilly’s answer, increasingly, is to hand it back to shareholders.
This is not a particularly compelling use of capital. Lilly is valued at some 12 times estimated revenue over the next 12 months. That’s a huge premium over peers, such as Merck (MRK.N), at 5 times. Repurchasing stock is simply very expensive.
Boss David Ricks may also be buying at the top. Patents for blockbuster drugs eventually expire, allowing copycats to drive down prices and profits. That’s still a decade away, but rivals desperately want a share of the burgeoning obesity market. Competing therapies will probably come sooner rather than later.
Lilly could use its cash to defend against that pressure by trying to develop new drugs. Yet the return on research investment, a notoriously hit-and-miss enterprise, was a disappointing 5.9% for big pharma in 2025, estimates Deloitte.
Buying smaller biotechnology outfits offers a way to kick-start development. Indeed, Lilly has been on an M&A binge. It agreed last week to buy a company developing psychedelic medicines for depression, and earlier this year announced three vaccine related acquisitions in one day.
History suggests long odds of success. When Gilead Sciences (GILD.O) developed a hepatitis C cure about a decade ago, its cash from operations grew sevenfold over two years. It returned capital and paid $12 billion for cancer specialist Kite Pharma. But competition eventually bit, and hepatitis revenue dried up when patients were cured.
Pandemic winners Moderna (MRNA.O) and Pfizer (PFE.N) variously ramped up R&D spending, cash returns to investors and manic acquisition activity. Their share prices have fallen 84% and 43%, respectively, over the past five years. Pfizer drew an activist campaign from a pushy investor. Lilly has grown fat from obesity, but may soon be left with slim pickings.
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