Lilly Pricing Spineometer: 5 of 5 Vertebrae

Lilly, a global pharmaceutical company, had a strongly positive Q2 2024. Revenue rose 36% to $11.3 billion and earnings before interest and taxes rose 68% to $3.5 billion over the same period last year.

A review of Lilly’s August 8 Q2 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

“Speed life-changing medicines” is an underlying theme of management at Lilly. Speed at the global level with pharmaceuticals implies a high need for pricing excellence. Consider the following business challenges and pricing requirements.

1. Lilly produces many high-growth pharmaceuticals including Trulicity, Zepbound, Mounjaro, Jaypirca, Jardiance, and Verzenio. Managing the price of fast-growing offerings requires a stronger pricing capability than normal.
2. Lilly has well over 50 products undergoing clinical trials. Managing new product development for business success requires engaging pricing professionals early in the cycle to ensure the opportunity exceeds the costs. Given that clinical trials can take many years to complete, updates on the expected market price would be required at multiple portfolio reviews, and each of these updates would benefit from a strong pricing capability.
3. The adoption of pharmaceutical regimens and the economic case for adoption varies across the globe. This creates a need for repricing offerings for individual countries.
4. Negotiations with national healthcare providers as well as insurers and pharmacy benefit managers would lead to price variances compared to list prices. Salespeople managing those negotiations would benefit strongly from price guardrails and the outcomes of those negotiations would benefit from profit-aligned sales incentives to reduce the principal-agent problem. Both price guardrails and profit-aligned sales incentives require the input of a pricing professional.
5. Lilly offers a “savings card” for many of its medicines. Designing and managing a savings card program is one more area where pricing expertise would be of benefit.
6. Gordon Brooks, Controller and interim CFO, stated “Gross margin in the quarter benefited from favorable product — and higher realized prices, partially offset by higher production costs.” Later, he added “Realized prices increased 15%, largely driven by Mounjaro access and savings card dynamics.” And, slide 9 of the earning presentation detailed the (Price/Rate/Volume Effect on Revenue” (see below). This implies the use of variance analysis, an accounting approach for measuring the impact of price, volume, mix, and exchange rates on profitability. (For a recent update on how to conduct this analysis with reduced biases, see Profit Bridges that Disambiguate Impacts of Currency Fluctuations from Other Marketing Variables.)

Industry benchmarks suggest 70 to 350 people would work on pricing at Lilly. As a pharmaceutical company, the titles of pricing professionals are likely to include terms such as Market Access and Healthcare Economics.

Research into the investment by Eli Lilly in pricing yielded encouraging results.

1. Lilly’s pricing team size is within expectations of industry benchmarks.
2. Pricing professionals at Lilly are globally distributed with a presence across North America, Europe, the Middle East, Latin America, Africa, and Asia Pacific.
3. A long career path for pricing professionals at Lilly can be identified, starting with interns and analysts moving through managers and directors, and rising to associate and senior vice presidents.
4. The responsibilities of pricing professionals at Lilly largely focus on reimbursement and market access. Analytics, international pricing, contract pricing, and Health Economics and Outcomes Research (HEOR) were also identified.
5. Often, pricing professionals at Lilly would focus on a specific market segment such as diabetes, obesity, oncology, Alzheimer’s, or immunology.

Given the importance and capability of pricing at Eli Lilly as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of August 2024.

Eli Lilly Pricing Spineometer: 5 out of 5 Vertebrae. Improvements are likely possible and opportunities for improvement exist, yet it is clear management takes pricing seriously and has made a strong investment in this area.

LLY (Eli Lilly and Company) rose from 772 the day prior to their earnings call to 909 a few days later. FY 2023 revenue of $34.1 billion with a 19% operating margin and P/E ratio near 109.

For FY 2023, a 1% improvement in price would yield a 5.2% improvement in operating profits holding all else constant at Eli Lilly.