Public Company Underwriting Case Study

Applied Underwriting Case Study: Eli Lilly and Company

Product Concentration, Manufacturing Expansion, Cash Conversion, and Residual Common Equity

The Underwriting Question

Can Eli Lilly convert extraordinary incretin driven demand into durable residual cash flow while funding manufacturing expansion, pipeline investment, business development, working capital, and a larger senior capital structure without allowing execution risk to outrun the economics available to common equity?

Executive Underwriting Conclusion

For the six months ended June 30, 2026, Lilly reported approximately $42.8 billion of revenue, $14.5 billion of net income, and $16.0 billion of operating cash flow. During the same period, property and equipment purchases consumed approximately $5.3 billion, while acquisitions and purchased in process research and development consumed approximately $13.3 billion of cash.

The company also paid approximately $3.1 billion of dividends and repurchased approximately $4.0 billion of common stock. Total debt reached approximately $54.9 billion at June 30, 2026, up materially from year end 2025 as Lilly used the balance sheet to help fund strategic expansion.

Mounjaro and Zepbound accounted for approximately 65 percent of first half revenue. That concentration is supporting an increasingly large manufacturing program, a growing inventory base, substantial research spending, external pipeline investment, and a larger layer of senior claims.

The present evidence does not indicate financial distress. It does indicate that the common equity outcome depends on more than revenue growth. Volume, realized pricing, manufacturing productivity, pipeline conversion, working capital discipline, and capital allocation must remain aligned long enough for the growth to convert into durable residual cash.

The Central Underwriting Question

Can Eli Lilly convert extraordinary incretin driven demand into durable residual cash flow while funding manufacturing expansion, a heavily financed research pipeline, aggressive business development, and a larger senior capital structure without allowing concentration, pricing pressure, or execution risk to outrun the economics available to common equity?

Why Eli Lilly Is a Capital Structure and Cash Flow Conversion Case

The surface narrative is straightforward: exceptional demand, rapid revenue growth, and a pipeline with significant commercial potential. A credit oriented framework starts one level below that narrative. It asks what must be funded before operating success becomes residual value.

Lilly must manufacture increasingly large volumes of complex medicines, build and validate capacity before full utilization, carry inventory through long production cycles, fund research that may fail, acquire external science, absorb reimbursement pressure, service debt, and meet contractual commitments. Those are not side issues. They are the capital claims that determine cash conversion.

Applied Analytical Sequence

Operating Performance → EBITDA Quality → Cash Flow Conversion → Capital Structure → Leverage and Liquidity → Downside Resilience → Residual Common Equity

Operating Performance

Lilly generated approximately $42.8 billion of revenue during the first six months of 2026, compared with approximately $28.3 billion in the comparable prior year period. Net income increased to approximately $14.5 billion.

The growth was overwhelmingly volume driven. In the second quarter, worldwide revenue increased approximately 48 percent as volume increased approximately 60 percent, partially offset by an approximately 13 percent decline from lower realized prices.

That distinction matters. Revenue can continue to grow while incremental unit economics change materially. Lower realized pricing is manageable if volume, manufacturing productivity, product mix, and operating leverage more than compensate. It becomes more consequential if price compression coincides with peak capital spending, inventory growth, acquisition obligations, and a larger interest burden.

Product and Franchise Concentration

Mounjaro generated approximately $18.6 billion of revenue during the first half of 2026 and Zepbound approximately $9.1 billion. Combined revenue of approximately $27.7 billion represented about 65 percent of total company revenue.

Concentration is not automatically a weakness. A dominant franchise can create exceptional economics when demand is durable, manufacturing is efficient, intellectual property remains defensible, and reimbursement expands. The risk appears when long duration capital decisions increasingly depend on that franchise continuing to perform.

Lilly is broadening the portfolio across cardiometabolic medicine, oncology, immunology, neuroscience, genetic medicine, and other areas. The underwriting task is to separate genuine diversification from investment that remains economically dependent on cash generated by the metabolic franchise.

Manufacturing Expansion and Capital Expenditure Program

Capital expenditures reached approximately $7.8 billion in 2025, compared with approximately $5.1 billion in 2024. Lilly has stated that capital spending will remain meaningfully higher in the near term as it expands manufacturing capacity for current and future medicines.

The announced program spans active pharmaceutical ingredient production, injectables, oral medicines, devices, advanced therapies, and supporting infrastructure. Lilly has described planned U.S. manufacturing commitments since 2020 in excess of $50 billion, while subsequent projects have continued to expand the program.

In May 2026, Lilly announced an additional $4.5 billion across Indiana manufacturing sites, taking announced Indiana manufacturing capital commitments since 2020 to approximately $21 billion. The scale is economically important because these are long duration assets that require construction, validation, staffing, regulatory readiness, and utilization before full cash returns are realized.

The 2025 Form 10-K also disclosed manufacturing and material supply agreements connected to medicines in development that could, under certain circumstances, require payments of up to approximately $10 billion if specified purchase volumes are not met. Reported capital expenditures therefore capture only part of the economic commitment behind the capacity strategy.

EBITDA Quality

Lilly’s gross economics remain strong. Gross margin was approximately 84 percent during the first half of 2026. That margin provides substantial capacity to absorb operating costs and reinvestment. It should not be confused with cash available to common equity.

Research and development expense was approximately $7.3 billion during the first half, while marketing, selling, and administrative expense was approximately $6.4 billion. Acquired in process research and development expense was approximately $3.4 billion.

Internal R&D should not be normalized away simply because it depresses an adjusted earnings measure. For a pharmaceutical company, research spending is part of maintaining the productive asset base. A business that stops replenishing its pipeline can improve near term cash flow while weakening future economics.

Acquired research requires different accounting treatment, but the economic principle is similar. Individual transactions may be episodic. The need to fund external innovation is not. Earnings quality should therefore be judged alongside the recurring cost of sustaining and renewing the portfolio.

Cash Flow Conversion

The cash flow statement is where Lilly’s growth becomes a capital allocation case. Operating cash flow was approximately $16.0 billion during the first six months of 2026. Property and equipment purchases consumed approximately $5.3 billion, leaving roughly $10.8 billion before acquisitions, purchased research assets, dividends, repurchases, and other financing claims.

During the same period, acquisitions consumed approximately $9.8 billion of cash and purchases of in process research and development approximately $3.5 billion. Dividends consumed approximately $3.1 billion and common share repurchases approximately $4.0 billion.

Lilly can support this level of deployment because it has substantial operating cash generation, liquidity, and capital markets access. The analytical point is narrower: the residual cash available to common equity is materially different from net income or operating cash flow once the full reinvestment burden is recognized.

Working Capital, Inventory, and Supply Chain Investment

Inventory increased to approximately $16.8 billion at June 30, 2026 from approximately $13.7 billion at year end 2025, an increase of roughly 22 percent in six months. Work in process represented approximately $10.0 billion of the June balance, compared with approximately $2.6 billion of finished products and approximately $4.1 billion of raw materials and supplies.

The composition matters. A large work in process balance represents capital committed before final sale and cash collection. During rapid manufacturing expansion, that investment can be necessary and rational. It also increases exposure to production timing, demand forecasting, regulatory changes, product mix, and commercial execution.

Working capital should rise during a buildout of this scale. The monitoring question is whether those balances remain proportionate to revenue and whether inventory ultimately converts into sales and cash without requiring a persistent increase in external financing.

Capital Structure, Debt, and Senior Claims

Total debt reached approximately $54.9 billion at June 30, 2026, compared with approximately $42.5 billion at December 31, 2025. Short term borrowings and current maturities were approximately $7.1 billion, while long term debt was approximately $47.9 billion.

In May 2026, Lilly issued approximately $9.0 billion of long term debt across maturities extending from 2028 through 2066. The financing supported acquisitions, repayment of commercial paper, and general corporate purposes.

The increase in debt should be evaluated in context. Lilly remains highly cash generative and has demonstrated strong access to long duration financing. The relevant issue is not a manufactured leverage alarm. It is the growing amount of senior capital that must be serviced before common shareholders receive the residual economics.

A larger debt structure also changes the consequences of an operating disappointment. Interest and refinancing obligations remain even if a manufacturing ramp, launch, pricing environment, or pipeline program underperforms.

Acquisitions, Licensing, and Contingent Commitments

Through June 30, 2026, Lilly disclosed approximately $13.3 billion of cash outlays related to business development, driven primarily by transactions involving Centessa, Kelonia, Orna, Ventyx, and Ajax.

The acquisition date fair values of Centessa and Kelonia were approximately $6.6 billion and $4.9 billion, respectively, while Ventyx was approximately $1.2 billion. These transactions broaden the pipeline while moving part of the portfolio renewal burden into investing and financing cash flows.

Contingent consideration adds another layer. Kelonia carries potential contingent consideration of up to approximately $3.75 billion, while Centessa carries approximately $1.54 billion. At June 30, recognized current and noncurrent contingent consideration liabilities totaled approximately $2.5 billion.

Pipeline value is not free. Acquired science must ultimately cover the purchase price, subsequent development spending, manufacturing investment, commercialization costs, milestone payments, and the cost of capital used to fund the transaction.

Liquidity and Refinancing Capacity

Lilly’s liquidity remains a material strength. At June 30, 2026, the company held approximately $9.0 billion of cash and cash equivalents and approximately $3.9 billion of investments. It also maintained approximately $10.1 billion of unused committed bank facilities, including facilities supporting commercial paper.

This profile, combined with strong operating cash generation and access to long duration debt markets, materially reduces near term refinancing risk. The case should not manufacture a solvency narrative unsupported by the facts.

Liquidity is better viewed as strategic capacity. Manufacturing projects already underway, research programs, acquisition obligations, and pipeline milestones may compete for capital at the same time. The relevant question is how much flexibility remains if several of those claims arrive while operating economics soften.

Research and Development Obligations

Lilly’s research pipeline is both an asset and a recurring claim on capital. The company is advancing programs across cardiometabolic health, oncology, immunology, neuroscience, and genetic medicine while adding external platforms through acquisitions and licensing.

Foundayo, orforglipron, received U.S. approval in April 2026 for chronic weight management in adults with obesity or overweight with at least one weight related condition. The approval broadens Lilly’s metabolic portfolio beyond injectable tirzepatide and adds an oral GLP-1 medicine to the franchise.

Success in one program does not remove clinical risk elsewhere. Development assets can fail, be delayed, receive narrower labeling, encounter safety findings, or achieve weaker commercial adoption. R&D should therefore be treated as a portfolio of required investments with uncertain payoffs, not as a discretionary expense that can be ignored when evaluating sustainable earnings.

Regulatory, Clinical, Reimbursement, and Pricing Risk

Regulatory and clinical risk directly affect the economics of the pipeline. Approval timing, labeling, safety requirements, manufacturing inspections, post approval obligations, and comparative clinical performance can materially alter expected cash flows. Unapproved therapies should not be treated as certain future assets.

Pricing pressure is already observable in reported results. Lilly’s second quarter growth was overwhelmingly volume driven while realized pricing declined. Expanded access can increase treated populations and improve utilization, but lower unit economics still have to be absorbed by scale, mix, and manufacturing productivity.

The framework does not require a political forecast. The relevant variables are measurable: realized net price, volume growth, payer access, rebate intensity, patient mix, gross margin, utilization, and cash conversion.

Downside Cases

Case 1: Price Compression Without Demand Failure

Volumes continue to grow, but realized pricing weakens because of reimbursement changes, expanded access, rebates, international pricing, and competitive response. The test is whether incremental volume and manufacturing productivity preserve operating cash flow despite lower unit economics.

Case 2: Manufacturing Ramp Underperformance

Demand remains strong, but new capacity is delayed, costs more than planned, operates below expected utilization, or requires additional remediation. Capital spending remains elevated while the revenue and margin benefit arrives later.

Case 3: Pipeline and Concentration Shock

The existing tirzepatide franchise remains commercially significant, but a major next generation asset fails clinically, is delayed, receives a narrower indication, or achieves weaker adoption. The question is whether the existing franchise can support capital commitments made in anticipation of a broader portfolio.

Case 4: Compound Capital Allocation Stress

Pricing or volume moderates at the same time that manufacturing capital expenditures, research spending, acquisition obligations, milestone payments, dividends, and debt service remain elevated. This is the most revealing credit oriented scenario because it forces the capital structure to show which claims are genuinely flexible and which remain ahead of common equity.

Core Credit Oriented Underwriting Principle

Capital Structure Assessment

Lilly’s current operating performance, liquidity, and market access provide substantial support for the investment program. The company has room to finance expansion without treating every period of heavy spending as a balance sheet event.

The scale and speed of capital deployment still matter. Capacity, inventory, acquired pipeline assets, contractual commitments, and debt are being added while a large share of revenue remains concentrated in the metabolic franchise.

The clearest evidence of successful execution will be sustained growth in operating cash flow and residual free cash generation as new capacity matures, without a persistent need for debt growth or other external capital to support the full reinvestment burden.

Residual Common Equity Analysis

Credit oriented underwriting reaches common equity last. Lilly’s residual claim should be evaluated after operating costs, taxes, internal R&D, manufacturing investment, working capital, interest, debt maturities, contractual supply commitments, acquisition consideration, contingent payments, commercialization spending, and other economically necessary claims.

At present, the company has sufficient earnings power and liquidity to meet those claims while continuing shareholder distributions. That is an important positive conclusion. It does not make the residual unlimited.

The common equity becomes increasingly sensitive to the durability of the metabolic franchise as Lilly commits long duration capital around its expected growth. If Mounjaro, Zepbound, Foundayo, and future metabolic assets sustain volume growth and acceptable realized economics, the manufacturing buildout can become a source of scale and cash generation. If pricing, clinical outcomes, competition, or execution disappoint, the same fixed asset base and senior claims can reduce the cash available to equity.

Investment Committee Monitoring Framework

Investment Committee Conclusion

Eli Lilly is a useful test of credit oriented public equity underwriting because the company is exceptionally strong at the same time that the capital demands behind its growth are becoming larger, longer dated, and more complex.

The company is effectively underwriting its own future demand through manufacturing capacity, inventory, research programs, acquisitions, supply commitments, and financing decisions. Common equity benefits if those investments produce durable cash flows above their full economic cost. Common equity absorbs the residual damage if expected growth fails to cover the capital committed in advance.

The investment committee should therefore follow operating growth through realized price, manufacturing utilization, working capital, operating cash flow, capital expenditures, business development spending, debt service, and dilution before assigning value to the residual claim.

Primary Reference Sources

• Eli Lilly and Company Form 10-Q for the quarter ended June 30, 2026
• Eli Lilly and Company 2025 Annual Report and Form 10-K
• Eli Lilly second quarter 2026 earnings release and investor materials
• Eli Lilly first quarter 2026 earnings release and investor materials
• Eli Lilly official manufacturing investment announcements
• Eli Lilly official acquisition and business development disclosures
• U.S. Food and Drug Administration approval materials for Foundayo, orforglipron
• SEC EDGAR filings and offering documents for relevant debt issuances

Case Study Disclosure

This case study is based solely on publicly available information and is provided to demonstrate the analytical process used within the Zepeda Capital Holdings Credit Oriented Public Markets Framework. It is intended for educational and informational purposes only. Nothing contained herein constitutes investment advice, an offer or solicitation to purchase or sell securities, or a recommendation regarding any security. The analysis reflects information available as of the periods identified and may change as additional information becomes available. Readers should conduct their own independent due diligence before making investment decisions.

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