The pharmaceutical sector could be the next industry to face sweeping tariffs from the Trump administration.
One of the more interesting aspects about President Donald Trump’s recent tariffs is that each major industry has shown at least some degree of weakness, regardless of whether the policies have directly affected them yet.
Take the pharmaceutical industry as an example. For the time being, Trump’s tariff agenda hasn’t actually done much to directly impact pharmaceutical businesses. However, the White House has certainly been dropping some breadcrumbs making executives at pharma giants wary that new tariffs could be imposed at a moment’s notice. Just the idea of how the administration’s tariff policies could impact these businesses has made investors jittery.
Over the last couple of years, one of the best pharma stocks to own has been Eli Lilly (LLY 14.56%). But now, an investment in Lilly may not look so enticing as the possibility of more tariffs loom. Let’s explore how tariffs would impact Eli Lilly’s business, and assess whether investors should buy the stock now or run for the hills instead.
Lilly could face some headwinds in the near term
Beyond research and development (R&D), one of the major expense items for pharmaceutical companies is the cost of raw materials for making medicine. It’s not uncommon to source certain ingredients from overseas.
If tariffs are imposed on the pharmaceutical industry, it’s likely that prices for these ingredients will rise. In addition, as trade relations continue to tense up, retaliatory tariffs from other countries could also weigh on Lilly’s business; the company could start to see diminished brand equity in international markets.
If Lilly does wind up facing these challenges, my hunch is that operating expenses will rise, and profit margins may see some compression in the near term.
Image source: Getty Images.
Its long-term prospects look much brighter
Tariff policies can be quite nuanced since certain items or markets may be exempt. With that said, I’ll admit that Lilly’s near-term prospects look cloudy.
Nevertheless, I remain extremely optimistic about the company’s long-term potential.
For the last two years, the company’s primary source of growth has been the blockbuster drugs Mounjaro and Zepbound. These are Lilly’s glucagon-like peptide-1 (GLP-1) medicines, which compete directly with Novo Nordisk‘s Ozempic and Wegovy. Weight loss drugs have become a major catalyst for the pharmaceutical industry in recent years, and Lilly’s foray into the GLP-1 realm so far has been quite successful.
Outside of GLP-1 medications, Lilly also has a fast-growing cancer medicine called Verzenio. Verzenio has multiple approvals granted by the Food and Drug Administration (FDA), which widens Lilly’s opportunity in the oncology market.
Another opportunity that I’m highly optimistic about is Alzheimer’s disease (AD). The AD market is expected to be worth tens of billions of dollars over the next several years, and yet remains quite fragmented, with limited competition and many medications geared toward niche symptoms. Last summer, Lilly received FDA approval for its AD medication, Kisunla.
Although weight loss will likely be Lilly’s core source of revenue in the near term, I wouldn’t discount the growth Kisunla presents down the road, as the company scales up its efforts in the AD space.
Is now a good time to buy Eli Lilly stock?
If tariffs end up being applied to the pharmaceutical industry, I suspect that Lilly will have to tighten its belt for the time being. If raw-material expenses rise and supply chain logistics are disrupted, the company will likely need to identify areas to cut costs.
Unfortunately, it might have to become more selective in its ambitions for the time being. Moreover, given that drug prices can be capped in certain markets, Lilly won’t be able to pass on many tariff-induced higher costs to consumers. All of this means that buying its stock right now requires a long-term mindset.
LLY PE Ratio (Forward) data by YCharts.
With that said, there’s been some normalization in Lilly stock over the last year. Specifically, shares have been on the decline since January, and have yet to recover from prior highs.
I think now is still a good opportunity to invest in Eli Lilly, despite some of the near-term uncertainties. As a long-term investor, I’d employ a strategy of dollar-cost averaging — buying shares at different price points over the course of several years to mitigate risk.
Although tariffs could lead to some short-term volatility in Lilly’s financials, the long-term picture still looks good — underscored by the company’s diversified portfolio and multiple billion-dollar opportunities across different pockets of the pharmaceutical market.