Eli Lilly’s Breakthroughs: Hedge Funds’ New Healthcare Favorite

The Healthcare Sector: Growth, Innovation, and the Impact of AI

The healthcare sector is undergoing a period of remarkable growth and innovation, heavily influenced by advancements in medical technology. Unlike pharmaceuticals, which focus on chemical processes, medical devices employ physical or mechanical means for disease prevention, diagnosis, and treatment. Key products in this space include pacemakers, imaging equipment, dialysis machines, and implants, among others.

In the United States, the healthcare sector is thriving, with healthcare spending estimated to have risen by **7.5% in 2023**, outpacing the nominal GDP growth rate for the same year. Meanwhile, a record **93.1% of Americans now have health insurance**, contributing to the sharp increase in healthcare expenditures. Projections indicate that national healthcare spending will grow at an average rate of **5.6% between 2023 and 2032**, while GDP is expected to increase by just **4.3%** during this period. Globally, McKinsey forecasts that healthcare profits will see a compound annual growth rate (CAGR) of **7%**, projected to rise from **$583 billion in 2022** to over **$800 billion by 2027**.

Despite the challenges posed by labor shortages and rising inflation, the sector is anticipated to recover in 2024, offering a favorable risk-reward climate for investors. A recent report from Silicon Valley Bank has highlighted a dramatic increase in investments in artificial intelligence (AI) within the healthcare sector, growing at a rate that is twice as fast as the IT sector. The report notes that businesses integrating AI account for **one out of every four dollars** spent in the healthcare industry and predicts that over **$11 billion** will be invested in AI healthcare this year, with approximately **$2.8 billion** already directed towards this area in 2024.

Deloitte’s 2024 Global Health Care Sector Outlook also reflects investor confidence, noting that the industry received **$31.5 billion in private equity funding from 2019 to 2022**. The integration of AI is projected to save the U.S. healthcare sector close to **$360 billion** over the next five years, with applications in medical administration, diagnosis, treatment, and patient care. Predictive analytics and health record automation are expected to enhance healthcare providers’ efficiency and effectiveness.

Eli Lilly and Company (NYSE: LLY)

Eli Lilly & Company (NYSE: LLY) stands out as a global leader among pharmaceutical companies, focusing on a range of critical areas, including diabetes, oncology, immunology, and neuroscience. Established in 1876, Eli Lilly has continued to expand its product offerings and production capacities. The company has made significant achievements, including the FDA’s recent approval of **Kisunla** for treating Alzheimer’s and the filing of **tirzepatide** for obstructive sleep apnea in both the U.S. and EU. With **11 novel compounds** currently in clinical trials aimed at addressing obesity and other chronic illnesses, the company is intensifying its R&D efforts.

Eli Lilly reported remarkable success for the second quarter of 2024, witnessing a **36% revenue increase** compared to the previous year, primarily driven by robust sales of **Mounjaro**, **Zepbound**, and **Verzenio**. Their earnings per share surged by **68%** due to high market demand and successful product launches. This success allowed the firm to raise its full-year revenue projection by **$3 billion**, underscoring its optimistic growth trajectory.

In a significant strategic move, Eli Lilly announced a commitment of **$4.5 billion** for the construction of the **Lilly Medicine Foundry**, which will be built in the LEAP Research and Innovation District in Lebanon, Indiana. This new facility will blend drug research and manufacturing, allowing for innovative production methods and increased capacity for clinical trial medications.

Hedge Fund Interest in Eli Lilly

According to Insider Monkey’s database of over 900 hedge funds as of Q3 2024, Eli Lilly holds a strong position among investors, with **106 hedge funds** holding shares in the company. Notably, Baron Funds’ “Baron Health Care Fund” acknowledged Eli Lilly’s value in its second quarter 2024 investor letter, noting increased investor enthusiasm surrounding **GLP-1 drugs** for diabetes and obesity. They highlighted that Lilly’s product, **Mounjaro/Zepbound**, not only provides excellent blood sugar control for diabetics but can also facilitate significant weight loss—a prospect that appeals to a vast potential market of **32 million Type 2 diabetics** and **105 million obese individuals** in the U.S. alone.

Baron Funds estimates that GLP-1 drugs could become a **$150 billion** category, projecting that Lilly will set a high efficacy standard and secure substantial market share. Their confidence in Eli Lilly’s trajectory anticipates the possibility that the company could triple its total revenue by **2030**.

While the healthcare sector appears promising, there is an ongoing belief among investors that AI stocks may yield even higher returns in a shorter timeframe. Nonetheless, Eli Lilly remains a favorite among hedge funds, owing to its innovative approach and strong growth prospects in the evolving landscape of healthcare.