Eli Lilly stock gets a rare downgrade: what is HSBC concerned about?

Investors should consider trimming exposure to Eli Lilly & Co (NYSE: LLY) following a more than 20% increase in the pharma stock’s price in recent weeks, says Rajesh Kumar, a senior HSBC analyst. 

Lilly has long been a top performer in the pharmaceutical space as investors continue to reward its lead in weight-loss treatments. 

However, the very enthusiasm has gone a bit too far and pushed the company’s valuation to such unusual levels that warrant a switch to taking profit, Kumar told clients in a research note on Monday. 

LLY shares are inching down in premarket following HSBC’s dovish call. 

Eli Lilly stock is immensely overvalued

Eli Lilly shares are currently trading at more than 40 times their estimated earnings for 2025, compared to the broader S&P 500 index, which is trading at approximately 20 times forward earnings.

Therefore, citing “valuation concerns”, the HSBC analyst lowered his rating on LLY stock this morning to “hold” and reduced his price target on the pharma giant to $700. 

His new objective, downwardly revised from $1,150 before, warns of a potential 20% decline from current levels. 

It’s also worth noting that Eli Lilly is a dividend stock, offering a yield of 0.68%, which helps mitigate some of the concerns regarding its high valuation.

LLY shares run the risk of multiple contractions

Rajesh Kumar dubs “overvaluation” a significant concern for Eli Lilly as macro uncertainty puts high-fly stocks at a particularly “greater risk of multiple contraction” this year. 

According to the HSBC analyst, the market is overestimating what the company’s anti-obesity treatment, orforglipron, means for its stock price, especially since the competition is showing no signs of letting up. 

“Bear in mind that the highest dose adverse events profile in the type-2 diabetes treatment might suggest lower compliance than injectables,” his report added. 

Note that Eli Lilly's stock price has nearly increased by six times since the COVID pandemic in 2020. 

Lilly faces stiff competition from Novo Nordisk

HSBC analyst Rajesh Kumar attributed much of the weakness in rival Novo Nordisk’s weight loss treatment (Wegovy/Ozempic) sales to “cannibalisation from compounder.”

But the European giant has recently secured a major legal victory that effectively bans several compounded versions of its Wegovy/Ozempic.

According to Kumar:

“We think when the compounders are stopped in May for Novo’s brands, the script momentum gap between the two players might close.”

HSBC’s cautious outlook on Eli Lilly comes just days before the pharmaceutical giant is set to report its first-quarter earnings.

The consensus estimate is for the company to earn $3.52 per share, a notable increase from $2.58 per share during the same period last year.

Still, the investment firm suggests trimming exposure as the risk-reward in LLY shares is no longer favourable.