Will Lilly's FY 2026 gross margin remain above 80%?

FY 2025 gross margin of 83.6% provides a 3.6pp cushion above the 80% threshold. The Medicare $50/month deal effective April 2026 affects only 3 quarters of FY 2026, limiting its full-year blended impact. Q4 2025 demonstrated that +50% volume growth can absorb -7% pricing compression while maintaining 82.5% gross margin — the volume leverage mechanism is proven. Manufacturing COGS per dose is likely $10-20 range, meaning even $50/month Medicare units carry 60-70% gross margin, far above the zero-margin scenario bears imagine. Eroding 3.6pp of gross margin in a single year requires an extreme mix shift that would contradict management's +23-27% revenue guidance framework.

The bear case requires quantifying the Medicare channel's impact on blended margins. Medicare Part D represents a subset of total GLP-1 volume. At $50/month vs ~$500+ commercial, gross margin on Medicare units is approximately 60-70% (COGS per dose estimated at $10-20). If Medicare channel grows to represent 10-15% of tirzepatide volume in the 3 affected quarters, blended gross margin compression would be approximately 1.5-2.5pp. Combined with commercial pricing trend of -7% (which compresses margin by ~0.5-1pp on its own) and increased depreciation from $50B manufacturing buildout, total compression could reach 2-3pp, placing FY 2026 at approximately 80.5-81.5%. This is tight but still above 80%. The risk is real but the cushion is adequate. Downgrading slightly from Run 1 due to manufacturing depreciation drag.

The unresolved debate between Moat Mapper and Gravy Gauge is central — whether volume leverage offsets pricing compression at scale. The Regulatory Reader's framing that the government deal 'transforms uncertainty into margin compression' is important: this is now structural, not speculative. However, the FY 2025 data shows the margin architecture is robust. The sequential compression from Q3 (83.6%) to Q4 (82.5%) was only 1.1pp despite accelerating volume and pricing pressure. Extrapolating that quarterly compression rate across FY 2026 would suggest margins of ~80-81% by Q4 2026, with the full-year blended still above 80%. The IRA precedent (71% semaglutide discount) is a forward risk but does not directly impact FY 2026 tirzepatide pricing yet. The scenario where margin breaks 80% requires both faster-than-expected Medicare uptake AND accelerating commercial price erosion simultaneously.

83.6% to below 80% is a 3.6pp drop in one year. That's a massive move for a pharma company with proven pricing power. The Medicare deal is real margin compression but it's partial year (April 2026 onward = 3 quarters) and Medicare patients are one channel. Commercial remains the bulk of revenue. The Q4 2025 data point is crucial: 82.5% margin while absorbing -7% pricing and +50% volume proves the manufacturing leverage thesis. Management guided $80-83B revenue (+23-27%) which implies confidence in the volume-price equation. The 80% threshold would require ~3.5pp annual compression — possible in theory but would be the worst single-year gross margin decline in Lilly's modern history.

I'm more cautious than consensus. The convergence of multiple compression forces is what makes this non-trivial: Medicare $50/month (structural), -7% commercial pricing (accelerating), $50B manufacturing depreciation (growing), and IRA framework setting expectations. The committee noted that the manufacturing moat is 'defensive rather than offensive' — it supports volume but doesn't protect pricing. Tirzepatide at 56% of revenue means margin is concentrated in one franchise that faces the most direct government pricing pressure. If Medicare Part D uptake for GLP-1s surges (which political and social forces favor), the mix shift could be faster than linear extrapolation suggests. Still above 50% probability of maintaining 80% due to the cushion, but the tail risk is meaningful.

The math framework: FY 2025 gross margin 83.6%. Compression forces for FY 2026: (1) Medicare $50/month for 3 quarters — if this reaches 8-12% of tirzepatide volume at ~65% gross margin vs ~87% commercial, that's ~1.5-2pp blended compression; (2) Commercial pricing -7% continuing — ~0.7pp compression; (3) Manufacturing depreciation increase — ~0.3-0.5pp. Total estimated compression: 2.5-3.2pp. Expected FY 2026 gross margin: ~80.4-81.1%. This sits just above the 80% threshold with a thin margin of safety. The probability is solidly above 50% but not overwhelming. A surprise — like faster Medicare enrollment, deeper commercial rebates, or manufacturing cost overruns — could push it below. But base case holds above 80%.

83.6% FY 2025 gross margin with 3.6pp cushion above 80%. Medicare deal is partial year only. Q4 showed volume can absorb pricing pressure. Historical pharma margin compression is gradual, not cliff-like. Strong probability of staying above 80%.

Multiple compression forces are real but need to sum to 3.6pp+ to breach 80%. Medicare $50/month for 3 quarters plus -7% commercial pricing plus manufacturing costs. Each individually compresses 0.5-2pp. Combined could reach 2.5-3.5pp, putting FY 2026 in the 80-81% range — tight but likely above threshold.

The 80% threshold is set at the right level — it's a meaningful test but one Lilly is more likely to pass than fail. Revenue growth of +23-27% implies massive volume increases that create manufacturing scale benefits. Even with Medicare pricing compression, the denominator effect (higher total revenue) partially absorbs the impact. Gross margin will likely compress but remain in the 80-82% range.