Pharmaceutical giant Eli Lilly (NYSE: LLY) is having a moment right now. Over the past two years, the company has made a big splash in the weight-loss space thanks to the one-two punch of blockbuster diabetes and obesity drugs, Mounjaro and Zepbound.
The excitement surrounding the weight-loss market has fueled a stock-buying frenzy, helping Lilly reach a market capitalization of about $720 billion, making it the most valuable pharmaceutical company in the world.
At first glance you might think that you have missed something and that the train has already left the station. However, a recent announcement from the company shows that this idea is far from realistic.
Below, I’m going to break down an important update that Lilly shared with investors earlier this month, and argue why now can still be an incredibly lucrative time to pick up shares.
On December 9, Lilly’s board of directors approved a $15 billion stock buyback program. CFO Lucas Montarce said about the share buyback:
As Lilly enters a period of rapid growth, our capital allocation priorities remain the same. We will continue to focus on supporting new launches, expanding our manufacturing capacity and advancing our pipeline through research and development and business development. However, given the company’s strong growth profile, we are also increasing the amount of capital we want to return to shareholders. We expect to implement this program over the next three years.
Below, I expand on Montarce’s comments and explain why I think this buyback is so crucial for investors.
While there are many reasons why a company may decide to buy back shares, one of the main motives may be that management believes the shares are undervalued. To me, Montarce’s quote implies that management sees a lot of upside for Lilly, given the company’s extensive pipeline and growth opportunities.
Let’s take a look at some of Lilly’s biggest opportunities and assess what impact they could have on the company, both in the short and long term.
As I mentioned above, Lilly’s main support in the weight loss market comes from the glucagon-like peptide-1 (GLP-1) receptor agonists Mounjaro and Zepbound. And while each of these drugs has generated billions of dollars in sales in recent years, there are several reasons to believe that Lilly has not yet pioneered the field of diabetes care and chronic weight management.
A few months ago, Lilly made some changes to Zepbound’s pricing to make it more affordable and accessible to patients who had opted for GLP-1 alternatives in the form of compounded medications, which are not approved by the Food and Drug Administration ( FDA). ). Earlier this month, Lilly went one step further by partnering with Ro, a direct-to-consumer (D2C) telemedicine platform that will now also serve as a distributor for Zepbound.
Another factor, which I think is being overlooked, is the possibility of GLP-1 treatments becoming more widely used beyond weight loss. According to a report from JPMorganGLP-1 drugs may be able to treat other conditions, such as sleep apnea, arthritis, chronic kidney disease, Alzheimer’s disease and some forms of addiction, and reduce cardiovascular risk.
Given the benefits of the GLP-1 market alone, it’s not surprising that Lilly is investing billions in manufacturing in an effort to scale up production as it looks to gain further momentum in the space.
In July, the FDA granted approval for Lilly’s disease drug Kisunla (donanemab). I see this as a subtle tailwind for Lilly, because the Alzheimer’s market is incredibly fragmented.
Because a number of medications are used to treat various symptoms of Alzheimer’s disease, the competitive landscape remains somewhat sparse. According to data collected by Market.us, the global market for Alzheimer’s drugs will be worth nearly $31 billion by early next decade.
Another big win for Lilly this year came when the FDA approved its eczema drug, Ebglyss. The eczema market is busier than Alzheimer’s disease and weight loss. But what makes Ebglyss a potentially game-changing treatment is that it is an injection, while most regular eczema treatments come in the form of an ointment or topical gel.
While Ebglyss may not have the same potential as some of Lilly’s other innovations, I’m encouraged by the company’s forays into yet another new part of healthcare and by their commitment to deepening their platform.
Because there are so many moving parts involved in Lilly’s growth trajectory, I think a good way to appreciate it is to look at the company’s PEG ratio. This is essentially a more advanced version of the price-to-earnings (P/E) ratio.
To derive a PEG ratio, take the P/E multiple and then divide that figure by the company’s estimated earnings per share (EPS) growth over a given period (for example, five years). At its core, the PEG ratio helps compare valuation and expected growth.
In general, a PEG ratio of less than 1 means the stock may be undervalued. Currently, Lilly’s PEG ratio is 0.74. Does this inherently mean Lilly stock is a buy? Not necessarily.
I see valuing Lilly as quite a complicated exercise. The company clearly has a lot of runway in the GLP-1 market alone. And because its presence in the Alzheimer’s and eczema markets is so new, it’s difficult to know with any accuracy how big an impact Kisunla and Ebglyss will have.
But with the new buyback program and management’s comments, I am cautiously optimistic about Lilly’s future and believe its valuation is reasonable at this time. For these reasons, I see Lilly as a no-brainer opportunity to buy and hold if you have a long-term horizon.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Adam Spatacco has positions in Eli Lilly. The Motley Fool holds and recommends positions in JPMorgan Chase. The Motley Fool has a disclosure policy.
15 Billion Reasons to Love Eli Lilly Stock Right Now was originally published by The Motley Fool
