After booming in the first half of the year, pharmaceutical giant Eli Lilly (NYSE: LLY) has lost some momentum; the company’s shares are down 11% since June 1. However, the healthcare leader still has many fans on Wall Street, including Israel Englander, the billionaire owner of Millennium Management, a hedge fund.
Millennium Management’s stake in Eli Lilly rose 86% in the third quarter. Should you follow Englander’s example and increase your stake in Eli Lilly (or take a position)?
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Since June 1, Lilly has received approval for brand new drugs, including eczema treatment Ebglyss and a potential blockbuster Alzheimer’s drug, Kisunla. It reported several positive data readouts for its new top-selling drug tirzepatide. And the company’s second-quarter results came with an upward adjustment.
So what is the cause of Lilly’s poor performance in the second half of the year? First, the shares look expensive. Eli Lilly’s forward price-to-earnings ratio recently stood at 54.8. The average for the S&P500 is 22, and that of health care is only 17.4.
Eli Lilly has been in trouble for a while, and its stock could face gravity at some point. Some investors have probably already decided to pocket significant profits earlier.
Second, Lilly’s third-quarter results were below expectations. Revenue grew 20% year over year to $11.4 billion. That’s not bad by any means, but it wasn’t enough to impress investors, especially given the company’s valuation. Lilly slightly lowered its full-year 2024 guidance and worsened the situation, sending the stock off a cliff after its last quarterly update.
Eli Lilly may or may not recover by the end of the year. It’s impossible to predict how the stock will do in the next month, or three, or six. But what if we expand our horizons beyond the next five years? Then we have every reason to think that Lilly can achieve market-based returns. Let’s look at just three:
For one thing, the company’s tirzepatide — sold under the brand names Mounjaro for diabetes and Zepbound for weight management — is just getting started. The two brands achieved combined sales of $4.4 billion in the third quarter. Mounjaro was first approved in May 2022 and Zepbound in November 2023.
Excellent data have already been released from late-stage studies for potential new indications for tirzepatide. One of these is to reduce the risk of worsening heart failure in adults with heart failure with preserved ejection fraction and obesity. Tirzepatide also succeeded in Phase 3 trials of preventing diabetes in patients with pre-diabetes who are overweight or obese, and it successfully treated sleep apnea in overweight patients.
Tirzepatide is a dual agonist – it mimics the function of two hormones, GLP-1 and GIP – and its success demonstrates the power of this approach. The sky is the limit if we add other potential indications that have not yet passed the final phase of testing. Analysts weren’t kidding when they said tirzepatide could reach peak sales of $25 billion.
Second, several of Eli Lilly’s newer drugs that aren’t called tirzepatide will ultimately have a meaningful impact within the next five years. Kisunla looks promising, but it’s not the only one. According to some forecasts, the ulcerative colitis treatment, first approved last year, could generate $1.2 billion in sales by 2029.
Third, Lilly will make significant progress in its pipeline in the coming years. One of the promising candidates is retatrutide, a triple agonist. Remember that tirzepatide is a dual agonist. Now Lilly is taking it a step further with retatrutide, which mimics GLP-1, GIP and glucagon; the company calls it “triple G.” The progress of this program could be a tailwind for the company. And it’s certainly not Eli Lilly’s only exciting candidate.
Thanks to the innovative pipeline, the drugmaker’s lineup should look different in five years. That’s something else that will help the stock price rise.
Even with Eli Lilly’s good prospects, you might hesitate to invest in it due to its high price-to-earnings ratio, which seems prohibitively expensive. However, the shares don’t seem that expensive when we put things into context. The forward price-to-earnings ratio reflects the market’s expectations for the company. If it can meet these expectations more often than not, its valuation won’t be much of an issue. In the third quarter, Eli Lilly’s adjusted earnings per share (EPS) rose to $1.18, compared to just $0.10 in the same period a year ago.
Analysts expect earnings per share to grow by almost 72% next year. This isn’t surprising, given the pace of tirzepatide and the fact that several of Lilly’s older drugs are also performing well. The company could keep up as newer drugs take off and tirzepatide earns label expansions. So in my opinion, Eli Lilly is worth investing in, despite its favorable price-to-earnings ratio. I would recommend following billionaire Englander’s lead on this one.
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Prosper Junior Bakiny has no position in any of the shares mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Billionaire Israel Englander Increased His Stake in Eli Lilly During the Third Quarter: Should You? was originally published by The Motley Fool
