The magic isn’t over yet Eli Lilly (NYSE: LLY). Although the pharmaceutical giant is not performing as well in the second half of the year as it did in the first half, it still has plenty of fuel for growth. In fact, the drugmaker recently received welcome news that shook its stock price.
The bears could be pointing out that Eli Lilly shares still look overpriced: the company’s price-to-earnings (P/E) ratio is over 86 – the average for the healthcare sector is less than a quarter of which at 18.
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Do recent developments make Eli Lilly stock worth investing in, despite its expensive valuation?
Eli Lilly is a leader in the weight loss industry thanks to tirzepatide, which it markets as Zepbound. The drugmaker’s only notable competitor is Novo Nordiskthe creator of Wegovy. These two are old enemies: they’ve been battling for supremacy in the diabetes market for decades. However, given the success of Wegovy and Zepbound, many other companies are looking to challenge Eli Lilly and Novo Nordisk.
One of them is Amgenwhose lead candidate, MariTide, recently reported positive Phase 2 clinical trial data. However, the market was not impressed with MariTide’s performance. The drug led to an average weight loss of up to 20% over 52 weeks in the study of overweight or obese patients, with no weight loss plateau observed.
Amgen did not indicate whether this was a placebo-adjusted result. In a Phase 3 study, Zepbound was associated with an average weight loss of up to 22.5% in patients after 72 weeks, compared to 4.3% in those taking a placebo. MariTide still has a long way to go, but considering that many analysts saw it as one of the most promising challengers to the Eli Lilly and Wegovy duopoly, the fact that it didn’t quite live up to expectations is good news for the current leaders .
There’s more good news for Eli Lilly when it comes to its weight-loss programs. President Joe Biden recently announced a proposal that would bring this class of drugs under Medicare and Medicaid. That would make them accessible to millions of additional patients and potentially increase their sales even further. Eli Lilly would be among the beneficiaries if this measure passes. There is no guarantee that this will happen, but the market is optimistic about this development. Shares of Eli Lilly rose significantly on the news.
Shares of Eli Lilly recently fell after third-quarter results fell short of expectations. The company’s revenue rose 20% year over year to $11.4 billion, while adjusted earnings per share of $1.18 were much higher than the $0.10 reported in the same period last year. Companies with high price-to-earnings ratios must meet higher standards; these results would be excellent for almost any sector pharmaceutical company. Still, the recent news that shook the stock price highlights two crucial points.
First, it will be difficult for anyone other than Novo Nordisk to challenge Eli Lilly in the weight loss market. The company has long been developing breakthrough medicines in adjacent areas and was the first to market in this field. Don’t underestimate the experience that comes with past successes and failures. Eli Lilly still has many weight loss candidates in the pipeline, including one called Triple G because it mimics the action of three different hormones: GLP-1, GIP and glucagon.
Zepbound mimics the action of the first two, and it’s clear how effective it is. Eli Lilly’s next generation weight loss therapy could be even more so. Second, there is significant and likely unmet demand for these drugs. Some people simply can’t afford them, so the prospect of the government helping foot the bill is attractive and could be a new tailwind for Eli Lilly. Beyond the weight loss market, Eli Lilly has plenty of drugs generating solid sales and plenty of attractive pipeline candidates.
These include Kisunla, a recently approved therapy for Alzheimer’s disease; and muvalaplin, a Phase 2 investigational drug that just showed positive results in lowering levels of lipoprotein(a) or LP(a) in adults at high risk for cardiovascular events. LP(a), a type of fat, can significantly cause cardiovascular problems. There is currently no drug approved in the US to lower LP(a), so there is an unmet need here.
Eli Lilly will earn a lot of endorsements and label expansions over the next five years. The company’s sales and profits should continue to grow rapidly, especially as newer products like Kisunla start contributing. Despite the high price-earnings ratio, the drug manufacturer can achieve excellent returns. Investors should still strongly consider buying Eli Lilly stock.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Amgen and Novo Nordisk. The Motley Fool has a disclosure policy.
Eli Lilly just got a bundle of good news: time to buy? was originally published by The Motley Fool
