Should Investing in Eli Lilly's Shares be Considered?
While Novo Nordisk's (NYSE: NVO) Ozempic has been the talk of the town when it comes to weight-loss drugs, it's not the only player in this category thriving. Elon Musk, who recently displayed his slimmer figure in a Santa Claus suit on X and dubbed himself "Ozempic Santa," wasn't using Ozempic. Instead, reports suggest he was on board with Eli Lilly's (LLY -1.38%) weight-loss drug, Mounjaro.
Eli Lilly's stock has been on a winning streak over the past few years, largely thanks to its collection of glucagon-like peptide-1 (GLP-1) receptor agonist drugs. The stock is up around 36% this year alone and has seen a massive increase of 506% over the past five years.
With such impressive numbers, the natural question arises: Is the stock still a worthy investment moving forward? Let's explore.
A GLP-1 Powerhouse
Though Ozempic has more popularity, Eli Lilly's Mounjaro and Zepbound have outperformed in clinical trials when it comes to aiding weight loss. Both drugs share the same active ingredient – tirzepatide – but they are approved for different uses. Mounjaro is approved to help adults with type 2 diabetes manage blood sugar levels, while Zepbound is intended for use in obese or overweight adults with at least one weight-related condition, such as type 2 diabetes, high blood pressure, or high cholesterol.
Despite their approved uses, it's not uncommon for non-obese individuals to utilize these drugs for weight loss. Elon Musk, for instance, has been reportedly using Mounjaro, a drug technically intended for type-2 diabetes patients. Off-label use of GLP-1 drugs for weight loss has become increasingly common, contributing to drug shortages and boosting profits for the manufacturers.
A study published this year even discovered that Mounjaro was more effective than Ozempic at promoting weight loss, with similar side effects. The study involved 18,000 participants and found that patients taking Mounjaro were twice as likely to lose 5% of their body weight, 2.5 times as likely to lose 10%, and more than three times as likely to lose 15% when compared to Ozempic patients. After six months, the average weight loss for Mounjaro patients was 10%, while those on Ozempic lost an average of 6%.
However, Novo Nordisk, the makers of Ozempic, have challenged the reported results, stating that the optimal dosage for weight loss with their drug was not disclosed. Mounjaro, on the other hand, seems to be gaining popularity, with Musk expressing his preference for the drug due to its better efficacy and fewer side effects, claiming Ozempic made him "fart and burp like Barney from The Simpsons."
Eli Lilly's GLP-1 drugs have played a significant role in the company's success. Last quarter, Mounjaro revenue nearly doubled year over year to $3.11 billion, while Zepbound contributed an additional $1.26 billion in revenue following its Q4 2023 introduction. Overall, the company's revenue climbed 20%, while its adjusted earnings per share surged from $0.10 a year ago to $1.18. Excluding a divestiture, revenue would have increased 42% year over year.
Looking ahead, Eli Lilly expects revenue growth to accelerate by 50% year over year in Q4, fueled by expanded production capacity and the release of Mounjaro in new international markets. The company has been investing heavily in increasing capacity and demand generation, committing over $20 billion since 2020 to build, upgrade, and acquire manufacturing facilities.
Is the Stock a Buy?
GLP-1 weight-loss drugs make up a significant portion of Eli Lilly's sales and will continue to drive the company's performance in the future. However, it's important to note that Eli Lilly's success isn't solely dependent on these drugs. In fact, its non-incretin drug revenue increased 17% last quarter, excluding dispositions.
Eli Lilly continues to see a vast opportunity, as it works to meet the strong demand for its drugs and expand into new international markets. There have also been calls for Medicare and Medicaid to expand coverage for these drugs within their programs. Zepbound was recently approved for use in obese patients with moderate to severe obstructive sleep apnea, opening up a new market for the drug.
From a valuation standpoint, the stock currently trades at a forward price-to-earnings (P/E) ratio of 35 times next year's analyst estimates, with a price-earnings-to-growth (PEG) ratio of only 0.6. PEGs below 1 suggest the stock is undervalued, making it an attractive investment option.
Eli Lilly isn't without its challenges. Unauthorized sellers have been distributing cheaper variations of GLP-1 medications under a temporary exception, and although Lilly's primary substance was removed from this exception list this month, semaglutide (found in Ozempic) and liraglutide (present in Saxenda) remain on it. This continuation results in comparatively affordable competition.
Firms like Hims & Hers contend they can still produce these customized drugs even after the supply shortage is addressed, as there's a historical precedent permitting the sale of custom-tailored medications that minimize side effects for specific individuals. Hims & Hers utilizes individualized medications across its entire drug assortment, so a legal spat might be imminent.
On the other hand, Lilly has allied with Hims & Hers' rival Ro to propose lesser pricing for Zepbound, aiming to stay competitive with the unauthorized distributors. Although the price range of $400 to $550 per month remains steep, this also suggests the potential for price pressure these drugs may face. Moreover, Musk, who boasts significant political influence, expressed his belief that nothing could improve American health more effectively than offering GLP-1 medications at extremely low costs.
Despite the prospect of resistance against high GLP-1 medication prices, for the moment, this is a stock with substantial growth potential at an appealing valuation. This renders it an appealing investment opportunity.
Given Eli Lilly's impressive financial growth due to its GLP-1 drugs, such as Mounjaro and Zepbound, one might consider investing in the company's stock. The stock has seen significant gains over the past years, with a 36% increase this year alone and a 506% increase over the past five years.
Furthermore, Eli Lilly's GLP-1 drugs have been found to be more effective than Novo Nordisk's Ozempic in promoting weight loss, according to a recent study. Mounjaro patients were found to lose twice as much weight, on average, compared to Ozempic patients after six months. This superior performance could provide a strong competitive advantage for Eli Lilly in the weight-loss drug market.
