It's no secret that the broader stock market has been under pressure lately, but many of its issues have to do with marketwide worries, including impending interest-rate hikes in the U.S. However, some companies are facing headwinds of their own that could lead to even more losses in the coming weeks.
Let's look at a healthcare company that recently got bad news from regulators: Eli Lilly (LLY 0.28%). This drugmaker fell along with the market in recent months, and it could continue to be vulnerable in the short term following recent developments.
The bad news
On Jan. 24, the U.S. Food and Drug Administration (FDA) announced that it was updating the emergency use authorization granted to several coronavirus treatments. The agency felt the need to do so since the omicron variant now accounts for most new cases of COVID-19 in the U.S., and some existing therapies are unlikely to work against this newer and more contagious variant.
The FDA specifically targeted bamlanivimab and etesevimab, marketed by Eli Lilly, and REGEN-COV, owned by Regeneron Pharmaceuticals. The healthcare regulatory agency decided to limit the use of these treatments to patients they're likely to work on -- that is, cases of COVID-19 that may have been caused by a variant other than omicron. Here's what this could mean for Eli Lilly.
Should investors give up on Eli Lilly?
During the nine months ended Sept. 30, Eli Lilly racked up about $1.2 billion in revenue from its coronavirus therapies -- 80.7% of which it generated in the U.S. Given the FDA's recent announcement, and considering there are now very few U.S. cases of COVID-19 that aren't due to omicron, it seems likely that Eli Lilly's sales from bamlanivimab and etesevimab will drop substantially as competing COVID-19 therapies pick up the slack.
Eli Lilly generated $20.3 billion in revenue in the first nine months of 2021, up 19% from the year-ago period. Its COVID-19 unit accounted for roughly 5.8% of its total revenue. Without its COVID-19 antibodies, Eli Lilly's top line for the period ended Sept. 30 still would have increased an impressive 12%.
In other words, the FDA's decision is hardly a death sentence for the pharma giant. But there's another reason to worry about this company: valuation. Eli Lilly's current forward price-to-earnings (P/E) ratio is 28.6. Meanwhile, the S&P 500's average forward P/E is 22.4, and the average for the pharmaceutical industry is a much lower 12.9.
Eli Lilly could be susceptible to heightened volatility in the near term. Companies that seem overvalued often fall harder than the broader market in cases of market-wide worries.
Reasons for optimism
But if we look past the short term, Eli Lilly remains an excellent stock to buy and hold for a long time. The company boasts an exciting lineup of products, including diabetes medicines Trulicity and Jardiance as well as immunosuppressant Taltz, among others.
In the first nine months of 2021, sales of Trulicity clocked in at $4.6 billion, 28.7% higher than the year-ago period. Revenue from Jardiance jumped by 26% year over year to $1.1 billion, and Taltz's sales increased 21% to $1.6 billion. Eli Lilly does also have other growth drivers, including cancer medicine Verzenio.
Not all of Eli Lilly's products are seeing their sales increase. In the nine months ended Sept. 30, the company's revenue from cancer medicine Alimta dropped about 3% year over year to $1.6 billion, largely due to generic competition.
The good news, though, is that Eli Lilly boasts a solid pipeline; it has several potential blockbusters ahead that should smooth out the losses brought about by patent expirations and other factors. These include tirzepatide, a glucagon-like peptide 1 (a type of drug that helps type 2 diabetes patients produce the optimal amount of insulin) that could earn approval this year. There is also a potential therapy for Alzheimer's disease called donanemab, and an investigational once-weekly insulin product for people with type 2 diabetes called Basal Insulin Fc.
Overall, Eli Lilly boasts dozens of ongoing programs. There's little doubt about the company's ability to expand its revenue base with new products or additional indications to existing products. While the recent FDA decision will undoubtedly cause some revenue losses -- and even though Eli Lilly's shares look richly valued right now -- for investors focused on the long game, the company remains an attractive pharma stock.