Alzheimer's is a debilitating disease that affects roughly 1 out of every 3 seniors within the US. Current treatments fall desperately short of being able to effectively treat the disease. Eli Lilly (LLY +0.70%) has a drug candidate in late stage clinical trials and is pushing toward FDA approval. However, a recent Medicare decision about a similar drug could leave Lilly poised to disappoint the market's high expectations.
Medicare moves the goalposts
On April 7, Medicare officials decided to only cover Biogen's controversial Alzheimer's drug Aduhelm for people enrolled in clinical trials. This decision potentially extends to drugs under development by both Lilly and Roche, which aim to treat Alzheimer's through the same biological target that Biogen's pursuing. Medicare now insists that those drugs can't just act on that target – they have to actually slow the disease's progression. Lilly's previous, early stage clinical trials on its Alzheimer's drug donanemab have missed that mark, which bodes poorly for Lilly's ongoing late-stage trials.
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Donanemab has the highest peak sales estimates of any drug in Lilly's pipeline, with Morgan Stanley analysts previously predicting $3 billion in revenue in 2030. Unfortunately, this revenue may shrink if insurance companies decide to limit coverage on their treatment.
Lilly remains a highly profitable company, and its robust pipeline may compensate for disappointing results in the Alzheimer's space. In fact, the market may already be primed for poor performance there. Lilly's management admitted during its most recent earnings call that it expects low revenue for donanemab through the first half of 2023. Biogen's struggles certainly leave the door open for other treatments if they can demonstrate greater efficacy.
Pricey valuation demands solid pipeline performance
Bolstered by a robust product pipeline and strong recent revenue growth, Lilly's stock has almost tripled over the past three years. Its P/E ratio now stands at 48, well above key pharmaceutical competitors. Within the Alzheimer's space alone, Biogen (BIIB 1.71%) has a P/E of 21 and Roche (RHHBY +2.21%) has a P/E of 22. While Lilly's revenue growth has certainly been strong, averaging about 10% annually over the past three years, it has not significantly outpaced competitors' growth.
Lilly's high P/E suggests the market feels confident about this pharmaceutical stock's overall future growth prospects. Forecasts predict 8% revenue growth in 2023 as Lilly starts to see the effect of bringing their impressive pipeline from late-stage development into the market. However, its longer-term growth prospects do hinge upon the performance of these new treatments in the marketplace.
The final results from donanemab's ongoing clinical trial will not be available until mid–2023, but preliminary readouts should give some indication of performance. To gain the confidence of patients taking the drug, physicians prescribing it, and insurance companies covering it, Lilly's drug must fight Alzheimer's better than Biogen's did.
