It's been a sad year for most investors, at least so far. With the S&P 500 in bear market territory (a drop of 20% or more from its most recent highs) and persistent geopolitical and economic problems, it's not clear that the end of these troubles is in sight. But some equities are doing just fine. Let's look at two examples in the biotech industry: Eli Lilly (LLY 0.69%) and Jazz Pharmaceuticals (JAZZ -1.01%). Are these stocks worth buying today?
1. Eli Lilly
Eli Lilly's stock is up by an impressive 17% since the beginning of the year. While the company has delivered solid financial results, perhaps the forward-looking market is more excited about its prospects.
Lilly's lineup features promising newly approved products, while its pipeline also has exciting programs. In the former category, the company recently earned regulatory approval in the U.S. for Mounjaro, a therapy designed to help type 2 diabetes (T2D) patients with glycemic control.
Lilly will seek approval for Mounjaro to help treat obesity, too. Diabetes and obesity are two serious health conditions that cause millions of deaths worldwide. The economic toll of obesity in the U.S. alone is estimated at more than $1 trillion. There is a dire need for innovative medicines to tackle these two diseases, and Mounjaro could be one.
The company is also working on an Alzheimer's disease treatment called donanemab. Alzheimer's was reported to affect some 5.8 million Americans in 2020 with that number growing, so there is also a need for effective therapies.
Lilly's pipeline also features Basal Insulin-Fc (BIF), an insulin product for those with T2D that could be highly successful if approved. BIF would be administered once a week, whereas T2D patients who need insulin typically take it daily.
The pipeline, including some promising immunology products, is estimated to be worth billions. Last year, the research company Evaluate Pharma estimated Mounjaro's net present value (NPV) at about $22.1 billion, while it put donanemab's NPV at $12.4 billion.
Of course, drugmakers can run into clinical and regulatory headwinds, but Eli Lilly's overall pipeline, with several dozen ongoing programs, will almost certainly record significant wins in the coming years. Meanwhile, the company's existing lineup remains strong, with products whose sales are still growing, including diabetes treatments Trulicity and Jardiance, as well as cancer drug Verzenio and immunosuppressant Taltz.
One worry is the stock's valuation. With a forward price-to-earnings (P/E) ratio of 38.7, it looks pricey compared to the biotech industry's average of 11.2. Eli Lilly might encounter some volatility as a result of its high valuation metrics, but for investors focused on the long game, I believe the company will more than justify its premium over time.
2. Jazz Pharmaceuticals
Jazz Pharmaceuticals' revenue jumped 34% year over year in the first quarter to $813.7 million. While that's very impressive for a biotech company, there is a catch. Last year, Jazz acquired GW Pharmaceuticals, a drugmaker focused on developing medicines based on cannabidiol. The $7.2 billion cash and stock transaction closed in May 2021. During the first quarter of this year, the company's lineup featured products it didn't have during the comparable period of last year.
Even so, assuming the acquisition of GW Pharmaceuticals had closed on Jan. 1, 2021, Jazz Pharmaceuticals' net product sales would have jumped by 7.1% year over year to $809.8 million, still a respectable performance in the industry. More importantly, there are excellent reasons to be optimistic about the company's prospects.
For instance, there is its lineup of newer products such as Xywav, a treatment for daytime sleepiness in narcolepsy and idiopathic hypersomnia patients. There is also the cancer drug Zepzelca; both earned approval in the U.S. in 2020, meaning they won't run out of patent protection anytime soon.
Epidiolex, which Jazz got the rights to when it acquired GW Pharma, still has plenty of potential. It's approved to treat Lennox-Gastaut Syndrome, Dravet Syndrome, and seizures associated with Tuberous Sclerosis Complex. The first two of these conditions are rare types of epilepsy. Epidiolex is also being investigated as a possible treatment for epilepsy with myoclonic-atonic seizures.
The pipeline features many other candidates, and the company plans to launch at least five new products by the decade's end. It is also aiming to record $5 billion in revenue by 2025. By comparison, the company's top line in 2021 came in at roughly $3.1 billion.
Despite its recent strong performances on the stock market, Jazz Pharmaceuticals remains reasonably valued with a forward P/E of 9.1. That's another reason it could continue defying the struggling stock market.
