Shares of Eli Lilly (LLY -1.00%) recently ticked higher in response to encouraging words from a Wall Street analyst who follows the pharmaceutical industry. Colin Bristow at UBS, an investment bank, thinks this is the most attractive pharma stock you can buy right now.
Is Bristow right about Eli Lilly? Before following any analyst after an upgrade or downgrade it's a good idea to understand why they're making a recommendation in the first place. Let's look at some of the reasons Bristow is excited about this pharma stock and weigh them against the risks.
The biggest reason to buy Eli Lilly stock now
In May, the FDA approved Eli Lilly's new diabetes drug, and analysts expect record-breaking sales. Mounjaro is a weekly injection for patients with type 2 diabetes. It's a first-in-class treatment containing a pair of hormones that control blood sugar called glucagon-like peptide-1 (GLP-1) and glucose-dependent insulinotropic polypeptide (GIP).
Mounjaro's approved to treat type-2 diabetes patients but its ability to reduce overall body mass is going to be an important driver of demand too. During the Surmount-1 trial, the average patient given the maximum recommended dosage weighed 20.9% less after 72 weeks of treatment. Patients in the placebo group lost 3.1% of their weight over the same time frame.
In 2021, the FDA approved a GLP-1 drug from Novo Nordisk (NVO -0.29%) called Wegovy for chronic weight management. This is essentially a higher dosage of the same active ingredient in Ozempic, a drug approved in 2017 to treat type-2 diabetes. Wegovy sales reached $183 million in the first quarter of 2022, then fell significantly to $154 million in the second quarter.
Novo Nordisk blamed production issues for Wegovy's backslide, but the FDA's approval of Lilly's drug during the second quarter could be playing a role, too.
Mounjaro and its dual-hormone mechanism wiped the floor with Wegovy's and Ozempic's active ingredient, semaglutide, during a head-to-head trial leading to Mounjaro's approval. Lilly's drug significantly lowered blood sugar compared to semaglutide and that's not all. The average weight loss recorded among patients given the maximum recommended dose of Mounjaro was 12 pounds more than the group treated with semaglutide.
In the U.S. alone, an estimated 30 million adults are living with type 2 diabetes and many of them could benefit from Mounjaro. With this in mind, Bristow thinks annual sales of Lilly's new drug will climb past $25 billion at its peak.
Another key reason to buy Eli Lilly
Pharmaceutical companies famously get to charge whatever prices the market will bear for their new drugs, but only for a limited time. Compared to other intellectual property rights, drug patents don't last long. As a result, established drugmakers are constantly fighting against sagging sales of older products that lose exclusivity. Eli Lilly looks like a buy now because the patent expirations challenging the company over the next few years will be relatively small compared to the strength of its growth drivers.
At the moment, Lilly's biggest problem is generic competition for Alimta, a lung cancer treatment that first earned approval in 2004. Sales are tanking, but the worst is already over. After falling by more than half this year, Alimta sales are responsible for less than 4% of total revenue. With less pressure from generic Alimta, Lilly could report strong growth in 2023.
Image source: Getty Images.
Know the risks
Mounjaro is widely expected to become a record-breaking blockbuster drug, and much of its value is already priced into Eli Lilly's stock price. The stock is currently trading at 38.5 times forward-looking earnings estimates.
The clinical trial data supporting Mounjaro over Novo's drug used a smaller dose of semaglutide than is currently available in Wegovy. Eli Lilly has already begun a new head-to-head trial with maximum doses of Wegovy and Mounjaro. A less than convincing result for Lilly's drug could lead to swift and heavy losses.
One nice thing about big pharma stocks is that they pay dividends that you get to keep even if the stock tanks. Eli Lilly's dividend program currently offers a 1.3% yield, rising fast. The company raised its quarterly payout by 88.5% over the past five years.
Despite rapid raises, the company only used around 58% of its earnings to meet its dividend obligation over the past year. With rising dividend payments to look forward to, this stock looks like a buy now. Just be sure to place it in a well-diversified portfolio.
