Why Eli Lilly Stock Is Bolting Higher Today

What happened

Shares of the Illinois-based drugmaker Eli Lilly (LLY -0.98%) were up by 6% on heavy volume as of 1:45 p.m. ET Wednesday.

What sparked this latest rally? Ahead of the opening bell, Lilly announced that its early-stage Alzheimer's disease treatment, donanemab, slowed cognitive decline by a clinically meaningful 35% in a late-stage trial.

By contrast, Biogen and Eisai's Food and Drug Administration (FDA)-approved Leqembi, slowed cognitive decline by 27% in a similar patient group, compared to placebo. That being said, there are key differences in the trials between these two drugs, making head-to-head comparisons impossible at this early juncture. 

So what

With a potential best-in-class clinical profile, Lilly plans on filing for donanemab's FDA approval later this quarter. Wall Street analysts haven't landed on a consensus peak sales estimate for the drug due its shifting clinical profile and changing market dynamics over the past year.

But the market's initial estimate, following this clinical update, seems to be in the area of $5 billion-plus per year. Lilly, after all, gained over $17 billion in market capitalization on this news.

Now, that's not a totally unreasonable estimate, given the dire need for new Alzheimer's disease therapeutics and the enormous size of this largely untapped market. However, there is the risk that the market might be overvaluing donanemab's commercial potential.

What's important to understand is that there is an important safety signal (brain swelling) in these latest clinical data that may hinder the drug's commercial uptake. Full trial results will therefore be critical for investors to mull over once they are available.

Now what

Is Lilly's stock a buy on this news? Even though this top pharma stock sports an uber rich premium, newer growth products like donanemab and the type 2 diabetes medication Mounjaro have the potential to transform Lilly into the world's largest healthcare company by the end of the decade. As a result, Lilly's shares may indeed be worth buying right now.