Most big pharmaceutical companies struggle to keep one megablockbuster drug in their product lineup. Recently revealed results from an Alzheimer's disease trial suggest that Eli Lilly (LLY -2.02%) could be poised to reap huge gains from not one but two of the world's most valuable new drugs.
We're not the first investors to recognize the potential in Lilly's pipeline. The stock is up 69% since the beginning of March.
Let's weigh the company's recent successes against the challenges it faces to see if buying the stock is a smart move right now.
Alzheimer's disease
Lilly's experimental treatment for Alzheimer's disease donanemab recently produced convincing efficacy results in a big phase 3 trial. According to the integrated Alzheimer's Disease Rating Scale (iADRS), patients chosen at random to receive donanemab exhibited cognitive decline at a rate 35% slower than patients who received a placebo.
Success on the iADRS was the primary endpoint Lilly set out to achieve, but investors have turned their eyes to clinical dementia rating-sum of boxes (CDR-SB) scores. On the CDR-SB test, donanemab led to a 36% slowing of cognitive decline over 18 months. This appears to be much better than Leqembi, a competing treatment from Eisai and its collaboration partner Biogen.
Leqembi earned accelerated Food and Drug Administration (FDA) approval based on its ability to clear amyloid-beta protein fragments from patients' brains. This July, the FDA is expected to grant Eisai's drug traditional approval based on a phase 3 trial in which CDR-SB scores declined 27% slower than the placebo group.
Leqembi and donanemab were tested on different patient populations, so any cross-trial comparisons need to be taken with a grain of salt. That said, it looks like Lilly's treatment has the upper hand in a space that could be incredibly lucrative. An estimated 6.7 million Americans age 65 and older are living with Alzheimer's dementia, according to the Alzheimer's Association.
Chronic weight management
While we wait for the FDA to approve donanemab for Alzheimer's disease, a drug already greenlit for type-2 diabetes is growing sales at a mind-bending pace. It's been a little less than a year since Mounjaro earned its first approval from the FDA, but it's already a bonafide blockbuster. First-quarter sales came in at a whopping $569 million, and it's just getting started.
Mounjaro activates the same GLP-1 receptors as Ozempic and Wegovy from Novo Nordisk. It's also the first to act on related GIP receptors, and this distinction appears to make a big difference when it comes to weight management.
In the trial leading to its approval for type-2 diabetes, investigators compared Mounjaro to semaglutide, the active ingredient in Ozempic and Wegovy, and the results were startling. Patients treated with Mounjaro lost 27 more pounds than the group given a standard form of insulin, and 12 more pounds than patients given semaglutide.
In April, Eli Lilly reported successful results of a phase 3 trial with Mounjaro that showed it led to weight reductions of 15% or greater for 48% of adults with obesity who received it. Weight reductions of 15% or greater were measured among just 2.7% of patients who received a placebo.
The company will finish submitting its application to the FDA any day now, if it hasn't already. This means an approval decision could come before the end of 2023.
I've seen peak sales estimates for Mounjaro as high as $48 billion annually. This seems extreme, but even the lower estimates assume it will break records.
The bad news
Expectations for Eli Lilly are already really high. The stock currently trades at 67.5 times trailing-12-month earnings. At this nosebleed-inducing multiple, the stock could tank if investors get the impression that the bottom line can't expand at a rapid pace for at least the next several years.
Eli Lilly's a big pharmaceutical company made of many moving parts, and some of those older parts are headed in the wrong direction. For example, first-quarter sales of Humalog, its mealtime insulin product, fell 25% year over year to $460 million.
Lilly's largest revenue stream at the moment is a diabetes treatment called Trulicity, which generated a whopping $2 billion in sales during the first quarter. Key patents protecting Trulicity's market exclusivity in the U.S. expire in 2027. Lecanemab and Mounjaro have a lot of potential, but overcoming losses from Humalog and Trulicity will still be a challenge.
I'm fairly confident about Mounjaro's future, but donanemab's is still a little hazy. Amyloid-related imaging abnormalities (ARIA) are a known side effect of treatments like donanemab. While Lilly's latest Alzheimer's data showed strong efficacy, there were two patient deaths attributed to ARIA during the trial.
Mounjaro and donanemab have a lot of potential, but meeting the expectations its nosebleed-inducing valuation implies is a long way from guaranteed. It's probably a good idea to remain on the sidelines until we know more about Lilly's Alzheimer's disease candidate.
