It isn't difficult to figure out that the market is impressed with Eli Lilly's (LLY 1.65%) prospects. The company has been one of the best-performing biotech giants in the past year, with its shares up by 34% over the trailing-12-month period.
Market sentiments can be wrong, though, so before rushing to press the buy button, it's essential to dig deeper than Eli Lilly's recent stock performance. Is the company's bull case stronger than the bear one? Let's find out.
NYSE: LLY
Key Data Points
The bull case
Eli Lilly is a longtime leader in the diabetes-care market. The company's current portfolio includes several important medicines in this area. One is Trulicity, which helps control blood-sugar levels in type 2 diabetes patients.
Another is Mounjaro, which only earned approval last year but promises to become one of the best-selling drugs in the history of the industry. Mounjaro will have to earn plenty of label expansions for that, and it seems to be on the right track. Earlier this year, it reported excellent results in a phase 3 clinical trial in helping diabetes patients lose weight.
Elsewhere, Eli Lilly is close to other important approvals. Its Alzheimer's disease therapy, donanemab, recently aced a pivotal study. The company should also cross the final regulatory barrier with ulcerative-colitis medicine mirikizumab, although in April it failed to earn approval from the U.S. Food and Drug Administration due to manufacturing issues.
Eli Lilly's exciting late-stage pipeline and portfolio of newer drugs, which also includes the newly launched anti-cancer medicine Jaypirca, is one of the key reasons it has outperformed the market over the past year. And the company's innovative potential is a central aspect of its bull case. There are many more promising programs in Eli Lilly's portfolio.
Eli Lilly generally records steadily growing revenue, earnings, cash flow, and dividends:
LLY Revenue (Quarterly) data by YCharts.
These should continue to grow as the company expands its lineup of products, especially given that the need for lifesaving medicines will only increase as the world's population ages. That's why Eli Lilly might be an excellent buy.
The bear case
Although Eli Lilly's prospects look strong, one of the key arguments against the company is that some of its success might already be baked into its stock price. That's what often happens for corporations with excellent prospects: Investors rush to buy the company's shares, thereby bidding up its price. Eli Lilly's forward price-to-earnings (P/E) and price-to-sales (P/S) ratios look incredibly high:
LLY PE Ratio (Forward) data by YCharts.
That's a forward P/E ratio of over 50 and a forward P/S multiple of around 14. For reference, the average forward P/E for the biotechnology industry currently stands at 15, and a forward P/S multiple is generally considered good when it's under 2. So by these popular valuation metrics, it might be best to avoid Eli Lilly's stock right now.
The company's shares could drop off a cliff if it fails to meet investors' lofty expectations, creating a much better entry point. Or worse, Eli Lilly could fail to maintain its solid performance (or anything close to it) from here on out, making the stock not worth buying right now.
The verdict
Eli Lilly should remain one of the leading biotech companies for a while. That's thanks to its ability to develop newer and better medicines, especially in diabetes care, although it does plenty of great work in other therapeutic fields.
SO although Lilly's shares look expensive, investors willing to hold them for five years or more should still receive excellent returns. The company's reasonable dividend profile makes the stock even more attractive. For patient investors, the bull case for Eli Lilly seems stronger than the bear case.
