Shares of Eli Lilly (LLY 1.19%) have climbed an incredible 44% since the end of February. Optimism for its weight-management franchise is heating up, but maybe it's a little too hot already.
Is this pharmaceutical industry giant still a good stock to buy? Let's measure its strengths against its weaknesses to find out.
Reasons to buy Eli Lilly now
Last May, Mounjaro earned its first approval, and it's already on pace to deliver $3 billion in revenue this year. That's all the more impressive when you consider that it's only approved to treat patients with type 2 diabetes.
Mounjaro isn't officially a weight-management drug yet, but that could change soon. During the Surmount-2 study, it reduced body weight by 15.7% on average for type 2 diabetes patients. The U.S. Food and Drug Administration is reviewing an application that could make Mounjaro a new weight-reduction treatment option by the end of 2023. Given the successful results supporting that application, a positive approval decision seems likely.
Competing with Novo Nordisk (NVO 0.84%), which markets Ozempic and Wegovy, won't be easy, but Lilly has a plan. Mounjaro is just just one piece of a much larger goal to dominate the market for anti-obesity treatments. Lilly's weight-management program recently took a big step forward with an announcement it would acquire Versanis Bio for $1.9 billion in cash.
Versanis Bio's only clinical-stage asset is an antibody called bimagrumab that blocks activin and myostatin signaling. These are key regulators of muscle metabolism, so inhibiting them could help patients maintain muscle mass while losing weight.
In addition to the red-hot market for weight-management treatments, Lilly could become a leading provider of Alzheimer's disease drugs in the years ahead. This May, the company showed that its experimental treatment, donanemab, reduced patients' rate of cognitive decline by 35% compared to a placebo.
Despite rapidly declining sales of its COVID-19 treatment, Lilly expects earnings to soar 20% this year to $8.28 per share at the midpoint of management's guided range.
Reasons to remain cautious
The biggest problems with Eli Lilly stock right now are the expectations other investors have placed on it. The stock currently trades for 51.75 times forward-looking earnings estimates.
New treatments for weight management and Alzheimer's disease could be big growth drivers for Lilly, but there are no guarantees. One thing we can be certain about, though, is declining sales of aging products once they lose patent-protected market exclusivity. For example, first-quarter sales of Humalog, a fast-acting insulin injection, slid 25% year over year because has to compete with lower-cost biosimilar versions.
Humalog isn't the only former blockbuster drug in Lilly's product line losing to new competition. First-quarter sales of Alimata, a cancer treatment that lost exclusivity in 2022, plummeted 83% year over year to just $58 million.
Image source: Getty Images.
A buy now?
The most important thing investors need to remember about businesses like Eli Lilly is that they constantly need to develop new blockbuster drugs. Key patents that protect exclusivity are generally good for just 25 years from the date of a new molecule's discovery. It isn't unusual for new drugs to spend half this time in the testing stage before they ever have a chance to generate sales.
The short-lived nature of drug patents makes spending more than 50 times earnings expectations on Eli Lilly or any pharma stock seem like a bad idea. New treatments for Alzheimer's disease and weight management could be huge blockbusters, but they'll need to offset a huge upcoming loss expected several years from now.
Eli Lilly's top-selling treatment at the moment, Trulicity, generated nearly $2 billion in sales during the first three months of 2023. Unfortunately for Lilly, Mounjaro could cannibalize Trulicity sales, and upcoming patent expirations could begin applying even more pressure beginning in 2027.
If drug patents didn't expire, Lilly would be a screaming buy even at its elevated valuation. Incoming exclusivity losses, though, make this a stock to keep on your watchlist instead of your shopping list.
