Eli Lilly (LLY 1.19%) has been on an epic run of late. Thanks to the excitement over its Alzheimer's disease and weight-loss assets, Lilly's shares have clobbered the broader markets over the past three years. There is a downside associated with Lilly's meteoric rise, however. The company's stock is now trading at over 52 times projected earnings, making it the most expensive big pharma stock right now.
Can Lilly's shares churn even higher, or is it time to take profits? Let's dig deeper to find out.
Lilly's strengths, weaknesses, and outlook
Lilly is a well-built fortress. The company's above-average spend on research and development has created one of the industry's deepest and most robust pipelines.
Lilly's pipeline and external-development efforts have brought several new growth products to market in recent times, such as diabetes drugs Mounjaro, Jardiance, and Trulicity, along with Taltz (a psoriasis drug) and Verzenio (a breast cancer drug). Its late-stage pipeline is also brimming with blockbuster candidates like lebrikizumab (atopic dermatitis), mirikizumab (immunology), and donanemab (Alzheimer's). Lastly, Lilly's recent $1.9 billion acquisition of Versanis Bio could cement its position as a leader in the lucrative weight-loss care market.
Like all big pharmas, Lilly has to deal with the loss of product exclusivity stemming from the expiration of key patents. Right now, the drugmaker is navigating generic competition for the top-selling cancer drug Alimta. Lilly is also feeling the sting of lower realized prices from diabetes meds Humalog and Trulicity. What's more, its top-line results have been negatively impacted by declining demand for COVID-19 solutions in recent quarters.
A battle is thus unfolding between Lilly's legacy products and newer growth products. Fortunately, the drugmaker's arsenal of newer products is expected to ultimately shine through from a top-line perspective despite these patent and pricing headwinds.
On the outlook front, though, Lilly is still a bit of a mystery. The extreme level of competition in the all-important weight-loss market makes it nearly impossible to make any long-term predictions right now. Lilly's recent acquisition in the space could give it a best-in-class drug. But Novo Nordisk, Amgen, and Pfizer are all likely to counter in some manner.
So, until the question of competitive positioning is resolved, it's arguably a bad idea to make any quantitative calls about Lilly's estimated revenue growth over the balance of the decade. Weight loss, after all, is highly likely to be the company's core growth driver for the next decade and a half. Speaking to this point, weight-loss meds might account for over 60% of the big pharma's annual revenue by the middle of the next decade.
Verdict
Is Lilly stock still a buy after this hefty run-up? That's a hard call. As things stand now, Lilly could own an outsized portion of the enormous weight-loss market by the decade's end. If true, Lilly's shares may have a fair amount of upside remaining. If a competitor outflanks Lilly in weight loss, however, the company's shares would likely shed a significant amount of their premium. So, all things considered, it might be best to look elsewhere for a more compelling growth opportunity.
