Animal health company Zoetis (ZTS 3.30%) and pharmaceutical giant Eli Lilly (LLY 1.19%) are healthcare companies that are off to solid starts this year, with Zoetis' shares up more than 30% and Lilly seeing a 23% rise to start the year. Despite their relatively high valuations, I think both companies make solid long-term choices for increasing wealth, thanks to market tailwinds for both.
Zoetis' growth is off the chain
Zoetis has been around for 70 years. The company's products cover everything connected to livestock and companion animals, including diagnostics, vaccines, and medicines. The company has more than 300 product lines, including 15 with revenue of $100 million or more last year.
I like the company's long-term prospects because a growing worldwide population is creating a greater need for animal protein, making Zoetis' products more important, and our increasing willingness to spend on pets will drive demand as well.
The company's stock is trading at nearly 43 times earnings, certainly not cheap. But that premium is because it has so consistently delivered, increasing annual revenue and earnings per share (EPS) for seven consecutive years.
Looking at the company's guidance for this year, it anticipates revenue between $8.575 billion and $8.725 billion, up 6% to 8%, as well as EPS of between $5.03 and $5.14, compared to $4.49 in 2022.
The company also offers a dividend that, while only yielding 0.9%, has been boosted each year by double-digit percentages for the past six years. This year, Zoetis increased its dividend by 15% to $0.38. Over the past decade, it has boosted its dividend by 476.9%.
Even with those increases, its payout ratio is only 30%, so the hikes should continue -- a positive for income-oriented investors.
Lilly is big and looking to get even bigger
Earlier this summer, Eli Lilly surpassed the market capitalization of Johnson & Johnson to become the largest pharmaceutical company for the first time since 1997. While Johnson & Johnson has since risen above Eli Lilly again, Lilly has had tremendous growth over the past three years. It trades at a relatively pricey 73 times earnings, but that's because there doesn't seem to be much standing in the way of solid growth ahead.
LLY market cap data by YCharts.
The company has been on a buying binge lately. It just extended its $2.4 billion tender offer to purchase Dice Therapeutics, a clinical-stage biotech that focuses on chronic autoimmune and inflammatory diseases. This comes on the heels of the company's planned $1.9 billion purchase of Versanis Bio, a private company whose lead therapy is bimagrumab, an obesity treatment.
Lilly is able to afford these acquisitions because the company is seeing increased revenue, thanks to the sales of its diabetes drugs, led by type-2 diabetes therapy Trulicity, which had $1.98 billion in first-quarter sales, up 14% year over year. And Mounjaro had $568.5 million in first-quarter sales and could be approved also as a weight-loss drug as early as the end of this year. Lilly also has type-2 diabetes drug Jardiance, which brought in $577.5 million in the first quarter, up 38% over the same period last year.
In a phase 3 trial, patients given Mounjaro lost up to 52 pounds over 72 weeks, and 63% of the participants lost at least 20% of their body weight. This has led to some doctors prescribing the medication off-label for weight loss. Mounjaro's greater efficacy than other approved GLP-1 inhibitors puts Lilly in a strong position in pricing the drug. GlobalData analysts say that the medication is set to be the world's top-selling obesity treatment.
Mounjaro was approved by the Food and Drug Administration (FDA) just last May as a type-2 diabetes treatment and had nearly $500 million in 2022 sales, which have been so brisk this year that the company has often had a difficult time keeping up with demand.
Trulicity, Mounjaro, and Jardiance are blockbuster drugs, but Lilly's breast cancer drug Verzenio, autoimmune-disorder therapy Taltz, and fast-acting insulin therapy Humalog are also expected to have more than $1 billion in sales each this year, based on their first-quarter figures.
On top of that, Lilly has another therapy with blockbuster potential. It hopes to gain FDA approval for donanemab as an Alzheimer's treatment by the end of the year. On July 17, the company said it had applied for full FDA approval after three positive phase 3 trials in which it slowed the progression of Alzheimer's by 40% to 60% in patients in the early stages of the disease. The drug is expected to be pricey, costing patients and their insurers about $26,500 a year.
Lilly has also increased its quarterly dividend by 15% this year to $1.13, the ninth consecutive year it has increased it, and the sixth straight double-digit percentage increase. The yield is only 0.93%, but with a payout ratio of 64% and with revenue likely to grow, the increases should continue.
