When it comes to diabetes treatments and weight-loss supplements, two companies come to mind: Novo Nordisk and Eli Lilly (LLY 1.19%). If you aren't familiar with these companies by name, perhaps you've seen commercials for the medicines Ozempic, Rybelsus, Jardiance, and Mounjaro. All four of these drugs were developed by either Novo Nordisk or Eli Lilly.
While Novo Nordisk currently dominates the weight-loss-supplement market, Eli Lilly might not be far behind. By specifically focusing on Mounjaro, investors may come to see that Eli Lilly has potentially unlocked its next catalyst.
What is Mounjaro?
In May 2022, the FDA approved a diabetes injection developed by Eli Lilly called tirzepatide. While that is the formal name for the treatment, the company commercially sells the drug under the name Mounjaro. The drug is specifically used to treat type 2 diabetes and is not meant to be a weight-loss medicine. Well, not yet, at least.
Back in October, the FDA approved a Fast Track request by Eli Lilly to assess whether tirzepatide could be treated for obesity in adults. In late July, the company announced results for two phase 3 trials titled SURMOUNT-3 and SURMOUNT-4, which focused on tirzepatide as a potential treatment for obesity. Per the studies, "participants on tirzepatide following intensive lifestyle intervention or with continued tirzepatide treatment, achieved up to 26.6% mean weight loss, for the efficacy estimand."
Since the Fast Track designation went into effect, it's clear that Eli Lilly has been serious about getting tirzepatide approved for weight-loss treatment, and the studies above indicate that the drug has showcased some encouraging signs.
Image source: Getty Images.
How popular is the treatment?
While it is interesting to read about Mounjaro and its potential, investors should look to Eli Lilly's financial results to get a sense of how well the drug is performing. To get a sense of how popular Mounjaro is just in the United States, consider that 93% of Q2 revenue for tirzepatide was from domestic sales.
For the quarter ended June 30, Mounjaro generated $980 million in revenue. Now, given Mounjaro's approval in May 2022, making a year-over-year comparison isn't totally fair. Nonetheless, the takeaway here is that Eli Lilly has turned Mounjaro into a multibillion-dollar revenue stream over the last year.
Considering that Mounjaro is currently only marketed toward patients with type 2 diabetes, it's entirely possible that it could be a game-changer for Eli Lilly if it is further approved for additional treatments such as weight loss.
Should you buy the stock?
The chart above shows that Eli Lilly stock is up 55% year to date. It isn't hard to see that the company witnessed some pronounced trading activity in July and August. My hunch is that, given the results of the phase 3 tirzepatide trials coupled with a solid earnings report, the stock got bought up.
LLY P/S Ratio data by YCharts.
Another useful metric to look at when assessing valuation is price-to-sales (P/S). Investors can see that Eli Lilly's P/S ratio of 17 is about two full turns higher than competitor Novo Nordisk. However, for most of 2023, the company was trading at a P/S ratio either lower or essentially in line with Novo Nordisk. It wasn't until the release of the phase 3 trial indications and second-quarter earnings that Eli Lilly's valuation began to soar.
While the stock is trading near highs, this is likely driven by some momentum that has entered the picture. For this reason, the effects of Mounjaro's potential approval for weight loss could be partially priced into the stock. But even so, I think a prudent approach could be for investors with a long-term time horizon to initiate a small position now. Subsequently, dollar-cost averaging into the stock over time can help build a larger position while also lowering your cost basis.
