Just about every evening when I sit down for dinner and turn on the television, a series of commercials with catchy jingles grabs my attention. It's always the same ads, each promoting a treatment from a pharmaceutical company. The most recognizable commercials at this point are for Ozempic and Rybelsus, both of which are weight-loss supplements developed by Danish drug company Novo Nordisk.

However, Novo Nordisk isn't the only pharmaceutical company dominating the airwaves. Ozempic's top rival medication is Mounjaro, which is developed by Eli Lilly (LLY 2.03%). While it's only been commercially available for about a year, Mounjaro has been a smashing success. The multibillion-dollar drug has been a major catalyst helping Lilly's stock rise over 60% so far this year, more than triple the return of the S&P 500.

Even though its stock has had quite a run throughout 2023, the company just received a major approval from the Food and Drug Administration (FDA) that makes scooping up some shares now look compelling. Let's break down what Eli Lilly has in its pipeline and thoroughly assess its valuation. It may be that Mounjaro's party is just getting started, and that the long-term prospects for Lilly look too good to pass up.

Big news from the FDA

As it stands today, Mounjaro is Eli Lilly's best answer to Novo Nordisk's Ozempic and Rybelsus. While the latter two belong to a class of medications called glucagon-like peptide-1 (GLP-1) agonists, mimicking the GLP-1 hormone that lowers blood sugar and helps people feel full, Mounjaro belongs to a similar class of medications called dual GLP-1/GIP receptor agonists.

Per Novo Nordisk's latest earnings report, its one-two punch of Ozempic and Rybelsus has helped the Danish pharmaceutical giant acquire almost 60% market share for GLP-1 treatments. Its wildly popular medications Wegovy and Saxenda have provided it with a strong position in the obesity market as well. Given the Danish company's deep and prolific portfolio, you might think Eli Lilly is stuck in a perpetual game of catch-up. But I'd encourage you to think again.

In early November the FDA granted Eli Lilly approval for its obesity drug Zepbound. Like Mounjaro, Zepbound is a medication built around the ingredient tirzepatide. The primary difference is that Mounjaro is sold for diabetes while Zepbound is approved for obesity. But given that each drug contains the same primary ingredient, Mounjaro and Zepbound are sister drugs.

The approval from the FDA is an absolute game changer for Eli Lilly. Let's explore how the addition of Zepbound to its portfolio could serve as the next growth pillar for the company.

A doctor with a notepad sits with a patient who's holding a bottle of pills.

Image source: Getty Images.

How big could this be for Eli Lilly?

To get a sense of how successful Mounjaro has been for Eli Lilly, let's take a quick look at the company's third-quarter earnings report. Total revenue of $9.5 billion represented an increase of 37% year over year. Mounjaro generated $1.4 billion in sales during the quarter, compared to $187 million in the prior-year period. Through the first nine months of 2023, Mounjaro's total revenue is just shy of $3 billion, accounting for roughly 12% of Lilly's total sales so far this year. Since the drug's formal approval by the FDA last May, it's ballooned into a multibillion-dollar revenue stream for Eli Lilly.

While Mounjaro's results so far shed some light on its popularity and positive reception overall, you might be wondering when sales growth will peak or begin to plateau. According to research analysts at Morgan Stanley and Barclays, the weight-loss drug market could range anywhere from $77 billion to $200 billion by 2030. With Zepbound now complementing Mounjaro, it seems that Eli Lilly has unlocked a major opportunity to gain momentum in that market. As my fellow Fool Keith Speights recently wrote in an article on the potential of both drugs, some analysts on Wall Street are calling for their total revenue to reach almost $70 billion per year.

Regardless of what Wall Street believes, it's important to consider a couple of risk factors. First, executives at both Novo Nordisk and Eli Lilly have made it clear that demand for weight-loss supplements is off the charts. While this seems great on the surface, you should keep in mind that matching supply and demand can be a costly, and daunting, task. Both companies have told investors to brace for rising manufacturing and research and development (R&D) costs in the near term.

While the increase in costs will probably be offset by accelerating revenue to some degree, it's highly likely that operating margins and profits will take a hit. However, the trade-off to these investments is that Eli Lilly is doing what it needs to in order to increase output and fulfill demand for the long term. By doing so, the company is laying the groundwork to reach or exceed revenue forecasts.

Is Eli Lilly stock a buy?

Assessing pharmaceutical stocks can be pretty challenging. As with technology companies, investors can become overzealous and place too much of a premium on a stock based on future growth catalysts. And for a company such as Eli Lilly, the addition of Zepbound to its portfolio is just one of many potential new revenue streams. For example, its breast cancer drug Verzenio is another multibillion-dollar revenue source that could just be getting started.

LLY Revenue Estimates for Next Fiscal Year Chart
LLY Revenue Estimates for Next Fiscal Year data by YCharts.

The chart above illustrates rising forecast revenue and earnings per share (EPS) consensus estimates for Eli Lilly in 2024. Should the company achieve the current revenue target, it would represent roughly 15% growth over the projected 2023 total of $34 billion.

Regarding EPS growth, note that management adjusted Eli Lilly's earnings estimates downwards during its Q3 call. The primary reason for the change to EPS targets is a series of acquisitions the company made. Acquisitions often come with hefty nonrecurring costs, including legal and banking fees, as well some redundant headcount and operating expenses. Nonetheless, as Eli Lilly integrates these new companies into its own operation, it should be able to generate ample savings in the form of synergies and new revenue streams.

LLY Total Return Level Chart
LLY Total Return Level data by YCharts.

The chart above shows that the stock's total return over the last decade is in excess of 1,000% -- far above Lilly's peers, including Novo Nordisk, Pfizer, AstraZeneca, and Sanofi. To me, it clearly illustrates that owning Eli Lilly over the long term has been a good idea.

I believe the revenue target for 2024 could very well be conservative; it's hard to know just how much Zepbound will impact Eli Lilly's top line. Moreover, should the drug prove as successful as Mounjaro, its revenue acceleration could help fund the company's stated near-term investments in R&D.

The big theme to keep in mind here is that weight-loss supplements are in high demand, and the total addressable market is enormous. Moreover, as treatments in Eli Lilly's other categories begin to gain momentum, it's tough to imagine a scenario whereby the company's growth stalls anytime soon.

If you're a long-term investor, I think now is the time to begin dollar-cost averaging into a position. Eli Lilly is a proven multibagger, and you might regret not buying the stock before Zepbound and other medications really kick into gear.