One of the biggest investment themes in 2023 stemmed from the popularity of a new class of obesity and diabetes medications -- a market largely dominated by pharmaceutical juggernauts Eli Lilly (LLY 1.19%) and Novo Nordisk (NVO 0.84%).
Novo Nordisk is the developer behind the wildly popular Ozempic, Wegovy, and Rybelsus -- three different formulations of the glucagon-like peptide 1 treatment (GLP-1) semaglutide. The success of Ozempic and its sibling treatments has helped Novo Nordisk acquire nearly 60% of the GLP-1 market.
While Novo Nordisk is currently the undisputed leader among weight management treatments, investors shouldn't sleep on Eli Lilly. The company manufactures semaglutide's top rival, tirzepatide, which it markets as Zepbound and Mounjaro. Moreover, it also enjoys substantial revenues from another diabetes treatment, Jardiance.
Mounjaro has been a smashing success since its FDA approval in May 2022. Through the first nine months of 2023, the drug has generated nearly $3 billion in sales and is Lilly's second largest source of revenue.
Investors have taken note of both Novo Nordisk and Eli Lilly's momentum, as each stock returned over 50% last year -- handily beating the S&P 500.
While both of these pharmaceutical companies carry encouraging prospects, I am more bullish on Eli Lilly in 2024. Let's dig into Lilly's operation and assess if more market-beating returns could be in store.
New kid on the block?
It is important for investors to understand that Ozempic is not explicitly approved for weight loss under guidelines issued by the Food and Drug Administration (FDA). Rather, the medication has an effect that can curb patients' appetite -- thereby making weight loss a byproduct from the treatment. However, Novo Nordisk also develops Wegovy, which has earned FDA approval for weight management in adults with obesity.
Through the first nine months of 2023, Novo Nordisk's obesity care sales increased 174% year over year. This was primarily driven by Wegovy, which grew almost 500% just in the U.S. While it's clear demand for both Ozempic and Wegovy is off the charts, there are reasons to believe that Eli Lilly could quickly catch up.
As of now, Lilly's biggest counter to Ozempic is Mounjaro. Like the treatments developed by Novo Nordisk, demand is so high for Mounjaro that the company is making significant investments in manufacturing to help increase output. This is a clear sign that Lilly should continue reaping huge returns from Mounjaro.
But perhaps even more exciting was the FDA's approval of Mounjaro's sister treatment, Zepbound, back in November. While Zepbound uses the same molecule (tirzepatide) as Mounjaro, this medication is specifically approved for weight management.
This is a major development because now Lilly is equipped with two products looking to take on Ozempic and Wegovy. While the demand for Zepbound is not yet known, the success of Wegovy could serve as a proxy for its potential. Moreover, given how quickly Mounjaro has become a major influence on Lilly's overall business, I am bullish that Zepbound will be a big hit.
While these developments are exciting, investors should understand that Lilly has many more catalysts in its pipeline beyond weight management treatments.
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Eli Lilly's pipeline is impressive
One of the company's more subtle potential catalysts relates to the cancer drug Verzenio. In early 2023, the FDA removed a testing requirement and thereby expanded Verzenio's potential uses for cancer patients. Through the first nine months of 2023, Verzenio sales increased 62% year over year to $2.7 billion -- making it Lilly's third-largest revenue generator.
In addition to weight management and cancer, Eli Lilly's prolific portfolio also includes Taltz -- a treatment for plaque psoriasis and psoriatic arthritis. And lastly, while investors will likely be scrutinizing the performance of Zepbound this year, I'd also keep my eyes on Lilly's Alzheimer's endeavor.
Should you buy Eli Lilly stock?
Eli Lilly operates across a wide spectrum of healthcare needs. That said, the booming demand for weight management products in particular has caused the stock to run up significantly.
The company's forward price-to-earnings multiple of 50.2 is more than double that of the S&P 500, and significantly higher than Novo Nordisk's forward P/E multiple of 32.7.
While the premium the stock carries is a bit rich compared to its primary competitor, I'd argue that the valuation is warranted. Lilly's portfolio of treatments is extremely diverse, and the company is aggressively pursuing several growth markets.
By contrast, Novo Nordisk's recent acquisition spree might suggest that the company is placing its focus on obesity and diabetes at the forefront. Although Novo Nordisk is also showing interest in other areas, including hypertension and kidney disease, it could be a while before these investments start paying off.
In addition to its success in weight management, Lilly's has made robust progress in areas such as plaque psoriasis and it has the potential to reach even further with its Alzheimer's treatments. All of these markets are enormous, and I think the company has more robust near-term prospects than Novo Nordisk. For this reason, despite its high valuation, I think now is a terrific time to begin building a long-term position in Eli Lilly stock by dollar-cost averaging.
