Eli Lilly (LLY 1.19%) is in the headlines all the time now, thanks to its latest blockbuster drugs for diabetes and obesity. And with more attention being paid to the company's successes, it's no surprise that hype is building about its future performance as an investment.
As smart investors know, it's a losing strategy to buy a stock right when its slate of opportunities is about to narrow. But it's also easy to miss out on growth by staying on the sidelines. Let's untangle the question of whether or not it's too late to make money buying this stock.
Shares are getting quite pricey
There are a couple of reasons why it might be too late to invest in Eli Lilly, starting with its high valuation.
Simply put, this isn't a stock for traditional value investors like Warren Buffett. Eli Lilly's shares are priced at a premium, with a trailing 12-month price-to-earnings (P/E) multiple of 116. For the sake of comparison, the average P/E of public pharmaceutical companies is 19. The market has very high expectations for this company, which may be nearly impossible to satisfy. And that supports the argument that it's too late to buy the stock, as those who invest today are more likely to experience lower returns.
Wall Street analysts, on average, are predicting that Eli Lilly's diluted earnings per share (EPS) in 2024 will total around $12.43 -- nearly double their consensus estimate of $6.31 for 2023. But why are those expectations so high? Two words: Mounjaro and Zepbound.
As you've probably heard, Mounjaro is Eli Lilly's smash-hit medicine for type 2 diabetes, and Zepbound is another formulation of the same molecule, indicated for treating obesity. Both products are selling so quickly that they're flying off the shelves of pharmacies, to the point of creating a shortage in the U.S. To address that issue, the company invested more than $3 billion in expanding its manufacturing sites last year, and it's currently in the process of doubling its output capacity.
With so much discussion of how well the pair of drugs is selling, it's no surprise that Eli Lilly's shares now trade at a hyped premium. Zepbound alone could bring in between $2 billion and $3 billion in sales this year, with supply constraints likely a larger barrier to adding revenue than consumer awareness.
Such a situation almost never happens in biopharma, and it's unlikely to happen to this business again anytime soon, so new shareholders could be setting themselves up for disappointment when the hype recedes over the next couple of years.
This one has plenty more room to run
It's indeed likely that Eli Lilly's ongoing top- and bottom-line growth have already been priced in by the market. But there's also a strong possibility that the market is actually underestimating how much money Eli Lilly will make in the next few years. Here's why.
Mounjaro and Zepbound are sure to make billions of dollars in their current iterations. But they're also being actively developed for additional indications that could expand their addressable markets even further. The molecule that the two products are based on is in ongoing phase 3 clinical trials. If it's proven effective at treating conditions like sleep apnea and certain kinds of cardiovascular disease in the context of diabetes and obesity, the impact to revenue could be significant and positive.
Meanwhile, phase 2 trials are investigating whether the same molecule might be useful to treat non-alcoholic steatohepatitis (NASH), another indication that would be highly lucrative to treat. And that's not even considering the other potential high earners in Eli Lilly's late-stage pipeline, like its Alzheimer's candidates, oncology therapies, and its program for Crohn's disease.
Finally, perhaps the biggest reason it's not too late to buy this stock is that Eli Lilly isn't in stasis. The longer you hold your shares, the longer the company will work hard to expand itself and pass the extra earnings on to you. Of course, if you prefer to only hold the stock for a couple of years, there's a solid chance that you'll be shortchanged by its high valuation or temporarily slowing growth.
Still, the growth drivers of today and tomorrow won't be the only ones this pharma comes up with, and it already has a long history of successfully innovating where it's the most profitable to do so. There are cheaper investments out there, but if you're patient, in due time you'll find that it wasn't too late to buy Eli Lilly today.
