Over the past year, Eli Lilly (LLY 1.19%) has impressed investors on almost every front. Financial results have been excellent, clinical progress has been solid, and its stock has crushed the broader market.
If there is one area where Eli Lilly hasn't been close to perfect, though, it's with its planned regulatory goals. Last year, it failed to earn anticipated approval for some new products due to regulatory roadblocks.
Eli Lilly recently ran into another regulatory hurdle that's worth paying attention to as well. What is it and what could it mean for investors?
Donanemab's approval will be delayed
Eli Lilly has been looking to develop an effective Alzheimer's disease (AD) treatment, an area that's been extremely difficult to crack for the entire industry. The company reported positive results from a phase 3 clinical trial for donanemab, an AD candidate, last year, which was followed by a request for regulatory approval in the U.S. and was completed in the second quarter.
The U.S. Food and Drug Administration (FDA) declined to grant accelerated approval to donanemab in January 2023 due to a lack of data from long-term, late-stage studies. (Companies can request accelerated approval for medicines based on clinical data thought to predict efficacy.) If Eli Lilly had earned this nod, it still would have had to seek full approval after directly confirming efficacy in phase 3 studies. So this setback wasn't a big deal.
However, the FDA delayed Eli Lilly's approval once last year. Regulatory action was initially expected by year-end but was pushed back to the first quarter of 2024.
The agency sent more bad news Eli Lilly's way last week. The FDA said it will push regulatory approval beyond the first quarter and convene a panel of experts to discuss the study Eli Lilly used to support donanemab's approval. This isn't a good sign. Most regulatory applications are completed in approximately 10 months. Eli Lilly's will likely run for about a year or more.
Further, the decision to seek the advice of independent experts -- especially when it had not initially said it would -- may indicate the FDA has serious questions and concerns regarding the data.
Even in the worst-case scenario, Eli Lilly will be fine
What should investors make of these developments? Suppose the worst happens, and the FDA doesn't approve donanemab. Would that change Eli Lilly's prospects? It wouldn't. While donanemab would be a nice addition to the company's lineup, the pharmaceutical giant doesn't need it to continue delivering above-average financial results and stock market performance.
Eli Lilly's new crown jewel tirzepatide, marketed as Zepbound or Mounjaro, generated more than $5 billion in sales in 2023, its first full year on the market. It's difficult to overstate how impressive that is. Many drugs never reach annual sales that high throughout their entire time on the market. But things are just getting started for this medicine.
It should earn a number of label expansions in the coming years that will catapult its revenue even higher. That estimated $25 billion in peak yearly sales doesn't seem out of reach. While tirzepatide will be the star of the show for Eli Lilly for the foreseeable future, it will have an excellent supporting cast.
Cancer drug Verzenio is still performing well. New approvals, such as ulcerative colitis medicine Omvoh, will also contribute meaningfully. Further, the drugmaker isn't done innovating. Having made some breakthroughs recently -- both tirzepatide and Omvoh have novel mechanisms of action for the conditions they treat -- Eli Lilly is still going after challenging targets.
In January, it reported highly encouraging results from an early-stage study of a gene therapy for hearing loss. A patient with more than 10 years of hearing loss experienced hearing restoration within 30 days of treatment. It's too early to pop the champagne bottles as there's still a long road ahead. But Eli Lilly is up to something here.
And of course, it still isn't necessarily the case that the FDA won't approve donanemab. In my view, the most likely worst outcome for now would be an FDA request for an additional trial. Donanemab might also earn approval elsewhere -- although the U.S. market is generally the most profitable. Still, Eli Lilly's prospects remain incredibly attractive. Analysts think the company's earnings per share will increase by nearly 51% per year for the next five years.
Even half of that would be incredible for a drugmaker of this size. Eli Lilly's recent regulatory setback is, if anything, an opportunity to buy the stock on the dip.
