Pharmaceutical maker Eli Lilly (LLY +0.79%) has seen its share price rocket higher by over 500% over the past five years. That stands in stark contrast to a roughly 20% advance for competitor Merck (MRK +1.29%) and a nearly 30% decline for Pfizer (PFE 1.42%). There's one very big story supporting Eli Lilly's stock price advance, but investors need to consider some drug industry facts before they invest today.
What separates Eli Lilly from the pack
The big news over the past five years for pharmaceutical giant Eli Lilly was its weight loss drug success. It has a leading position in the new class of drugs known as GLP-1 inhibitors. This is a very big deal, given the prevalence of obesity and the ongoing health risks faced by people struggling with their weight. On top of that, there's a beauty angle here that can't be ignored, which further expands the market for GLP-1 drugs.
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That said, there are some key things to keep in mind when you consider any drug maker. For example, finding, developing, and marketing new drugs is very costly. Also, every drug maker faces stiff competition and tight regulatory requirements. While the outlook is very bright right now for Eli Lilly, things could change. In fact, things are almost certain to change.
Eli Lilly's weight loss drugs have regulator-granted exclusivity through the middle of the next decade. That's great, but when the patents expire, competitors can start producing the same drug, which generally leads to what is known as a patent cliff. That's when generic versions of a drug dramatically reduce the revenue from the original drug. There's no reason to think Eli Lilly's top line is in any imminent danger, but there will come a day when it is.
That's a big deal, noting that the company's GLP-1 drugs made up over 50% of the healthcare giant's sales in the first half of 2025. There's another risk here, though, because other companies are working to bring out and market their own weight loss drugs. If a more attractive drug comes to market, Eli Lilly's products could see revenue declines well before their patent expirations.
Eli Lilly is fully priced, if not expensive
This is where investors have to make a risk/reward decision and the valuation of Eli Lilly's stock is going to be a key factor. Starting with a non-traditional valuation tool, the stock's 0.7% dividend yield is near the lowest levels in the company's history. The yield is also well below the pharma average yield of around 1.1%. It looks as if Eli Lilly is being afforded a premium price right now.
NYSE: LLY
Key Data Points
That view is bolstered by more traditional valuation tools. For example, the price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages. While the metrics aren't massively out of line with historical trends, the clear indication here is that Wall Street is, indeed, baking a lot of good news into Eli Lilly's price.
Given the high expectations for Eli Lilly, any stumble could lead to a change in the view of the stock. And that could lead to a quick share price decline. The complicating factor is that the rather swift and dramatic advance that's taken shape over the past five years is largely thanks to the company's success in just one new drug niche. Its dominance of that niche is time limited by the industry's patent setup and at risk because competitors are developing their own weight loss drugs.
The easy money has probably been made
Eli Lilly is not a bad company by any stretch of the imagination. And it could continue to perform well as a business thanks to its GLP-1 drug strength. But that strength appears priced into the stock at this point and the valuation of the stock suggests that there's increasing downside risk to consider.
If you bought Eli Lilly when its GLP-1 drugs were introduced, it could have helped make you a millionaire. From here, however, the opportunity for this stock to be a millionaire maker appears less attractive. In fact, if the company fails to live up to the high expectations built into the stock price, it could end up being a wealth destroyer.
