This Unstoppable Healthcare Stock Just Made a Move in AI: Time to Buy?

Key Points

• Drug giant Eli Lilly is launching an AI-powered drug discovery platform.

• While it won't generate any revenue, this initiative could pay off in the long run.

• Still, there are plenty of other reasons to invest in this major pharma stock.

• 10 stocks we like better than Eli Lilly ›

Recent breakthroughs in artificial intelligence (AI) are producing tangible results, and not just in the tech industry, although companies in that sector tend to dominate the AI headlines. Even in healthcare, the technology can help boost productivity and efficiency. That's why many healthcare companies are actively pursuing various AI initiatives.

Eli Lilly (NYSE: LLY), one of the largest companies in the sector by market cap, recently announced a move along those lines. Let's see what that could mean for the company's prospects.

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Accelerating drug discovery

Developing novel medicines is expensive and time-consuming. Most drugs that reach the clinical trial phase, which typically involves three stages and costs hundreds of millions of dollars, never make it to the market.

Several companies are already attempting to address this problem through AI-powered models, and Eli Lilly is now among them. On Sept. 9, the company announced the launch of TuneLab, an AI-powered drug discovery platform.

Image source: Getty Images.

Eli Lilly will grant access to TuneLab to select biotech companies free of charge. The company's goal is twofold. First, to help accelerate the drug discovery process by predicting which compounds are more likely to prove safe and effective once they move into clinical trials, thereby reducing the failure rate of new products entering clinical studies. Second, Eli Lilly aims to lend a helping hand to smaller biotechs that lack the resources to develop their own AI models.

Of course, the pharmaceutical giant is getting something out of it. Having trained its drug discovery AI models on its own data for years, Eli Lilly will be able to access more data from the biotech companies using TuneLab -- and all that without having to spend the money it typically needs to generate said data. That way, the drugmaker can fine-tune its drug discovery algorithms at a low cost and improve its already impressive drug innovation engine.

What it means for investors

This development won't move the needle for Eli Lilly anytime soon, but it highlights once again that the company is planning for the long term.

The drugmaker is currently experiencing tremendous success in the areas of diabetes and weight management. Second-quarter revenue grew by 38% year over year to $15.6 billion, while its non-GAAP (generally accepted accounting principles) earnings per share climbed 61% year over year to $6.31.

However, Eli Lilly isn't resting on its laurels and is instead looking at the next stage of growth beyond its current crop of medicines and late-stage drug candidates.

Over the past year or so, the company has made several moves to enhance its pipeline through licensing deals and acquisitions, including those outside of its core therapeutic area of expertise.

In May, Eli Lilly announced its acquisition of SiteOne Therapeutics, a small biotech company with a promising non-opioid pain medication in development. The deal cost Eli Lilly about $1 billion in upfront cash. Verve Therapeutics, another biotech company acquired by Eli Lilly in July for $1.3 billion, is working on genetic therapies for cardiovascular diseases.

Eli Lilly is casting a broad net precisely because of the uncertainty involved in developing medicines, even when they have already reached phase 2 studies. The company's TuneLab initiative could address this shortcoming over the long run and, eventually, allow the drugmaker to launch just as many blockbusters but at a lower cost, thereby improving its margins and bottom line.

Even if TuneLab doesn't deliver on that promise, Eli Lilly's rich lineup, which is helping it deliver revenue and earnings growth well above industry averages, along with a deep pipeline, makes the stock attractive. Some might complain that the company is trading at 25 times forward earnings, which is well above the healthcare industry's average of 16.5.

That is well warranted, though, when you look at Eli Lilly's financial results and prospects, which put those of most similarly sized peers to shame. Eli Lilly remains an excellent stock to buy at current levels. The TuneLab initiative only emphasizes what we already know about the company's outstanding management team.

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Prosper Junior Bakiny has positions in Eli Lilly. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.