Eli Lilly's GLP-1 Pricing Problem Is Actually a Growth Opportunity

Eli Lilly (NYSE: LLY) is posting excellent financial results thanks to its work in the GLP-1 market. However, some investors worry that the company could suffer from insufficient insurance coverage for its GLP-1 medicines, particularly in the weight-loss space. Many patients are left having to pay for these drugs out of pocket, and since they aren't exactly cheap, access is arguably lacking. Could this eventually become a significant problem for Eli Lilly? Perhaps, but for now, the company is turning it into an opportunity, and investors should take notice.

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Firing on all cylinders

First, some background. Since health insurance usually covers much, sometimes most, or even all, of the cost of prescription medicines, patients aren't exactly price sensitive. If a drugmaker reduces the price of a therapy by 10%, that may change nothing at all to what each patient pays out of pocket. However, the GLP-1 market, particularly the weight loss niche, is behaving differently.

According to some estimates, about half of Eli Lilly's GLP-1 prescriptions for Mounjaro, which treats diabetes, and Zepbound -- an anti-obesity medicine -- are for cash-paying customers. When patients pay the full cost themselves, they have a stronger incentive to respond to price changes. In the second quarter, Eli Lilly reported that average realized prices for its products declined 13% year over year, largely driven by Mounjaro and Zepbound (Eli Lilly lowered Zepbound prices in the U.S. in December).

But the company also noted that sales volume was 60% higher than the year-ago period, once again largely driven by Mounjaro and Zepbound. So, Eli Lilly is absorbing lower per-unit prices while substantially boosting volume, consistent with its strategy of using lower net prices to make its GLP-1 medicines more accessible, particularly -- though not exclusively -- to cash-paying patients.

The result? During the period, Eli Lilly's revenue jumped by 48% year over year to $23 billion, and its adjusted earnings per share were $8.38, 33% higher than the year-ago period. Management expects volume growth in the company's GLP-1 portfolio will continue to more than offset average price declines. That's what we'd expect them to say. But the trend so far has supported that hypothesis.

Can new market entrants disrupt Eli Lilly?

Eli Lilly will face more competition in the GLP-1 market in the coming years, potentially disrupting its progress. However, even in a more competitive environment, Eli Lilly looks likely to dominate this space, which should remain a powerful growth driver for the company for the foreseeable future. Here are two reasons why.

First, Eli Lilly's medicines could remain among the most effective. Zepbound is currently the leader. Novo Nordisk's (NYSE: NVO) CagriSema will probably be the next brand-new approval in the market, but it won't dethrone Zepbound. How do we know that? Novo Nordisk ran a head-to-head study comparing Zepbound with CagriSema, and Zepbound won. Eli Lilly's pipeline candidates also look incredibly promising.

The company's retatrutide posted arguably the best efficacy results in late-stage trials of an anti-obesity candidate we have ever seen. Second, Eli Lilly's newer products will help expand the market, notably by earning indications in areas where Zepbound may not be competitive. Eli Lilly's Foundayo, an oral weight-loss medicine approved in April, is attracting mostly new patients who have never taken GLP-1s before.

With new products not simply cannibalizing sales of the company's existing ones, expect its revenue growth to remain strong. What does all this mean for the stock? Eli Lilly is well-positioned to maintain its lead in the GLP-1 space, and we haven't even mentioned its work in other therapeutic areas that could also drive growth in the next five years. The bottom line: It's not too late to buy this high-flying healthcare stock.

Prosper Junior Bakiny has positions in Eli Lilly and Novo Nordisk. The Motley Fool has positions in and recommends Eli Lilly and Novo Nordisk. The Motley Fool has a disclosure policy.