Eli Lilly's Momentum Looks Unstoppable -- but 1 Factor Could Change Everything

Eli Lilly (NYSE: LLY) has been on a historic run over the past five years, outperforming similarly sized peers in the pharmaceutical industry and becoming the first healthcare stock to reach a $1 trillion market cap. The company's diabetes and weight-loss portfolio has been the main engine behind its terrific performance of late, and it remains strong. During the second quarter, Eli Lilly's revenue jumped 48% year over year to $23 billion, while adjusted earnings per share rose 33% year over year to $8.38.

Sales from Eli Lilly's Mounjaro, a diabetes medicine, soared 91% year over year to $9.9 billion, while sales of Zepbound, approved for weight loss and obstructive sleep apnea, grew 46% to $4.9 billion. Can anything stop Eli Lilly's momentum? Here's one thing that might do so.

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A lesson from Eli Lilly's biggest rival

Eli Lilly generates most of its revenue from Mounjaro and Zepbound, which have the same active ingredient, tirzepatide, a medicine that mimics the action of the GLP-1 and GIP gut hormones. In the second quarter, sales from these two medicines accounted for almost 65% of the company's top line. Eli Lilly also markets Foundayo, an oral GLP-1 approved for weight loss, although it was approved in April and doesn't yet contribute much to its financial results.

Still, the point is that Eli Lilly's lineup is concentrated at the top, with just a couple of brands responsible for most of the recent momentum. Other pharmaceutical giants are well aware of Eli Lilly's GLP-1 success, and they are seeking to launch competing therapies.

What happens if, as they do so, Eli Lilly loses significant pricing power, revenue from its two growth pillars no longer increases as fast, and it fails to generate better GLP-1 therapies? That's more or less what happened to Eli Lilly's biggest competitor, Novo Nordisk (NYSE: NVO).

The Denmark-based drugmaker was performing extremely well several years ago while riding the wave of soaring demand for its GLP-1 products, Ozempic and Wegovy. However, Mounjaro and Zepbound hit the market and took market share away from Novo Nordisk's products.

Furthermore, Novo Nordisk experienced significant clinical setbacks. The company's next-gen GLP-1 medicine, CagriSema, performed well -- and even beat Wegovy -- in a phase 3 weight-loss study. But CagriSema's mean weight loss of 22.7% in the trial fell short of management's goal of 25%. Then Novo Nordisk ran a trial pitting CagriSema against Zepbound. CagriSema lost.

The result? Worsening financial results and a dim outlook in Novo Nordisk's core market explain why it has lost more than 60% of its value over the past two years. The same thing could happen to Eli Lilly.

Is it too late to buy the stock?

While investors should closely monitor these risks, there are several reasons not to be too worried. First, Eli Lilly's next weight-loss product, retatrutide, has already posted fantastic clinical trial results. In a phase 3 study, it recorded a mean weight loss of up to 28.3% over 80 weeks, well above the phase 3 results of currently approved weight loss medicines. Eli Lilly does have other candidates that may not perform as well in phase 3 studies. But the company's track record in this market in recent years has been impressive.

Second, Eli Lilly has been on a campaign to expand and diversify its pipeline. It has made more than 10 acquisitions this year alone (not including licensing deals) and gained attractive pipeline candidates across multiple therapeutic areas. We should see significant clinical and regulatory progress from at least some of those products over the medium term, and some will likely become blockbusters. And for what it's worth, Eli Lilly also has several approved medicines that look likely to generate over $1 billion in sales eventually.

That's the case with the company's Alzheimer's disease treatment, Kisunla, as well as Ebglyss, a medicine for eczema. Novo Nordisk didn't have a lineup and pipeline as rich as Eli Lilly's outside of its core therapeutic areas. So, Eli Lilly may avoid a catastrophic performance even if its GLP-1 portfolio encounters headwinds. And for now, the evidence suggests that Eli Lilly should remain the GLP-1 leader for at least the next few years. That's why the stock is still a buy.

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.