Is Eli Lilly Stock a Buy?

Type 2 diabetes and obesity have become an increasing global healthcare problem, reaching near crisis proportions in the United States. The arrival of GLP-1 agonists, drugs that mimic hormones to slow digestion and quell hunger, offers a potential solution and has created one of the pharmaceutical industry's most lucrative opportunities in recent history.

Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) were early leaders in the development of GLP-1 agonists, and dominate the market. Research from MarketsandMarkets suggests that annual global sales of GLP-1 agonists could grow at a 33% annualized rate, reaching $471 billion by 2032.

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Given the potential opportunities in the sector, should investors buy Eli Lilly stock? Here's where the company and its stock stand now.

The GLP-1 agonist opportunity is gearing up for its next phase

You may have heard of Novo Nordisk's Ozempic and Wegovy, as well as Eli Lilly's Mounjaro and Zepbound. These are currently the dominant brand-name GLP-1 agonists. Ozempic and Mounjaro are approved to treat Type 2 diabetes, while Wegovy and Zepbound are approved to treat chronic obesity. Eli Lilly currently trails its archrival, with an estimated 34% market share.

Companies are now gearing up for the next phase of the GLP-1 agonist opportunity. Ozempic, Wegovy, Mounjaro, and Zepound are all administered via injection, but the next wave of GLP-1 agonists is in development, including drugs administered orally. As popular as the leading GLP-1 agonists have been, most people would probably prefer a pill to a needle.

Other pharmaceutical companies are also developing GLP-1 agonists, so the competition is heating up. A report from Ozmosi estimates that seven new GLP-1 agonists could launch in the U.S. by 2030.

Recent developments could help Eli Lilly increase its market share

Competition isn't ideal for Eli Lilly, but developments suggest that it may not threaten the company's growth prospects as much as initially feared. The company recently announced that orforglipron, its upcoming once-daily oral GLP-1 agonist, performed well in its Phase 3 clinical trial. It achieved the desired results while demonstrating similar safety and tolerability in patients as the current injectable drugs.

Experts believe its formulation will be easier to produce and cheaper to sell than current drugs. The company is also developing retatrutide, a weekly injectable triple hormone receptor agonist that could be even more effective than tirzepatide, the active drug in Mounjaro and Zepbound. Eli Lilly anticipates releasing its late-stage trial data later this year.

Meanwhile, the competition has struggled. Pfizer (NYSE: PFE) recently abandoned danuglipron, its experimental oral GLP-1 agonist for chronic weight management, after a trial patient experienced a liver injury while taking it. Late last year, Novo Nordisk announced that CagriSema, its next-generation weekly injected drug for diabetes and weight loss, had passed its benchmarks in a 68-week Phase III trial, but its efficacy fell short of expectations.

Investors shouldn't make assumptions about any drugs until they receive formal approval and clearance for sale. However, Eli Lilly could end up in a strong position to increase its market share of this rapidly growing industry. It already has an established footing, its next-generation products are performing well, and multiple competing products have stumbled.

Is Eli Lilly a buy?

The only problem is that the market is aware of this -- just look at Eli Lilly's share price. The company's stock trades at a lofty price-to-earnings ratio (P/E) of almost 72. Analysts currently expect Eli Lilly to grow earnings by an average of nearly 30% annually over the long term, roughly twice as fast as Novo Nordisk. Still, that's a price/earnings-to-growth ratio (PEG) of 2.4.

The PEG ratio weighs the stock's valuation against the company's anticipated growth rate. The lower the ratio, the better the value.

I prefer not to buy stocks at PEG ratios higher than 2.5, as things don't always go as planned. What if either of Eli Lilly's upcoming drugs fails, like Pfizer's did? The pharmaceutical approval process involves numerous moving parts, so investors should try to avoid overpaying.

With a 2.4 PEG ratio, Eli Lilly is up against that soft ceiling. Investors may consider nibbling on shares, but the stock doesn't offer much value at its current price. The broader stock market has been more volatile in recent weeks, so waiting for a lower price at which to buy could prove wise.

Should you invest $1,000 in Eli Lilly right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.