Down 12%, Should You Buy the Dip on Eli Lilly?

Eli Lilly (NYSE: LLY) has been a great growth pick for investors over the past few years. The pharma company, thanks to its weight loss drug portfolio, has seen revenue climb in the double digits -- and as a result, the stock has taken off, climbing more than 170% in three years.

You may recognize the names of these blockbusters driving Lilly's growth, as they've been widely talked about across the media. Lilly sells tirzepatide, commercialized as Zepbound for weight loss and Mounjaro for type 2 diabetes. Doctors have prescribed either for the weight loss indication, and together, the two drugs generated more than $16 billion in revenue for Lilly last year.

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On top of this, Lilly has a broad portfolio of drugs targeting a wide range of indications, so this company doesn't rely uniquely on one treatment area -- though the weight loss portfolio has been the focus in recent times due to its performance so far and future prospects.

All of this is fantastic, but it has pushed the valuation of this stock higher -- so it resembles that of a tech stock rather than that of a pharmaceutical company. In recent times, though, Lilly has become less expensive, as the stock slipped 12% from a high reached in March.

Is Lilly a buy on the dip? Let's find out.

Image source: Getty Images.

A growth story in full bloom?

So, let's consider what might be ahead for the company's weight loss portfolio. While it may seem as if the growth story is in full bloom right now, there could be a lot more to come down the road -- for two reasons.

First, analysts have forecast that the weight loss drug market may reach nearly $100 billion in about five years -- up from about $28 billion today. Second, Lilly's current drugs may represent its very first step in this high-potential market. The company is developing two other candidates that could prove to be even better than current options -- and they're both approaching the finish line.

Today, tirzepatide is given in injectable form weekly. The drug, known as a dual GIP/GLP-1 receptor agonist, acts on hormones involved in digestion, and as a result helps regulate appetite and blood sugar levels. The product has been so popular that it was on the market regulator's drug shortage list until Lilly ramped up manufacturing to meet soaring demand.

Moving forward, Lilly may offer those aiming to lose weight another even better option: a weight loss drug in pill form. The company's candidate, orforglipron, recently delivered strong efficacy data and a safety profile similar to today's injectables, and Lilly aims to apply for regulatory approval in the weight loss indication by year-end and in the type 2 diabetes indication next year.

A weight loss pill

This potential product could represent significant growth for Lilly because patients may prefer a pill to an injection, and it's easier and cheaper for Lilly to manufacture a pill than medicine in an injection pen format. Lilly also has another weight loss candidate -- retatrutide -- in phase 3 trials, and it acts on not just two but three hormonal pathways, suggesting it may be even more efficacious than current commercialized weight loss drugs.

All this means Lilly's weight loss drug-driven growth could be in its early days. And the company has prepared for this, making the biggest-ever pharma manufacturing investment in the U.S. -- this is a commitment of more than $50 billion over the past five years.

Of course, Lilly may face some headwinds that could limit the pace of growth. For example, a lack of reimbursement from certain health plans or pricing pressures as rival drugs enter the market represents risks. In fact, these and other concerns prompted Goldman Sachs Research to lower its obesity drug market forecast to $95 billion by 2030 from $130 billion.

Leading in innovation

Still, even considering potential headwinds, Lilly is likely to deliver significant growth from its weight loss drugs in the years to come, especially since it is leading when it comes to innovation -- orforglipron would represent the only weight loss drug of its class in pill format that doesn't come with strict food and water guidelines.

So, does this make Lilly a buy today? The stock trades at 37x forward earnings estimates, down from nearly 43x just three months ago. This is expensive for a pharmaceutical company, but Lilly's leadership in the high-growth weight loss market makes it worth this premium.

At the same time, like its pharma counterparts, Lilly offers investors the safety of a big pharmaceutical company -- regardless of the economic situation, people need their medicines, and this results in steady revenue for these players. Also, like pharma rivals, Lilly offers investors passive income in the form of dividends.

So, the answer to our question, is, yes, Lilly is a buy on the dip, because it gives investors the best of both worlds -- strong growth and safety. And today you can get that on sale.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.