The magic isn't over for Eli Lilly (NYSE: LLY). Though the pharmaceutical giant isn't performing as well in the second half of the year as it did in the first, it still has plenty of fuel for growth. In fact, the drugmaker recently received some welcome news that jolted its stock price.
The bears might point out that Eli Lilly's shares still look too expensive: The company's trailing price-to-earnings (P/E) ratio tops 86 -- the average for the healthcare industry is less than a quarter of that at 18.
Do recent developments make Eli Lilly's shares worth investing in despite its expensive valuation?
LLY data by YCharts
Eli Lilly's potential competitor comes up short
Eli Lilly is a leader in the weight loss sector thanks to tirzepatide, which it markets as Zepbound. The drugmaker's only noteworthy competitor is Novo Nordisk, the maker of Wegovy. These two are old foes: They have been battling for supremacy in the diabetes market for decades. However, considering Wegovy's and Zepbound's success, many other companies are looking to challenge Eli Lilly and Novo Nordisk.
One of them is Amgen, whose leading candidate, MariTide, recently reported positive phase 2 clinical test data. The market was not impressed with MariTide's performance, though. The medicine led to an average weight loss of up to 20% in 52 weeks in the study involving overweight or obese patients, with no weight loss plateau observed.
Amgen did not indicate whether this was a placebo-adjusted result. In a phase 3 study, Zepbound was associated with an average weight loss of up to 22.5% in patients after 72 weeks, compared to 4.3% for those taking a placebo. MariTide still has a long way to go, but considering many analysts saw it as one of the most promising challengers to the Eli Lilly and Wegovy duopoly, the fact that it did not quite meet expectations is good news for the current leaders.
A boost on the regulatory front
There is more good news for Eli Lilly as far as its weight loss programs are concerned. President Joe Biden recently announced a proposal whereby this class of medicines would be covered under Medicare and Medicaid. That would make them accessible to millions of additional patients and, potentially, help their sales soar even more. Eli Lilly would be one of the beneficiaries if this measure passes. There is no guarantee that it will happen, but the market is optimistic about this development. Eli Lilly's shares jumped meaningfully on the news.
Plenty of reasons to buy
Eli Lilly's shares recently dropped after its third-quarter results did not meet expectations. The company's revenue increased by 20% year over year to $11.4 billion, while its adjusted earnings per share of $1.18 was much higher than the $0.10 reported in the year-ago period. Companies with high P/E ratios are held to higher standards -- these results would be excellent for almost any peer pharmaceutical company. Still, the recent news that helped jolt its stock price highlights two crucial points.
First, it will be difficult for anyone other than Novo Nordisk to challenge Eli Lilly in the weight loss market. The company has been developing breakthrough medicines in adjacent areas for a long time and was first to market in this field. Don't underestimate the experience that comes with past successes and failures. Eli Lilly still has plenty of weight loss candidates in the pipeline, including one it is calling Triple G since it mimics the action of three different hormones: GLP-1, GIP, and glucagon.
Zepbound mimics the action of the first two, and it's clear how effective it is. Eli Lilly's next-gen weight loss therapy could be even more so. Second, there is a significant and probably unmet demand for these medicines. Some people simply can't afford them, so the prospect of the government helping foot the bill is appealing and could be another tailwind for Eli Lilly. Beyond the weight loss market, Eli Lilly has plenty of drugs that generate solid sales and plenty of attractive pipeline candidates.
They include Kisunla, a recently approved Alzheimer's disease therapy; and muvalaplin, an investigational phase 2 medicine that just posted positive results in lowering lipoprotein (a), or LP(a), levels in adults at high risk of cardiovascular events. LP(a), a type of fat, can cause cardiovascular problems in high levels. No medicine is currently approved in the U.S. to lower LP(a), so there is an unmet need here.
Eli Lilly will earn plenty of approvals and label expansions in the next five years. The company's revenue and earnings should continue growing rapidly, especially as newer products like Kisunla start contributing. So, despite its high P/E, the drugmaker can deliver excellent returns. Investors should still strongly consider purchasing shares of Eli Lilly.
* The content presented above, whether from a third party or not, is considered as general advice only. This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments.
