For a leading pharmaceutical company like Eli Lilly (NYSE: LLY)Developing new drugs is crucial for the company to ensure continued growth. Patents are not valid forever, so continuous innovation is the only sure way to succeed and remain a top company in the healthcare industry.
In recent years, the company has received approvals for several new products, including Mounjaro for diabetes, Zepbound for weight loss, and Kisunla for Alzheimer’s. These products could be cornerstones of the company’s business in the coming years. And they are reasons why investors are optimistic about the company’s future today.
For Lilly, these are also opportunities to continue to increase value, even though the stock currently appears expensive, trading at more than 100 times its recent earnings. The future growth opportunities are just so enticing.
It is the active ingredients of glucagon-like peptide 1 (GLP-1) in particular that are currently generating a lot of hype. And they already account for a significant portion of the company’s sales.
Mounjaro and Zepbound together generated more than $4 billion in revenue last quarter
Two products that will likely be the two biggest moneymakers for Eli Lilly in the foreseeable future are Mounjaro and Zepbound. They contain the same active ingredient, tirzepatide, and are essentially the same drug, although Mounjaro is approved for diabetes and Zepbound is approved for weight loss. In a clinical trial, tirzepatide has shown the ability to help people lose an average of 26.6% of their body weight over an 84-week period, and that’s why it’s become such a promising asset for the company.
For the period ending June 30, Eli Lilly’s revenue rose 36% to $11.3 billion. Mounjaro generated $3.1 billion in sales, while Zepbound brought in $1.2 billion. Together, revenue from these GLP-1 products accounted for 38% of Eli Lilly’s revenue. To put into perspective how quickly these drugs have grown, consider that their combined revenue was less than $1 billion in the same period last year (Zepbound was not approved until November 2023, while regulators gave Mounjaro the green light in May 2022). Their share of revenue was less than 12% last year.
These products are getting bigger
These products are already a big part of Eli Lilly’s business, accounting for 38% of sales. But there’s no reason to believe they won’t get bigger. The market for obesity drugs is likely to be huge – potentially worth $100 billion – and Eli Lilly is likely to be a major player.
Revenue from Mounjaro and Zepbound could exceed $50 billion, according to analyst estimates. And even that could be a low number. Ultimately, it will depend on how many indications tirzepatide can be used for.
It’s currently approved for treating diabetes and for weight loss, but there may be other possibilities. Studies have shown that tirzepatide can reduce the risk of heart failure and help with sleep apnea. And there are many obesity-related conditions and diseases that the drug can potentially treat, so it can be difficult to estimate exactly how much revenue it could generate for Eli Lilly.
Should investors be concerned about a lack of diversification?
In all likelihood, sales of tirzepatide-related drugs will rise even higher, exceeding 50% of total sales. This could be worrying because it would make the business less diverse by relying so heavily on a core drug. But it’s not just any drug either; it’s a game changer in the healthcare industry. Tirzepatide has the potential to be the best-selling drug of all time.
When a company has such assets in its portfolio, it should be no surprise if it takes the lion’s share of sales – it would be difficult to develop other drugs with similar revenue opportunities. While there will always be a need to innovate and develop new drugs, this is a great example of how developing just one highly successful drug can drastically change a company’s growth prospects.
Are Eli Lilly shares still a buy?
Since the beginning of the year, Eli Lilly shares have risen by over 50%. And in just three years, the stock’s value has increased by more than 230%.
But even though Lilly has become a hot stock of late, there is a lot to suggest it is a good buy right now. Its price-to-earnings-to-growth (PEG) ratio is around 1.4. That multiple could drop if analysts increase their expectations for future growth—which could happen if tirzepatide is approved for more indications. And the lower that PEG ratio gets, the better it is to buy Eli Lilly.
I don’t think the stock is anywhere near its peak: revenue and earnings could skyrocket in the coming years. And while the valuation seems expensive right now, that may not be the case in a few years when tirzepatide generates significantly more revenue. Eli Lilly remains one of the best stocks to buy in the healthcare sector today, and I don’t expect that to change any time soon.
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David Jagielski does not own any stocks mentioned. The Motley Fool does not own any stocks mentioned. The Motley Fool has a disclosure policy.
Eli Lilly’s flagship GLP-1 drugs now account for nearly 40% of sales, and that figure is expected to grow in the coming quarters. Original article from The Motley Fool
