Forget Mounjaro: Eli Lilly’s next big hit has arrived

In the last two years, the pharmaceutical industry has been taken over by glucagon-like peptide-1 (GLP-1) agonists. Even if you’re not familiar with this terminology, I’d bet you’re familiar with diabetes and obesity drugs like Ozempic, Wegovy, and Mounjaro — which are all GLP-1 drugs.

Currently based in Denmark Novo Nordisk (NGO -1.58%) dominates the GLP-1 market, thanks to its deep list of treatments, including Ozempic, Wegovy, Rybelsus and Saxenda. However, Novo Nordisk’s main rival in the field of weight loss should not be slept on.

Eli Lilly (LLY -1.01%)the developer of Mounjaro, has shown that it can compete with Novo Nordisk at a high level. What’s more, the company’s sibling treatment for Mounjaro — Zepbound — has been sizzling since its approval last November to help with weight loss. With sales of more than $1.2 billion in the three months ending in June, Zepbound has already earned “breakthrough drug” status given to drugs that sell more than $1 billion in a year.

It’s almost enough to make one “forget” about Mounjaro.

Let’s break down how Zepbound helps transform Lilly and gauge what the long-term picture might hold.

Zepbound seems unstoppable

Often, when a new drug receives approval from the Food and Drug Administration (FDA), the approval is granted for the treatment of a single condition.

For example, Ozempic is technically only approved to treat diabetes. However, weight loss is often a byproduct of taking diabetes medications. But since Ozempic is not officially approved for chronic weight management, Novo Nordisk has launched a separate drug called Wegovy, which is specifically aimed at obesity care. It is important to note that Ozempic and Wegovy have the same primary compound, semaglutide.

Eli Lilly followed a similar template to that of Novo Nordisk. Mounjaro is Lilly’s answer to Ozempic and is used to treat diabetes.

Last year was Mounjaro’s first full calendar year on the market. The diabetes drug brought in $5.2 billion in annual sales for Lilly in 2023, making it the company’s second-largest source of revenue.

While Mounjaro was undoubtedly a monumental success, Lilly was also working on something else in the background. As Novo Nordisk did, Lilly has developed an alternative version of its diabetes drug — Zepbound — that is aimed at treating obesity and also shares its main ingredient, tirzepatide, with Mounjaro.

Zepbound received FDA approval in November 2023 and has been a success since launch:

Image source: Eli Lilly.

In the first quarter of 2024, Zepbound generated $517 million in sales, putting it at an annualized run rate of about $2 billion. But according to Lilly’s second-quarter earnings report, Zepbound has already demolished its run rate forecast.

For the quarter ended June 30, Zepbound reported sales of $1.2 billion — making it a blockbuster drug with less than a year on the market.

The best part? The journey seems to begin.

The journey is just beginning

According to research published by Goldman Sachsthe total addressable market for obesity care drugs could reach $100 billion by 2030. Since the World Health Organization (WHO) estimates that over 1 billion people globally are living with obesity, I am inclined to believe that this estimate would could be conservative.

Given that the obesity care market is fragmented — with Novo Nordisk and Eli Lilly being the two major players — Lilly’s growth prospects over the next few years appear robust.

In addition, Lilly’s management has made some important moves to ensure that the supply and demand dynamics do not produce any hiccups. Namely, Lilly acquired a manufacturing facility from Nexus Pharmaceuticals earlier this year to combat any shortage of weight loss drugs. I think this was a wise decision and it positions Lilly well for the future.

Image source: Getty Images

Is Eli Lilly Stock a Buy?

The chart below illustrates Lilly’s price-to-earnings (P/E) ratio over the past few years. Clearly, Lilly has experienced quite a bit of valuation expansion, especially over the past 18 months.

LLY PE Report Data by YCharts.

While this may suggest that Lilly stock is overvalued, I believe there is more to the story. note that S&P 500 is up more than 40% since January 2023. While Lilly has consistently demonstrated impressive financial performance, I think the stock has likely seen some meltdown activity due to broader market conditions.

In addition, Lilly recently received approval for a new Alzheimer’s treatment called donanemab, and it’s plausible that some of the anticipation surrounding the donanemab approval will be factored into the stock.

Despite its expensive valuation, I still see Eli Lilly as an extremely compelling opportunity for long-term investors. Both Mounjaro and Zepbound are already successful drugs. And with an estimated market size of at least $100 billion and little in the way of competition, it’s hard to see Lilly experiencing a significant disadvantage in the weight loss space.

As the diabetes and obesity care markets continue to evolve, I think investors with a long-term horizon should consider a position in Eli Lilly.