Mounjaro scores another win: Why Eli Lilly is still a buy

To paraphrase a quote from Shakespeare, bad news and misfortune tend to come in groups. But that can also apply to good news. Ask Eli Lilly (LLY -0.15%)a pharmaceutical company flying on all cylinders. The drugmaker continues to impress investors with exceptional financial results, impressive regulatory wins and exciting clinical advances.

Much of the company’s recent success has to do with tirzepatide, a diabetes (marketed as Mounjaro) and obesity (marketed as Zepbound) drug that has only been on the market since mid-2022, but it already generates over $4 billion in sales. per quarter. No, it’s not a typo.

Lilly recently announced positive results from a pivotal clinical trial of Mounjaro, which could lead to even stronger sales. Here’s a rundown of these new developments and why Eli Lilly’s stock is still worth buying.

LLY Total Return Level data by YCharts.

Mounjaro helps prevent the disease it treats

According to data from the US Centers for Disease Control and Prevention (CDC), 38.4 million Americans had diabetes as of 2021. Mounjaro’s complex mechanism of action helps patients with type 2 diabetes — 90% to 95 % of the diabetic population — reduce blood sugar levels and increase insulin production.

That’s all well and good, but once people have diabetes, they can’t get rid of it. What if Mounjaro could reduce the risk of developing the disease in the first place? According to Eli Lilly, it does just that.

The company conducted a study that lasted 176 weeks (a little over three years) and another 17 weeks of observation after treatment ended. This clinical trial looked at 1,032 people who had prediabetes (higher-than-average blood sugar levels) and who were overweight or obese. Mounjaro reduced the risk of developing type 2 diabetes by 94% compared to a placebo.

There is still a lot of growth left

Shares of Eli Lilly rose 3% on the news, a significant jump for a stock approaching a $1 trillion valuation. It’s not hard to see why the market was excited by these developments, as 1 in 3 Americans has diabetes. Although not all meet the second criterion in this pivotal study, many do.

Between those with type 2 diabetes, those with prediabetes, and overweight and obese patients who may or may not have either condition, Mounjaro and Zepbound could easily target around 100 million patients in the US alone, with indications that has already won, and those are likely to win. This list also includes patients with sleep apnea.

Most drugs never generate a billion dollars in annual sales. With all this in mind, analysts’ projections for Mounjaro’s peak sales don’t seem so far off the mark: some have predicted it could generate as much as $25 billion in annual revenue.

Still, naysayers might point out that Eli Lilly’s stock has skyrocketed more than 800% over the past five years. Lilly’s forward price-to-earnings (P/E) ratio is a staggering 59.

LLY PE ratio data (before) by YCharts.

The average for the healthcare sector is a much more modest 19. Can Eli Lilly justify this rating?

Well, its portfolio now also includes Kisunla, an Alzheimer’s drug that recently won approval. Some of the company’s older products are also doing well, including Verzenio, a cancer drug. Other newer products have been overshadowed by Mounjaro, but could also potentially be successful; these include cancer drug Jaypirca and ulcerative colitis treatment Omvoh, both of which received the green light last year.

Analysts believe Eli Lilly’s earnings per share will grow an average of 76% over the next five years and have raised their forecasts several times over the past year — just as Lilly has raised its revenue estimates by 3 billion dollars during the second… quarterly earnings announcement.

Mounjaro and its supporting cast are surprising everyone, even (so it seems) the company’s management. And Lilly’s recent success speaks volumes for its ability to develop innovative drugs.

So, despite the company’s strong performance in recent years and a rich P/E expectation, it’s still worth investing in Eli Lilly.