With GLP-1 drugs no longer in short supply, is now the time to buy Eli Lilly stock?

The popularity of GLP-1 weight loss drugs has increased, which has created a shortage among many drugs, including Eli Lillyhis (LLY 1.27%) popular Mounjaro and Zepbound. However, the US Food and Drug Administration (FDA) recently removed both drugs from the shortage list, indicating that supply can now keep up with current demand.

Removing the drug from the shortage list is positive for Eli Lilly in a few ways and could help the stock continue its strong run. Shares of Eli Lilly are up more than 65% for the year. Let’s take a closer look at the two drugs and how this news could affect the company.

Expansion of production

Mounjaro and Zepbound are the trade names of GLP-1 drugs that use tirzepatide as the active ingredient. The FDA first approved Mounjaro to help improve blood glucose levels in adults with type 2 diabetes. It later approved Zebound for weight loss in obese or overweight adults with at least one weight-related condition , such as type 2 diabetes, high blood pressure or high cholesterol.

While the drugs have clear indications from the FDA, their popularity has grown more from off-label use for general weight loss, not just among obese patients.

Mounjaro was Eli Lilly’s best-selling drug in the second quarter, with sales of $3.09 billion, more than threefold from a year ago. Meanwhile, Zebound was the company’s fourth best-selling drug, with sales of $1.22 billion in Q2. Another GLP-1 drug, Trulicity, which is also used to treat type 2 diabetes, was the third best-selling drug, but its sales fell 31% to $1.25 billion as which patients switched to newer GLP-1 drugs.

Image source: Getty Images.

The popularity of Mounjaro and Zepbound has left the company facing a supply shortage for its active ingredient tirzepatide. The same thing happened with the rival Novo Nordiskwhich has experienced supply shortages for semaglutide, the active ingredient in its GLP-1 drugs Ozempic and Wegovy.

These shortages have allowed a number of other companies to step in and sell generic compounding versions of these popular weight loss drugs, as the FDA allows drug compounding when a drug is on the drug shortage list.

Eli Lilly and Novo Nordisk have both complained about these cheap alternatives and their effectiveness. While delisting drugs could help lessen this competition, many compounds currently use semaglutide, not tirzepatide, and thus can continue to make their versions as Ozempic and Wegovy remain on the list.

Meanwhile, companies like His and her health (HE 10.08%) have long created custom drugs under FDA exemption and will seek to continue to do so with GLP-1 drugs as well under the argument that they are not just children. This could lead to some legal battles down the road once the semaglutide shortage ends.

But for now, the big benefit for Eli Lilly is that it appears to have the manufacturing capacity to continue to meet the high demand for Mounjaro and Zepbound. That was a big focus for the company, and it said during its last earnings call that it expected to have 50% more GLP-1 drug doses in the second half of 2024 compared to the second half of 2023. It has a number of new facilities under construction that are nearing completion and should help boost production next year.

The company also just announced a new $4.5 billion investment to create an advanced manufacturing and drug development center at its Indiana facility. This is on top of a $5.3 billion expansion announced in May to help it produce the active pharmaceutical ingredients for its GLP-1 drugs.

Is Eli Lilly a buy?

While artificial intelligence (AI) has been one of the most popular investment trends, GLP-1 weight loss drugs are a close second. Demand for Eli Lilly’s Mounjaro and Zepbound remains robust, and sell-side analysts tracking script data point to strong growth for both drugs.

While the stock looks expensive on a forward price (P/E) basis, trading at 39 times analysts’ next-year estimates, it only has a price-to-earnings-growth ratio (PEG ratio) of 0.6, given his strong sight. increase from GLP-1 drugs. PEGs below 1 are usually considered undervalued, so on that basis the stock is cheap.

LLY PE ratio (forward 1y) from YCharts

With the healthcare company doing a good job of expanding its production capabilities to meet robust demand for Mounjaro and Zepbound, the stock looks like a buy at current levels.