Two Fresh Motivations to Invest in Eli Lilly Shares Immediately, alongside Two Warnings of Potential Concerns
As a pioneering pharmaceutical corporation consistently revolutionizing and generating new therapies, Eli Lilly and Company (LLY) (0.50%) consistently offers investors additional justifications to consider purchasing their stocks.
On the contrary, the specific characteristics of its industry may often provide valid reasons to exercise a bit more caution when investing in it. Here are two reasons supporting the acquisition and two potential concerns to take into account prior to making a decision.
Successful new data and additional capital investments set to yield substantial returns
Eli Lilly's recent success story is undeniably impressive. The popularity of its drug for type 2 diabetes, Mounjaro, and its weight loss counterpart, Zepbound, have contributed significantly to the company's trailing-12-month operating income, which has surged by an astonishing 90.7% over the last three years to reach $15.1 billion. The high demand for these drugs, both forms of the compound tirzepatide, led to a temporary shortage of the drugs in the U.S. before October.
Consequently, Eli Lilly is investing heavily in manufacturing, with a $3 billion plant expansion in Wisconsin, bringing the total investment in the site to a substantial $4 billion. Companies that significantly increase their previous billion-dollar manufacturing investments by spending additional billions are firms that anticipate needing substantial manufacturing capacity.
Given that management has approved the expansion, it's a reasonable assumption that they believe it will generate significant returns, and each new investment in facilities implies the company will enter larger total addressable markets.
One of the reasons for expanding the capacity for manufacturing Mounjaro and Zepbound is that Eli Lilly is conducting additional research and development, aiming to identify other health conditions that these drugs can benefit.
Moreover, Eli Lilly is comparing its products to those of its primary competitor in the cardiometabolic medicine market, Novo Nordisk. Novo Nordisk owns the blockbuster semaglutide, marketed as Ozempic for type 2 diabetes and Wegovy for weight loss.
Recently, Eli Lilly published a preliminary phase 3b clinical trial analysis indicating that Zepbound is more effective at promoting weight loss than Wegovy. After 72 weeks of weekly treatments, patients on Zepbound lost 47% more weight than patients on Wegovy. While the complete results are still subject to peer-reviewed scientific journal approval, investors can anticipate that the efficacy of Zepbound will provide it with a competitive advantage in gaining and preserving market share. This further bolsters the argument for purchasing Lilly stock.
The latest growth spurt may be nearing its end
However, there are reasons to exercise caution if you're considering buying this stock currently.
Firstly, it's highly unlikely that Eli Lilly can continue its exponential growth rate indefinitely. Indeed, preliminary evidence suggests that the growth rate is slowing down. Based on its third-quarter earnings report, drug wholesalers didn't purchase as many doses of Mounjaro and Zepbound in Q3 as they had in previous quarters. The stock's value subsequently decreased on the day the report was released.
Management has suggested that wholesalers had previously stockpiled GLP-1 drugs, leading to a temporary oversupply. However, this explanation does not mitigate the fact that the manufacturing capacities for GLP-1 drugs have now expanded sufficiently to meet existing US demand, given the company's current level of marketing investment. Sales growth for Mounjaro and Zepbound will eventually have to be achieved by gaining market share from competitors, specifically Novo Nordisk. This will necessitate an increase in Eli Lilly's selling, general, and administrative (SG&A) expenditures, with no assurance that these costs will decrease in the future as competition intensifies.
Valuation concerns
Secondly, Eli Lilly's stock valuation is relatively high, and it has been for some time. The company's trailing price-to-earnings (P/E) ratio is 86, indicating that investors are willing to pay higher prices for the stock due to their expectations of significantly faster-than-average earnings growth. While it's possible that earnings will continue to increase, it's also possible that a few quarters with below-expectations results will prompt many investors to sell their shares in search of better opportunities. This risk is in addition to the risks typically associated with a few subpar quarters.
In conclusion, the balance of risk vs. reward still favors purchasing Eli Lilly stock today, although this benefit is likely to persist for the foreseeable future. It's essential to understand that if you're seeking a stock trading at a sensible valuation with the potential for substantial near-term growth, Eli Lilly may no longer fit that description.
- Given Eli Lilly's current high valuation and the slowing growth rate of Mounjaro and Zepbound sales, investors interested in purchasing Lilly stock might want to consider the potential risks associated with maintaining their current high P/E ratio and increased competition in the cardiometabolic medicine market.
- Despite the promising results of Eli Lilly's Zepbound in promoting weight loss compared to Novo Nordisk's Wegovy, investors should carefully consider the long-term financial implications of potentially increased SG&A expenditures as the company competes for market share in the GLP-1 drug market.
