Is Eli Lilly Stock a Buy?

While Novo Nordisk's (NYSE: NVO) Ozempic has gotten most of the name recognition associated with weight-loss drugs, it's not the only drug in this category doing well. While Elon Musk recently showed off his slimmed-down figure in a Santa Claus suit on X calling himself "Ozempic Santa," he wasn't taking Ozempic. Reports indicate he was actually taking Eli Lilly's (NYSE: LLY) weight-loss drug Mounjaro.

Eli Lilly's stock has been a strong winner over the past few years, powered by its portfolio of glucagon-like peptide-1 (GLP-1) receptor agonist drugs. The stock is up about 36% year to date as of this writing and has gained around 506% over the past five years.

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Given the stock's strong performance, the natural question becomes whether the stock is still a buy going forward. Let's see if the momentum can continue.

A GLP-1 powerhouse

While Ozempic has more brand recognition, Eli Lilly's Mounjaro and Zepbound have proven better clinically at helping patients lose weight. The two Eli Lilly drugs use the same active ingredient -- tirzepatide -- but they are approved for different indications. Mounjaro is approved to help adult patients with type 2 diabetes improve blood glucose levels, while Zepbound is approved to help weight loss in obese adults or overweight adults with at least one weight-related condition (such as type 2 diabetes, high blood pressure, or high cholesterol).

Regardless of what they are approved for, however, many non-obese people are using these drugs to lose weight. One example is the already mentioned Elon Musk using Mounjaro, which is technically approved for type-2 diabetes patients. Off-label use of GLP-1 drugs to lose weight has become rampant, helping drive shortages of the drugs and profits for the companies that make them.

Meanwhile, a study earlier this year found that Mounjaro was superior to Ozempic in helping people lose weight with similar side effects. The study involved 18,000 people and showed that patients taking Mounjaro were twice as likely to lose 5% of their body weight, 2.5 times as likely to lose 10% of their body weight, and more than three times as likely to lose 15% of their body weight as patients taking Ozempic. Meanwhile, after being on the drug for six months, patients on average lost 10% of their body weight using Mounjaro versus 6% for patients prescribed Ozempic.

Novo Nordisk, the maker of Ozempic, has questioned the reported results, saying the optimal dosage for weight loss for its drug was not released. However, Mounjaro is getting a following, with Musk saying he preferred the drug because it was more effective with fewer side effects for him, adding Ozempic made him "fart and burp like Barney from The Simpsons."

Eli Lilly's GLP-1 drugs, meanwhile, have been powering the company's results. Last quarter, Mounjaro revenue more than doubled year over year to $3.11 billion, while Zepbound added an additional $1.26 billion in revenue after being introduced in Q4 of 2023. The company's overall revenue climbed 20%, while its adjusted earnings per share skyrocketed from $0.10 a year ago to $1.18. Excluding a divestiture, revenue would have climbed 42% year over year.

Looking ahead, Eli Lilly sees revenue growth accelerating to 50% year over year in Q4, powered by increased production capacity and the launch of Mounjaro in new international markets. The company has been pouring money into increasing capacity, and will also begin to increase spending on demand generation. Since 2020, Eli Lilly has announced more than $20 billion in commitments to build, upgrade, and acquire manufacturing facilities.

Image source: Getty Images.

Is the stock a buy?

GLP-1 weight-loss drugs are not the only drugs Eli Lilly is selling and developing. In fact, the rest of its portfolio was solid, with revenue last quarter up 17% for non-incretin drugs, excluding its dispositions. That said, it is these weight-loss drugs that will largely drive its results and the stock moving forward.

The company continues to have a big opportunity in front of it, as it looks to continue to increase supply to meet the strong demand. Meanwhile, it is launching the drugs in new international markets and there have been calls for Medicare and Medicaid to expand coverage for the drugs under their programs. Zepbound also just got approval for use in obese patients with moderate to severe obstructive sleep apnea, which opens up a new market for the drug.

From a valuation perspective, the stock trades at a forward price-to-earnings (P/E) ratio of 35 times next year's analyst estimates, with a price/earnings-to-growth (PEG) ratio of only 0.6. PEGs under 1 are considered undervalued, so the stock is very attractively valued on that basis.

Data by YCharts.

Eli Lilly is not without risks. Compounders had been selling cheaper versions of GLP-1 drugs under a shortage exemption, and while Lilly's active ingredient was taken off the exemption list this month, semaglutide (the active ingredient in Ozempic) and liraglutide (the active ingredient in Saxenda) are still on it, which leads to low-price competition. Meanwhile, companies such as Hims & Hers have argued they can still make these compound drugs even after the shortage issues are resolved as there is a well-established precedence of being allowed to sell personalized versions of drugs that can reduce side effects for individual users. Hims & Hers uses personalized medications across its drug portfolio, so a legal battle could be brewing.

For its part, Lilly has teamed with Hims & Hers' competitor Ro to offer cheaper prices for Zepbound and to better compete with the compounders. The $400 to $550 per month price is still high, and it also speaks to the risk of potential price pressure these drugs could face. Meanwhile, Musk, who's gained a lot of political influence, said nothing could improve the health of Americans more than offering GLP-1 drugs at super-low prices.

While a potential pushback on high GLP-1 drug prices is a risk, for now, this is a stock with huge growth at an attractive valuation. This makes it a solid buy candidate.

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Geoffrey Seiler has positions in Hims & Hers Health. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.