Eli Lilly: The GLP-1 Opportunity, While Increasingly Recognized, Is Vastly Underestimated

Summary:

• Eli Lilly is expected to receive FDA approval for tirzepatide, an obesity medication, and has two other medications in phase 3 clinical studies.
• The GLP-1 therapy market is projected to reach $150 billion in the US by 2030, with a potential 30% of the obese population using it.
• Recent developments, including positive trial results and increased employer coverage for obesity medications, strengthen the outlook for Eli Lilly’s growth.

In August, I recommended Eli Lilly (NYSE:LLY) stock, given its pipeline, highlighted by the tremendous opportunity in weight loss medications. Lilly should soon receive FDA approval for tirzepatide (marketed as Mounjaro for Type 2 diabetes) for obesity, and two other medications, oral orforglipron and GGG agonist retatrutide, are in phase 3 clinical studies. In the United States, there are an estimated 110 million obese adults, and the medical costs are $1,850 higher annually per person than for those of normal weight. This is due to the myriad of chronic conditions associated with obesity, including high blood pressure, nonalcoholic steatohepatitis, Type 2 diabetes, osteoarthritis, and sleep apnea. As a result, these patients access the healthcare system through several medical specialists, thereby presenting numerous opportunities for prescription intervention. I am forecasting 30% of this population to be on a GLP-1 therapy by 2030, creating a $150 billion market in the US.

Over the past three months, several developments have occurred that strengthen my confidence in my analysis. Novo Nordisk A/S (NVO), the manufacturer of GLP-1 Wegovy, announced that its Phase 3 study met its main goal of reducing major adverse cardiovascular events by 20% in overweight or obese people with established cardiovascular disease and no prior history of diabetes. This week, Novo announced that it is ending its Phase 3 FLOW trial ahead of schedule after an interim analysis of the kidney outcomes study of semaglutide (the active ingredient in Wegovy and Ozempic) found a very high likelihood of study success in patients with Type 2 diabetes and chronic kidney disease. Also, this week, results of a 502 employer survey by Accolade (ACCD) and Savanta suggested that the number of US employers who cover obesity medications could nearly double in 2024 from 25% to 43%. Furthermore, 81% of human resource decision makers believe that the employees are interested in coverage, and 79% agree that GLP-1 coverage would help employees’ health long term. Of those companies already covering GLP-1s, 75% noted higher employee satisfaction and 57% saw an improvement in comorbid health conditions. This latter point is critical, because widespread insurance coverage (including Medicare) will necessitate outcomes data that is forthcoming over the next four years. Lilly has studies underway in obstructive sleep apnea, knee osteoarthritis, cardiovascular outcomes and NASH.

Lilly is also expected to receive FDA approval for its Alzheimer’s drug, donanemab, by the end of the year. Data scheduled to be presented at the upcoming CTAD conference (Clinical Trials on Alzheimer’s Disease) may shed more light on the validity of the amyloid hypothesis in slowing disease progression. Lilly also has an impressive pipeline in immunology and oncology.

Lilly’s stock has performed well over the past two years. However, as I stated in my August article, I believe that the company is very early in a multi-year period of rapid growth that will exceed consensus expectations, driven by the GLP-1 franchise. When looking at the two components of stock price determination, earnings and the P/E ratio, I maintain that there will be constant upward earnings revisions. Therefore, the true P/E is not as high as it appears, and it could expand as well. My target price remains $750.

I forecast the GLP-1 category to achieve record revenues, and I note that my US 2030 forecast widely exceeds the consensus worldwide estimate. Besides Novo, there are also a host of “picks and shovels” companies that will benefit.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of LLY, NVO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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