Eli Lilly: Skinny Customers, Fat Profits
Contributor since 2013 / 6734 Followers
Summary:
- Lilly’s Mounjaro has shown promising results in weight loss, potentially surpassing competitors Ozempic and Wegovy.
- Ensuring long-term access, building bipartisan support for relevant legislation, and capitalizing on market opportunities within the type 2 diabetes sector are crucial to addressing the obesity epidemic.
- Eli Lilly’s robust revenue growth, driven primarily by its weight loss drugs, combined with its all-time high operating margin and earnings per share projections, present a compelling investment opportunity.
Antonio_Diaz
Our investment thesis delves into the potential of Eli Lilly’s (NYSE:LLY) Mounjaro, a diabetes drug that has shown promising results in off-label use for weight loss. We explore the drug’s impact on the weight management market and its possible advantages over competitors like Novo’s Ozempic and Wegovy. The analysis includes an examination of the challenges and opportunities in the obesity treatment market, as well as the financial and valuation aspects of investing in Eli Lilly.
Business Analysis: Weight Management
Lilly’s Mounjaro, a diabetes drug, is gaining attention for its off-label use in weight loss, with research suggesting it may be more powerful than Novo’s (NVO) Ozempic or Wegovy. A study found that tirzepatide, Mounjaro’s active ingredient, led to sharper reductions in blood sugar levels and greater weight loss than its competitors. Currently, Mounjaro is only FDA-approved for treating Type 2 diabetes, but there is speculation that it may be authorized for weight management soon. Demand for Mounjaro is increasing, causing supply shortages and potentially surpassing Ozempic in media attention and sales.
The approval of a new product for chronic weight management such as Wegovy marks a significant milestone in the field of obesity treatment. As our analysis reveals, the potential impact of this product on the lives of millions of people living with obesity and associated comorbidities cannot be overstated. However, several challenges and opportunities lie ahead, which we will address in this comprehensive analysis.
One of the main hurdles in ensuring the widespread adoption of this new medication is securing long-term access in the United States. Presently, only about 22% of the employers have opted into obesity medications, and access within Medicare Part D remains limited. Expanding coverage of obesity treatments should be a priority for policymakers and healthcare providers alike, as it would facilitate the broader adoption of such medications and consequently improve health outcomes for a considerable number of people.
The growing bipartisan support for the Treat and Reduce Obesity Act is an encouraging sign in this regard. With over 130 sponsors and counting, the act has the potential to contribute significantly to addressing the obesity epidemic in America. However, the real challenge lies in the productivity of the House and Senate in passing legislation within the next few years. A concerted effort from both parties is essential to ensure that obesity control becomes a priority across all age groups in the United States.
In the short term, our analysis indicates that the sleep apnea and heart failure indications are of particular importance. As these indications are covered under Medicare Part D, they not only help people living with comorbid issues associated with obesity but also enable differential access for these individuals. The cardiovascular MMO study will be a vital next step in demonstrating the long-term benefits of treating weight management aggressively and early on in the disease progression.
The market for GLP-1 sales is currently dominated by obesity treatments, with a significant opportunity for growth within the type 2 diabetes sector. The sheer number of people living with obesity, both in the U.S. and globally, presents a considerable market opportunity. However, it is essential to focus on encouraging the use of products like tirzepatide earlier in patients’ lives to prevent the development of conditions such as NASH, rather than exclusively targeting the treatment of these advanced stages.
The response to the new product has been overwhelmingly positive, with patients experiencing visible improvements and sharing their experiences on social media and through word of mouth. This consumer-driven demand, combined with extensive scientific research, is likely to fuel the growth of the product in the market. It is also expected to generate increased discussions with HR departments and congressional representatives, emphasizing the importance of ensuring access to such treatments.
The introduction of this new product for chronic weight management represents a significant step forward in obesity treatment. Ensuring long-term access, building bipartisan support for relevant legislation, and capitalizing on market opportunities within the type 2 diabetes sector will be crucial in addressing the obesity epidemic and improving health outcomes for millions of people. By focusing on early intervention and aggressive treatment of weight management, healthcare providers and policymakers can work together to prevent downstream costs and promote better health for individuals living with obesity and related comorbidities.
Financial & Valuation
Over the past three years, Eli Lilly’s revenue has experienced steady growth. This upward trend is expected to continue, and even accelerate, over the next two years, primarily due to the success of the company’s weight loss drugs. In 2023, revenue is anticipated to grow by 7.3%, and by 2024, it is projected to increase by an impressive 18.8%, ultimately reaching $36.4 billion. Along with this robust revenue growth, the operating margin is forecasted to reach a new all-time high of 33.7% in 2024, resulting in an all-time high earnings per share (EPS) of $11.52, a significant 36% increase from the expected $8.46 in 2023.
Eli Lilly has established itself as a solid dividend growth stock, boasting a commendable track record of eight consecutive years of dividend growth and over 30 years of uninterrupted dividend payments. While the company’s current yield of 1.25% may appear relatively low, it is quite safe, given the modest payout ratio of just 42%. Moreover, considering the company’s impressive earnings growth trajectory, there is ample opportunity for future dividend growth.
However, it is important to note that investing in Eli Lilly comes at a premium. The company is currently trading at a 40 times multiple on forward next twelve month consensus EPS, which is at the very high end of its five-year range relative to the S&P 500. Additionally, the stock is trading at a 122% premium EPS basis, near the high of its five-year range. While this high valuation may deter some investors, it is crucial to recognize the company’s attractive growth potential and strong financial position.
Based on our research and analysis, we believe that Eli Lilly’s robust revenue growth, driven primarily by its weight loss drugs, combined with its all-time high operating margin and earnings per share projections, present a compelling investment opportunity. Furthermore, the company’s solid dividend growth record and prospects for future dividend increases add to its appeal. While the high valuation might be a concern for some, we are of the opinion that the potential rewards outweigh the risks for long-term investors seeking exposure to a company with strong growth prospects and a proven track record of dividend payments.
Risks
Our comprehensive analysis of the risks associated with owning Eli Lilly shares focuses on three main concerns: safety issues surrounding tirzepatide, competitive threats to the drug, and potential setbacks in the development and approval of other key drugs in Lilly’s pipeline, such as donanemab.
First and foremost, safety issues are a significant risk when investing in pharmaceutical companies, particularly those developing weight loss drugs. Historically, many of the first drugs used for weight loss had life-threatening side effects, leading to their removal from the market. While tirzepatide is a relatively new drug, there is still a level of uncertainty surrounding its safety. The unpredictability of safety issues could adversely impact the marketability and profitability of tirzepatide, posing a risk to shareholders.
Another concern is the increasing competition in the weight loss drug market. While tirzepatide currently enjoys a strong position, it is important to note that other companies are developing similar drugs that could threaten its dominance. One example is Amgen’s obesity agent AMG 133, which has a unique mechanism of action as a GLP-1 receptor agonist and a GIP receptor antagonist. The potential for competition in this space creates uncertainties regarding the future market share and profitability of tirzepatide, posing a risk to Eli Lilly shareholders.
Lastly, our analysis highlights the risk associated with the failure of other important drugs in Lilly’s pipeline, such as donanemab, a monoclonal antibody treatment for Alzheimer’s disease. Despite promising results in initial studies, the FDA has not yet granted approval for donanemab due to insufficient data. A failure in Phase 3 trials or an inability to secure FDA approval would not only impact the company’s projected revenues but also diminish investor confidence, which could adversely affect Eli Lilly’s share price.
Conclusion
The potential of Lilly’s Mounjaro in weight management and diabetes treatment presents a promising investment opportunity. By addressing the challenges and seizing the opportunities in the obesity treatment market, Lilly can contribute significantly to improving health outcomes for millions of people. Financially, the company’s strong revenue growth, driven by its weight loss drugs, and its impressive dividend growth record, make it an attractive option for long-term investors. While there are inherent risks associated with pharmaceutical investments, we believe that the rewards outweigh the risks for investors seeking exposure to a company with strong growth prospects and a proven track record of dividend payments.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of LLY 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.
Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.