Shares of Eli Lilly (NYSE:LLY) reached new all-time highs this week, pushed by the continued share worth and elementary momentum, and by what some would say is the weight problems market hype. The previous is true if we simply look on the numbers, however there’s additionally some fact to the latter. This may be seen by the formation of a GLP-1 ETF of which Eli Lilly and most important competitor Novo Nordisk (NVO) are an enormous half – the Roundhill Glp-1 & Weight Loss ETF (OZEM).
The title and ticker image are short-sighted as a result of the weight problems market is already anticipated to go far past the GLP-1 mechanism and the OZEM ticker is definitely primarily based on Ozempic, which is the sort 2 diabetes model title of Novo Nordisk’s semaglutide and the precise title of the load loss drug Wegovy. Nonetheless, there’s actual substance behind the hype and each Eli Lilly and Novo Nordisk would ship much more prime and backside line progress if each of their weight problems merchandise weren’t provide constrained.
Eli Lilly’s valuation is a bit uncomfortable at present ranges, however it is likely one of the fastest-growing and best-positioned large pharma corporations when it comes to future progress prospects. There may be additionally the potential for progress acceleration and additional upside revisions as soon as the corporate secures sufficient drug provide.
Provide-constrained progress of tirzepatide (Mounjaro/Zepbound)
When Eli Lilly reported first quarter outcomes, it barely missed income estimates, however that didn’t cease the corporate from elevating the full-year income steerage vary by $2 billion on the mid-point to $42.4-43.6 billion. The brand new mid-point of the vary represents 26% Y/Y progress and 35% Y/Y progress if the numbers are adjusted for the latest divestitures.
The non-GAAP EPS steerage was additionally elevated from $12.20-12.70 to $13.50-14.00, pushed by the elevated income progress steerage vary.
The elevated income steerage was the results of administration getting extra snug in regards to the provide outlook for tirzepatide (Zepbound/Mounjaro), however the progress of the incretin enterprise (consisting of Zepbound, Mounjaro and Trulicity) continues to be closely provide constrained. Eli Lilly continues to take a position aggressively to broaden the manufacturing of tirzepatide throughout the globe and this contains a further $5.3 billion introduced this week to extend the capability of its facility in Lebanon, Indiana. The timelines present how ramping manufacturing shouldn’t be simple and takes time – floor was damaged in 2023, manufacturing will start towards the tip of 2026 and can scale up via 2028.
On the Q1 earnings name, administration stated that provide constraints will ease within the second half of the 12 months and that, relying on the demand and the corporate’s skill to get its further manufacturing websites on-line, it may final via 2025 as properly.
Regardless that income progress estimates have risen significantly in the previous couple of quarters, I consider the market continues to be underestimating the expansion potential in 2025. This regardless of expectations of continued however much less pronounced provide constraints, additionally for the second half of the last decade as provide points needs to be addressed by then. As such, I see potential for progress acceleration in 2025 and 2026 versus an estimated progress slowdown from 26% this 12 months to 22.4% in 2025 and 18.1% in 2026.
Eli Lilly’s place within the weight problems market and progress prospects
Trying on the progress of the incretin enterprise and the evolution of the market, Eli Lilly shouldn’t be solely maintaining, but in addition barely catching as much as Novo Nordisk. The essential caveat right here is the provision constraints for each corporations. These market share dynamics in latest quarters are solely being pushed by the provision of tirzepatide and semaglutide and this may stay the case for the foreseeable future.
Because the graph exhibits, Novo Nordisk continues to be the weight problems and the general incretin class chief. Novo Nordisk additionally has a bonus over Eli Lilly when it comes to product labels as Wegovy’s label now contains the indication of decreasing dangers of main cardiovascular antagonistic occasions (‘MACE”) which allows Medicare protection within the US, and Eli Lilly’s cardiovascular outcomes trial of tirzepatide is just anticipated to finish in 2027.
Nevertheless, Eli Lilly’s benefits over Novo Nordisk embody higher topline efficacy of tirzepatide (primarily based on cross-trial comparisons) and that is one thing the corporate intends to show in a head-to-head trial in opposition to semaglutide with topline outcomes anticipated this 12 months.
Eli Lilly additionally reported constructive part 3 outcomes of tirzepatide in obstructive sleep apnea this 12 months, and the outcomes from a part 3 trial of tirzepatide in coronary heart failure with preserved ejection fraction (‘HFpEF’) and from the talked about head-to-head trial of tirzepatide in opposition to semaglutide are additionally anticipated this 12 months. Constructive outcomes can be adopted by regulatory submissions to broaden the label of tirzepatide to incorporate obstructive sleep apnea and HFpEF. These two indications aren’t solely essential from a market growth perspective, but in addition as a result of each obstructive sleep apnea and HFpEF can be eligible for Medicare protection.
And as talked about, each corporations are nonetheless struggling to provide sufficient of tirzepatide and semaglutide, and the present progress developments and market share dynamics are a extra a mirrored image of how a lot every firm can produce slightly than their aggressive positioning. I might anticipate this to remain the case for not less than the subsequent a number of quarters, and buyers of each corporations ought to fear about their skill to ramp manufacturing and the provision outlook updates the 2 corporations present slightly than the quarterly gross sales numbers themselves.
Given all of the demonstrated advantages of those medication, and the emergence of latest knowledge and extra potential indications, I count on progress expectations to proceed to advance within the subsequent few years.
So far as different rivals are involved, we’re unlikely to see anybody problem the 2 corporations on the business market since all others are properly behind. Nevertheless, we’re seeing rising challenges within the clinic from a number of rivals, and I coated these in my earlier articles on every of those corporations, however will summarize shortly right here:
Amgen (AMGN) solely made qualitative feedback about its MariTide compound however prior knowledge point out this might be one of many first longer-acting rivals to problem the 2 leaders. Viking Therapeutics (VKTX) reported vital weight reduction at week 13 with once-weekly subcutaneously administered VK2735 and promising 4-week knowledge for the oral model of the identical drug. You’ll be able to see my evaluation of the ends in the article I printed this month. Roche (OTCQX:RHHBY) has joined the celebration due to its late 2023 acquisition of Carmot, and reported topline outcomes with vital placebo-adjusted weight reduction, which I coated final week.
These are simply among the potential rivals and we should always count on many extra to emerge within the clinic within the following years. Nevertheless, all of those candidates have solely generated part 2 knowledge and are but to even begin registrational part 3 trials, not to mention a cardiovascular outcomes trial that take 5 years or longer to finish.
Nevertheless, Eli Lilly and Novo Nordisk themselves aren’t standing nonetheless and each have further pipeline efforts to additional solidify their management positions.
Subsequent in line for Eli Lilly is orforglipron, the corporate’s oral nonpeptide GLP-1 agonist, with part 3 readouts in 2025 from trials in kind 2 diabetes, weight problems, and a smaller cardiovascular outcomes trial in kind 2 diabetes sufferers. Orforglipron shouldn’t be as aggressive on weight discount as tirzepatide, however might be an excellent choice for a lot of sufferers. Within the part 2 trial, orforglipron achieved weight reductions starting from 8.6% to 12.6% at week 26, or 6.6% to 10.6% placebo-adjusted.
And retatrutide, the corporate’s once-weekly subcutaneous “triple G” agonist (GLP1/GIP/glucagon) is shut behind with a lot of the part 3 readouts anticipated in 2026 and 2027. Retatrutide has an much more highly effective weight reduction impact than tirzepatide with as much as 24% weight reduction at week 48.
Past the incretin class, Eli Lilly is engaged on bettering the physique composition by rising fats mass loss and retaining lean physique mass. Final summer season, it acquired Verzenio that introduced bimagrumab. I wrote about this in my February article on Regeneron (REGN):
Bimagrumab is a monoclonal antibody that binds activin kind II A and B receptors to dam activin and myostatin signaling, and it believes that combining with incretins comparable to Zepbound or retatrutide may protect muscle mass and should result in higher outcomes for folks with weight problems and with associated problems. Importantly, the addition of a drug like bimagrumab may tackle the massive disadvantage of incretins – vital lack of muscle mass alongside fats loss.
Bimagrumab generated spectacular knowledge in a small part 2 trial – it led to vital loss in fats mass (7.5kg versus 0.5kg fats mass loss for placebo), a acquire in muscle mass (1.7kg acquire versus 0.4kg muscle mass loss for placebo) and it additionally demonstrated metabolic enhancements in kind 2 diabetes sufferers who had been obese or overweight.
That is an rising and really attention-grabbing space within the weight problems market that I coated in better element within the above-linked article on Regeneron, and Eli Lilly has been proactive in getting its arms on bimagrumab and advancing these efforts. The subsequent step is to report the part 2 outcomes of bimagrumab together with semaglutide later this 12 months and we should always see whether or not the mix strategy results in higher physique composition with elevated fats loss and minimal or no lean mass loss. And sure, Eli Lilly is doing a mix examine with Novo Nordisk’s semaglutide, however that is the trial Eli Lilly inherited when it acquired Verzenio and determined to finish the examine to hurry up bimagrumab’s improvement.
There are additionally different non-incretin approaches to weight reduction and a type of is a long-acting amylin candidate eloralintide, however this one is in earlier phases of improvement and the part 2 trial was solely initiated this 12 months.
General, I see Eli Lilly as very properly positioned to both sustain with Novo Nordisk and to probably even to leap forward in some areas of the more and more aggressive weight problems and adjoining markets.
Eli Lilly has a sturdy pipeline past weight problems and wholesome stability sheet do broaden the pipeline and product portfolio via M&A
Whereas the market is basically centered on Eli Lilly’s weight problems product portfolio and pipeline (appropriately), Eli Lilly has a sturdy pipeline in different areas. A number of the near-term progress alternatives are lebrikizumab in atopic dermatitis and donanemab in Alzheimer’s illness, offered they’re authorised by the FDA, and a few are longer-term progress drivers.
I just like the long-term potential of RNAi candidates the corporate in-licensed from Dicerna Prescribed drugs, which was, curiously sufficient, acquired by Novo Nordisk and now Novo Nordisk will get among the upside from the success of those candidates via milestone funds and royalties on internet gross sales. Specifically, I just like the long-term prospects of lepodisiran, an RNAi candidate that lowers LPa which is related to elevated danger of heart problems. It is a actually long-term driver because the part 3 outcomes aren’t anticipated earlier than 2029, however we should always get a greater concept whether or not decreasing LPa works subsequent 12 months when Novartis (NVS) stories the part 3 outcomes of its LPa-lowering candidate pelacarsen and these outcomes ought to have direct read-through to lepodisiran.
And an essential long-term driver also needs to be M&A and Eli Lilly ought to use the revenue windfall from the quickly rising weight problems portfolio to broaden its pipeline to additional strengthen its aggressive place within the weight problems market and to diversify its pipeline and scale back the long-term danger of overly counting on the weight problems portfolio.
Dangers
The principle dangers for Eli Lilly are:
The corporate not having the ability to safe sufficient provide of tirzepatide and probably different weight reduction compounds within the following quarters and years. I don’t anticipate this being a long-term drawback given the investments the corporate is making, however there might be hiccups alongside the way in which that trigger further drug shortages or result in prime and bottom-line misses in upcoming quarterly stories. Competitors is likely one of the key long-term dangers because the weight problems market is now in all probability essentially the most aggressive in the entire trade. Almost each large pharma firm will desire a piece of the market, and so will many rising smaller corporations with new and progressive approaches. These are, nonetheless, longer-term dangers as there are unlikely to be any business market challenges aside from from Novo Nordisk within the subsequent few years. Valuation is a big danger right here as Eli Lilly is buying and selling at elevated worth to gross sales and worth to earnings multiples, even when in comparison with Novo Nordisk. Plenty of progress is priced in at present ranges and the corporate wants not solely to ship consistent with present progress expectations, it wants the earnings and income estimates to maintain trending increased to proceed to ship shareholder worth.
There seems to be no stability sheet danger as of at the moment. Eli Lilly ended Q1 with $5.6 billion in money and investments and $26.2 billion in whole debt, and it ought to generate double-digit billion money flows this 12 months and much more within the following years. Longer-term, there’s the danger of the corporate making large M&A bets and stretching the stability sheet on offers that fail to provide the fascinating long-term upside.
Conclusion
Eli Lilly’s valuation calls for plenty of progress within the following years, however primarily based on the present outlook for the weight problems enterprise and the expansion being constrained by tirzepatide’s provide constraints, I might nonetheless count on the inventory to carry out properly over the subsequent few years. The corporate additionally has a wholesome scientific pipeline with many further photographs on purpose that might considerably broaden the income base via the remainder of this decade and it has the stability sheet to additional strengthen its product portfolio and pipeline within the following years.
However, I’m additionally aware of the dangers and the elevated valuation and don’t intend to overstay my welcome if Eli Lilly begins falling behind on each elementary and worth fronts.
Editor’s Notice: This text discusses a number of securities that don’t commerce on a serious U.S. alternate. Please concentrate on the dangers related to these shares.