Analysis of Recent FDA Update Suggests Potential Investment Opportunity for Eli Lilly in 2025?
Eli Lilly (LLY) saw its stock surge over 60% since the beginning of the year up until its peak during summer, thanks to the company's dominance in the booming market for obesity drugs. Lilly's main contender in this market is tirzepatide, marketed as Zepbound for weight loss and Mounjaro for type 2 diabetes. Prescriptions for both drugs have soared, resulting in strong double-digit revenue growth for the pharmaceutical giant.
The demand for these drugs was so high that it outpaced supply, forcing Lilly to expand its manufacturing capabilities to meet the demand. However, the shortage also gave compounding pharmacies permission to produce and sell their own versions of the drug. This lowered Lilly's revenue potential.
Recently, though, the U.S. Food and Drug Administration (FDA) announced that there is no longer a shortage of tirzepatide, requiring compounding pharmacies to cease selling their alternative versions of the drug.
With the shortage now resolved, does this make Lilly a worthy investment for 2025?
Understanding the Mechanism of Lilly's Weight Loss Drugs
First, let's examine the complete story behind Lilly's weight loss drugs. Belonging to the class of dual GIP/GLP-1 receptor agonists, these drugs interact with hormonal pathways associated with digestion. They function by managing blood sugar levels and appetite, leading to impressive results in both clinical trials and real-world applications.
In a recent comparative study involving Novo Nordisk's Wegovy, Zepbound emerged as the superior option, resulting in an average weight loss of approximately 20%, surpassing the more than 13% achieved by Wegovy. Both Lilly and Novo Nordisk sit at the forefront of this market today.
Further research into Zepbound reveals potential for addressing other health issues prevalent in individuals with obesity, from heart failure to sleep apnea. Lilly has already applied for regulatory approval for Zepbound in these areas, and lately, received approval for use in sleep apnea.
The significance of regulatory approval in these areas for Lilly lies in the fact that Medicare only covers weight loss drugs if they're approved for a secondary condition. Obtaining such approval would expand the pool of eligible Zepbound patients.
Lilly, however, has faced challenges in fulfilling demand, providing an opportunity for compounding pharmacies to take market share. These pharmacies are authorized to sell their versions of drugs on the FDA shortage list, often at a lower price. Once the drug is removed from the shortage list, though, compounders must cease selling.
Addressing the Supply Issue
In late October, the FDA removed tirzepatide from the shortage list, stating that supply now meets or surpasses current demand and will continue to meet projected demand in the future. Compounding pharmacies now have a 60-90 day window, depending on their operations, to stop selling their versions of the drug.
This development is favourable for Lilly, as patients now have no choice but to obtain Zepbound or Mounjaro from the pharmaceutical company, allowing Lilly to fully benefit from the demand. Even during the drug shortage, these products generated billions in revenue, poster a strong indication of growth as capacity increases and compounding pharmacies exit the market.
Does this news make Lilly a worthy investment for 2025? While considering the whole picture, it's noteworthy that Lilly offers a diverse range of other drugs across various treatment areas. In the latest quarter, three major products — Verzenio for breast cancer, immunology drug Taltz, and diabetes drug Humalog — each recorded double-digit revenue growth. Currently, Lilly's stock trades at 57x forward earnings estimates, a significant decrease from over 70x just a few months ago. With a brighter future ahead, Lilly is a promising pharmaceutical stock to invest in for 2025 and potentially hold onto for the long term.
Given the resolution of the tirzepatide shortage, Lilly now has the opportunity to capture the full market potential of its weight loss drug, Zepbound. Investors considering Lilly as a long-term investment in 2025 might find its diverse drug portfolio attractive, as its key products, such as Verzenio, Taltz, and Humalog, continue to show strong revenue growth. The reduced forward earnings estimates compared to a few months ago also suggest that Lilly's stock could be an attractive investment opportunity.
