Since the launch of its drug Mounjaro last year, it's clear that Eli Lilly (LLY +3.56%) has become a strong competitor to Novo Nordisk (NVO +3.48%) and its early dominance in the market for medicines that treat obesity and type 2 diabetes.
And now, Eli Lilly could have a further trick up its sleeve. While Novo Nordisk's portfolio includes household names like Ozempic, Rybelsus, and Wegovy, Eli Lilly's retatrutide -- currently in clinical trials -- might be an even bigger winner.
So does that make Eli Lilly's stock worth buying today? Let's dive in and see what's going on.
NYSE: LLY
Key Data Points
Ozempic may have a possible new contender
As of June 26, Eli Lilly became the developer of the most promising potential therapy for weight loss and diabetes. Per a press release, its phase 2 trial examining its candidate retatrutide was a stunning success, with patients losing 17.5% of their body mass after 24 weeks of treatment, and losing a total of 24.2% of their mass after 48 weeks of treatment.
In comparison, a 2021 study of Novo Nordisk's semaglutide, the molecule in Ozempic, found that after 68 weeks, patients lost an average of 14.9% of their mass. The side effect profiles of the two medicines are comparable. So retatrutide looks like it blows Ozempic out of the water because it helps people to lose weight dramatically faster.
If Eli Lilly manages to get retatrutide out the door after it wraps up its next phase of clinical trials, it'll be a boon to the top and bottom lines, and it is highly likely that it will steal market share from Novo Nordisk's trio of interventions for the same conditions.
And the market could indeed be sizable. According to a market research report by Mordor Intelligence, the demand for such therapies could be as large as $12.5 billion by 2028. For reference, Lilly's drug Mounjaro, which targets the same indications, generated $568.5 million in Q1, and at that point it hadn't even been on the market for a year.
Considering the company's total revenue for that period was just under $7 billion, it's safe to say that the class of drugs is already a major driver of its favorable financial performance.
While there's no guarantee that retatrutide will ever get commercialized, at the moment its phase 2 results look so unusually strong that it would be surprising to see a different story play out with its phase 3 trials. And that's actually part of this stock's set of risks.
NYSE: NVO
Key Data Points
This stock is absurdly expensive
Great products don't always make for companies that are great investments. Thanks to the ever-growing hype surrounding Novo Nordisk's Ozempic, which has now spilled over into hype about Mounjaro, Eli Lilly's stock has been bid up to a frothy valuation.
Its price-to-earnings (P/E) ratio is 72, which is incredibly high. At the same time, analysts see the company's top line growing by 19.7% to reach an average of $37.5 billion in 2024. While it would be hard for that snappy pace to accelerate, in the following years after launching retatrutide, it's possible.
But the question would then still remain whether the valuation is justifiable as it would take a tremendous (and unattainable) amount of fresh revenue and earnings to bring its value multiples into more reasonable territory.
Therefore, if you're a stickler for inexpensive stocks, this is the wrong choice. While Eli Lilly's valuation is not based on hype alone, the current moment is one where the market is moving quickly. Another competitor might well top retatrutide's results, and the battle for market share might get expensive, especially if there are superior products floating around, which there might be eventually.
On the other hand, if you're an optimistic sort, it is probably a good bet that the promise of the latest generation of weight loss and diabetes medicines is in the early innings of being revealed. That leaves plenty of time for new investors to start a position and see some growth. As competition heats up, Eli Lilly will be extremely well-positioned to flourish, even if Novo Nordisk or other competitors manage to commercialize more therapies of their own.
In other words, it is probably true that this stock's valuation should be a bit higher than the norm as the expectations that investors have for its future growth are likely to be met.
