One of the biggest contributors to growth in the pharmaceutical industry right now is weight-loss medicine. Diabetes and obesity treatments from Novo Nordisk, such as Ozempic, Rybelsus, and Wegovy, are taking the world by storm.
Eli Lilly (LLY 0.65%) is another rising star in the weight loss arena thanks to blockbuster drug Mounjaro and the company's newest rising star, Zepbound. In late April, Lilly quietly made an acquisition that I think is going to unlock a new phase of growth. The catch? Lilly didn't acquire another company or any rights to competing medications.
Let's break down Lilly's latest move and explore how it should lead to further growth over the long-run.
Following in Novo's footsteps
Ozempic, Mounjaro, and all of their sibling treatments belong to a class of medications known as glucagon-like peptide-1 (GLP-1). Indeed, demand for GLP-1 treatments is soaring, and research suggests that these drugs are here to stay. Data from J.P. Morgan shows the GLP-1 market reaching $100 billion by 2030, with 9% of the U.S. adult population using these treatments.
With so much hype around these medical breakthroughs, investors ought to be aware of some risk factors. Namely, matching supply and demand has been a challenge for both Novo Nordisk and Eli Lilly. This dynamic led Novo to pursue and interesting strategic deal earlier this year.
Back in February, Novo Nordisk announced a $16.5 billion acquisition of Catalent. The rationale behind the deal was to take over Catalent's manufacturing facilities so that Novo Nordisk could ratchet up its production of Ozempic and Wegovy.
Well, Lilly just took a page out of its rival's book with a similar transaction. Eli Lilly recently announced that it is acquiring an injectable manufacturing facility from Nexus Pharmaceuticals.
For now, GLP-1 medications such as Ozempic, Wegovy, Mounjaro, and Zepbound are administered via an injection. Lilly's intentions with this new facility parallels that of Novo Nordisk as the company is firing on all cylinders to meet demand.
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Some important things to consider
It's encouraging to see Lilly aggressively pursuing outlets to increase production efforts. However, investors should be aware that the new facility from Nexus won't be up and running for a while. During Lilly's first-quarter earnings call, management shared with investors that the company is "targeting to initiate production at the end of 2025."
Although the addition of enhanced manufacturing capabilities is not reason enough to buy Lilly stock, there are some silver linings. First, the company is laying the groundwork for long-term sustained growth. And second, clearly demand trends for Mounjaro and Zepbound are robust -- aligning with J.P. Morgan's research about GLP-1's in general.
So, while the deal may not be a game changer right now, I still see Lilly's acquisition as quite savvy. Investors simply need to employ some patience and think about and investment in Lilly as a long-term idea while the GLP-1 movement continues to scale.
Is Eli Lilly a good buy right now?
I see several reasons to buy Lilly's stock right now. First, GLP-1 medications are in their infancy. It will be years before Eli Lilly begins to recognize peak sales for Mounjaro and Zepbound.
Moreover, early research is showing that GLP-1 treatments have applications outside of diabetes and obesity care. For example, earlier this year the Food and Drug Administration (FDA) approved Wegovy for an expanded indication to treat patients with cardiovascular disorders.
This is a big deal because Wegovy is already extremely popular in its core market of chronic weight management. Expanding into the cardiovascular market provides Novo Nordisk with an entirely new platform for growth.
Considering that Lilly's Zepbound is its closest competing treatment to Wegovy, coupled with Zepbound's already staggering growth, I'm cautiously optimistic that Lilly will also be entering new GLP-1 markets in due time.
At a forward price-to-earnings (P/E) ratio of 56.7, Lilly's stock is a bit pricey compared to the broader market. The forward P/E of the S&P 500 is roughly 20 right now. That said, I think there are too many catalysts fueling Lilly's momentum to warrant sitting on the sidelines.
A prudent strategy in building a position is to use dollar-cost averaging over a long-term time horizon. This will allow you to buy into Lilly's stock at various price points over time while also monitoring the company's progress within the GLP-1 market and beyond.
