Eli Lilly’s heavyweight status looks set to last

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Eli Lilly was once considered something of an also-ran in the pharmaceutical industry. The company, known for powerhouse psychiatric drugs like Prozac, struggled to replace lost sales from patent expirations on some of its most profitable treatments in the 2010s. It pulled in less revenue in 2019 than it did in 2011. In the latter half of the decade its market value languished at around the $100bn mark.

These days, Lilly is the world’s most valuable drugmaker, after overtaking Johnson & Johnson last summer. Its $610bn market capitalisation makes it the ninth biggest company on the S&P 500.

It has America’s obesity epidemic to thank. And if 2023 was the year of Ozempic and Wegovy, then 2024 could be the year of tirzepatide.

The latter, made by Lilly, has been approved to treat type 2 diabetes since 2022 under the brand name Mounjaro. Some doctors prescribe it off-label as a weight loss drug. But last November, US regulators gave the greenlight for it to be used as an obesity treatment under the name Zepbound.

High expectations for the weekly injectable treatment have sent Lilly shares on an epic run. The stock bucked the wider pharma sell-off, rising 60 per cent last year. A price to forward earnings multiple of over 50 values the stock more like a tech company than a pharma group. Bristol Myers Squibb trades on just seven times earnings while Pfizer is on 20 times.

The frenzy for weight loss and diabetes medications is unlikely to fade. In the US, more than 40 per cent of adults are considered obese. This new class of weight loss drugs — known as GLP-1 — need to be taken consistently for lasting results. JPMorgan thinks sales of these drugs could exceed $100bn by 2030. 

For now, the market is dominated by Lilly and Novo Nordisk, the Danish maker of Ozempic and Wegovy. But Lilly may yet have an edge. Some research has shown tirzepatide, the active ingredient in Mounjaro and Zepbound, has better efficacy. Zepbound is also cheaper than Wegovy. One bullish estimate reckons Zepbound and Mounjaro could generate over $50bn in peak annual sales. That compares to Lilly’s total revenues of $28.5bn for the whole of 2022.

The number is not as far fetched as it looks, especially if Lilly can show tirzepatide offers other health benefits like reducing the risk of heart attacks or strokes. This would encourage the US government and private insurers to include the treatment in its healthcare coverage.

Lilly also has a promising drug in the field of Alzheimer’s, the last great excitement before obesity medications took the spotlight. Lilly’s valuation may seem impossibly high but don’t expect a correction to come any time soon.

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