Up 45% This Year What’s Driving The Growth For Eli Lilly Stock?

LLY: Eli Lilly and Company logo
Eli Lilly and Company

Eli Lilly stock (NYSE: LLY) has seen about a 45% rise this year, significantly outperforming the broader S&P500 index, up 16%. Even if we look at the longer term, LLY stock, with a stellar 200% return from levels seen in late 2020, has outperformed the S&P 500 index, up nearly 20%. The stock has been on a strong run for the last few years, primarily due to its pipeline potential. However, from a valuation perspective, at the current price of about $525, LLY stock looks expensive, as discussed below.

This 3x rise for LLY stock since late 2020 can primarily be attributed to 1. a 170% rise in the company’s P/S ratio to 16.9x revenues currently, compared to 6.2x in 2020, 2. a 20% rise in Eli Lilly’s revenue to $30 billion over the last twelve months, compared to $25 billion in 2020, slightly offset by 3. a 5% rise in its total shares outstanding to 949 million. This has meant that Eli Lilly’s revenue per share rose 15% to $31.09 over the last twelve months, vs. $27.03 in 2020. Our dashboard on Why Eli Lilly Stock Moved has more details.

Eli Lilly’s revenue growth over the recent years has been driven by market share gains for some of its drugs, such as Trulicity, Verzenio, Jardiance, and its Covid-19 antibodies. But it’s not the revenue growth in recent years that has kept the stock buzzing. Last year, the company secured U.S. FDA approval for its diabetes/obesity drug – Mounjaro (Tirzepatide) – which, per some analysts, could garner over $40 billion in peak sales, and the figure would be over $65 billion, if we include the company’s other obesity drugs. [1]

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Mounjaro targets two obesity-related hormones – GLP-1 and GIP. The company is also developing – Retatrutide – which targets three obesity-related hormones, including glucagon. [2] However, Eli Lilly is not the only one developing obesity drugs. Nova Nordisk was the first to launch weight loss treatments – Wegovy and Ozempic, and Pfizer is also working on a similar drug that targets obesity-related hormones. Pfizer estimates the total peak market opportunity for the obesity drug class at $100 billion annually. [1]

Earlier this week, Eli Lilly reported its Q2 results, with Mounjaro garnering $1 billion in quarterly sales, compared to the $482 million it garnered in full-year 2022. The strong surge in Mounjaro sales lifted investor sentiment, sending LLY stock to its lifetime highs. One of the Wall Street analysts upgraded the potential peak sales target for Mounjaro to a whopping $68.7 billion. Mounjaro is all set to become the world’s biggest drug in history. Together, the current behemoths – Merck’s Keytruda and AbbVie’s Humira – garnered $42 billion in 2022 sales. Investors are optimistic about Eli Lilly’s future, with Mounjaro disrupting the obesity drugs market. Beyond the obesity drugs, Eli Lilly has more potential blockbuster drugs in its pipeline. For example, the company expects the U.S. FDA decision for its Alzheimer’s treatment – Donanemab – later this year. If approved, the drug could garner $5 billion in peak sales.

Looking at valuation, at its current levels of $525, LLY stock trades at 17x trailing revenues and 13x its 2024 revenues of $40 per share ($38 billion total sales). This compares with its last three-year average of 9x, implying that the stock is expensive compared to its historical average. It also trades at a much higher valuation compared to its peers. Merck, AbbVie, and J&J trade at 4.7x revenues, Pfizer at 2.2x, and Bristol Myers Squibb at 2.8x.

There is no denying that Eli Lilly is about to see a strong revenue and earnings growth phase in the coming years, but its stock price action has meant that the positives are already priced in, in our view.

What if you’re looking for a portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

Returns Aug 2023
MTD [1]
YTD [1]
Total [2]
 LLY Return 16% 44% 615%
 S&P 500 Return -3% 16% 100%
 Trefis Multi-Strategy Portfolio -5% 22% 293%

[1] Month-to-date and year-to-date as of 8/10/2023
[2] Cumulative total returns since the end of 2016

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  1. Eli Lilly Is Priced for Perfection in the Obesity Market, David Wainer, Mar 22, 2023, The Wall Street Journal [] []
  2. Eli Lilly’s Press Release, June 26, 2023 []