Eli Lilly (NYSE:LLY): Is this US$700bn company the biggest threat to Novo Nordisk & Ozempic?

For investors who missed out on Novo Nordisk, or reckon it is overvalued, Eli Lilly (NYSE:LLY) could be the next best thing. On a market cap basis, it is US$200bn bigger than Novo Nordisk and is actually the world’s largest pharmaceutical company. Like Novo Nordisk, it has had a historical business aiding people with diabetes and obesity, but also has oncology, immunology and neuroscience drugs too. But can it catch up to, and maybe even beat, Novo Nordisk? And is it worth a buy?

Introduction to Eli Lilly

This company, headquartered in Indianapolis, was named after the Civil War Union Army Veteran and pharmaceutical chemist who founded the company in 1876. It has been a ground-breaking company for the bulk of its existence, being the first to mass produce a polio vaccine and human insulin. It was also the first pharmaceutical company to adopt the concept of straight-line production – an industry standard nowadays.

The company made $34bn in revenue during 2023 and a $5.2bn profit, with its key revenue drivers being diabetes drugs Humalog and Trulicity. It is eyeing off future opportunities, particularly using radiopharmaceutical drugs to treat cancer.

It has nearly doubled in the last 12 months and is up nearly 600% in 5 years.

Eli Lilly (NYSE:LLY) share price chart, log scale (Source: TradingView)

A rival to Ozempic?

Eli Lilly has a drug called tirzepatide that regulates blood sugar levels and thus helps people with diabetes. In May 2022, it was FDA approved as an adjunct to diet and exercise to improve glycemic control in adults with Type 2 diabetes, under brand name Mounjaro. 18 months on, the FDA approved it as an obesity treatment, under the brand name Zepbound. Yes, the FDA has endorsed it as an obesity-killer. Specifically, it is approved for adults with obesity or who are overweight with at least one weight-related condition.

Eli Lilly’s Mounjaro/Zepbound drug; Source: Company

The drug has been shown in a Phase 3 clinical trial to help people lose up to 52 pounds in 16 months – results unparalleled by any other drug. Zepbound is a GLP-1 agonist like Ozempic is, but it imitates a second hormone, called GIP, which – along with reducing appetite – may also improve how the body breaks down sugar and fat.

There has been demand for these drugs, just like Ozempic. In 2023, Eli Lilly made US$5.1bn from Mounjaro in the first full year of sales. This was the company’s second biggest revenue generator behind Trulicity. Trulicity true is an injectable drug to help diabetes, but is dulaglutide based and has not been as effective at helping with weight loss even if it is effective with diabetes and some are using it to help with weight loss.

In the March quarter of 2024, the first full quarter of Zepbound’s approval, the company made $517m from Zepbound. And yet it is still dwarfed by Mounjaro which sold $1.8bn, up from $568m in 2023’s March quarter.

There’s good news and bad news

Eli Lilly is well positioned to make a mark in the weight-loss drug market. Being first to market will help it build trust and entrench loyalty. Remember that Ozempic is only approved for diabetes and not for obesity. Also, as a company with established facilities, Eli Lilly will be better positioned to meet demand through its existing facilities. It also has the balance sheet to invest – it told investors in May 2024 it would invest US$5.3bn in a manufacturing plant in Indiana to expand the production of Zepbound, along with other medicines. And even before the investment, the ongoing supply squeeze has ended. It is not the company saying that, but the FDA which has taken Zepbound off the list of medicines with shortages, after nearly 2 years on the list.

The bad news is that Zepbound will cost consumers US$1,060 for a month’s supply and this may not be covered by insurance companies, let alone by Medicare. However, if it as effective as has been shown in the clinical trials, people will find a way to afford it. Also, as a high-growth company, there is the risk investors may lose confidence in the company if growth slows down substantially. And the company, like Novo Nordisk, will need to deal with fake and compounded versions of its medications. In fact, it is already fighting lawsuits with med spas purportedly selling fakes.

There’s growth ahead but it isn’t cheap

For CY24, consensus estimates expect US$43b in revenue and US$13.26 in EPS, or a $12bn profit, with the latter figure more than double the year before and the former 26% higher. In CY25, $52.8bn in revenue and a $16.8bn profit, followed by $62.2bn in revenue and a $21.9bn profit. Eli Lilly trades at a P/E of 40.2x for FY25 but a PEG of 0.99x. This is higher than Novo Nordisk that is 28.4x P/E and many of its US peers – Merck trades at 11.5x and Bristol-Myers Squibb trades at 6.7x.

On the basis of its PEG multiple, you could conclude that Eli Lilly is worth a buy. The analysts covering the company have a mean share price of US$920.45, up 20% from the current price. We would concur that Eli Lilly has growth ahead of it, although we would add warning that (as is the case with Novo Nordisk) it won’t be an entirely smooth path ahead.

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