Eli Lilly(NYSE: LLY) stock has climbed in the double digits over the past year thanks to its leading position in one of the highest-growth pharmaceutical markets around: weight loss drugs. Lilly sells tirzepatide, commercialized as Mounjaro for type 2 diabetes and as Zepbound for weight control. Doctors have prescribed both for the weight loss indication though, and demand has been so high that it's surpassed supply -- and the same has been the case for rival Novo Nordisk, which sells similar compound semaglutide, commercially known as Ozempic and Wegovy.
And this lack of sufficient supply actually has represented a significant problem for both companies. The obvious reason is: A company can't fully benefit from the revenue opportunity if it isn't able to produce enough product. Even worse, though, in the pharma business, when a company's drug ends up on the U.S. Food and Drug Administration's (FDA) shortage list, compounding pharmacies are authorized to produce copies of the drug and sell it -- and often these copies are cheaper. This is what's been happening in the case of the Lilly and Novo Nordisk drugs.
In recent days, though, Lilly and the company's shareholders got what may be billion-dollar news -- and it could fuel gains in this already high-momentum stock. Let's find out more.
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Compounders making weight loss drugs
As mentioned, compounding pharmacies have been winning big in recent months, furnishing copies of Lilly's weight loss drugs and watching their revenue climb. The FDA listed Mounjaro on its shortage list about two years ago, then added Zepbound this past April -- Zepbound only won FDA approval about six months prior to landing on the list.
Just days ago, though, the FDA removed tirzepatide from its shortage list, closing the door to copies from compounding pharmacies. Within 60 days, all compounding pharmacies must halt production. Meanwhile, Novo Nordisk's semaglutide remains on the shortage list, meaning the pharmacies may continue producing their versions of it.
This could represent billions of dollars in revenue for Lilly over time because the company now is ready to serve the customers that have been turning to compounding pharmacies -- and Novo Nordisk won't take away market share because the company's drugs still are on the shortage list.
But, you might argue, patients turning to compounders may not be able to pay for Lilly's higher-priced drug. The company has that covered, thanks to another recent move. Lilly, through its self-pay channel, has introduced single-dose vials of Zepbound that are half the price of all other medicines of the same class -- incretins, or drugs that help regulate blood sugar levels. The vials are easier and cheaper to manufacture than the original version of Zepbound, which comes in a single-dose pen format.
Lilly's investment in manufacturing
Single-dose vials as well as Lilly's heavy investment in manufacturing over the past few years put the company on the right path to handle demand for these much-sought-after drugs. Lilly has invested more than $18 billion since 2020 in its manufacturing capacity, a wise move considering forecasts for growth in this particular market. The weight loss drug market may increase by 16 to reach $100 billion by the end of the decade, according to Goldman Sachs Research.
Now, Lilly's emergence from this drug shortage quagmire ahead of rival Novo Nordisk could give it the upper hand with doctors and patients -- further boosting its revenue opportunity.
It's important to keep in mind that, even when Lilly wasn't able to keep up with demand, it still generated blockbuster revenue from Mounjaro and Zepbound. Mounjaro brought in $3 billion in revenue in the most recent quarter, while Zepound delivered $1.2 billion, for example. So, now with the ability to serve additional patients, more growth could be right around the corner and may represent billions of dollars over time.
Is Lilly a buy?
What does this mean for investors? It's true that Lilly shares have advanced quite a bit -- 63% over the past year -- and they're trading for 54 times forward earnings estimates. That seems pretty pricey for a pharma stock. But considering that Lilly today is behaving more like a growth stock -- and this could continue in light of weight loss drug market growth forecasts -- current levels are reasonable. Especially for long-term investors, who will be well positioned to benefit from this pharma giant's growth years down the road.
All of this means, now, after this billion-dollar news, is a great time to be a Lilly shareholder -- or to get in on this high-growth pharma story.
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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
