Stock splits can get the market excited, even though nothing changes for the business fundamentally, including its future prospects. So what's the reason behind a rally following a stock split? Once a company's share price goes above a certain psychological threshold, the average investor begins to perceive the stock as "expensive" and worries about being unable to buy enough (or even whole) shares of that company.
When the executive leadership and board perceive such a loss in interest in the underlying stock, they typically undertake a stock split, thus generating renewed investor interest as shares then seem more "affordable" post the split, pushing up the stock price.
One way to predict which companies might engage in such a move is to look for companies whose shares are not only trading at comparatively hefty sticker prices, but whose businesses are likely to keep performing well.
It's not an exact science, but Eli Lilly(NYSE: LLY) and Regeneron Pharmaceuticals(NASDAQ: REGN) are two excellent candidates that fit that description.
1. Eli Lilly
As of this writing, Eli Lilly's stock is changing hands for about $908 a share. The stock has been red hot in recent years, up nearly 700% since 2019. If it can maintain this pace -- or anywhere close to it -- the company could boast a share price above $2,000 by 2027, which wouldn't be an unacceptable level for a stock split. And although Eli Lilly is already delivering strong financial results, I believe things are about to get even better.
In the second quarter, Eli Lilly's revenue increased by 36% year over year to $11.3 billion. Excluding the onetime revenue it recorded from the sale of the rights to one of its former medicines in Q2 2023, the company's top line grew by 46% year over year. Eli Lilly's biggest growth drivers, diabetes treatment, Mounjaro, and weight loss medicine, Zepbound, are still flying high. Further, the company recently earned FDA approval for Kisunla, an Alzheimer's disease treatment. That's to say nothing of other newer products, including ulcerative colitis therapy Omvoh and cancer drug Jaypirca, that aren't yet contributing meaningfully to its revenue, but should, eventually.
Expect Eli Lilly's financial results to continue being incredibly strong. The company will also record more clinical and regulatory wins. There has been positive clinical trial news recently from Tirzepatide -- the active ingredient in both Mounjaro and Zepbound -- as well as insulin efsitora alfa, Eli Lilly's investigational once-weekly insulin formulation. Here's the bottom line: Eli Lilly's business is firing on all cylinders and it doesn't look like that is about to change. Even if there are hiccups, the stock price will remain mostly northbound for a while.
Eli Lilly has conducted several stock splits in its history, but its last one was in 1997. The company might do so again within three years, but whether it does or not, the stock is a buy.
2. Regeneron
Regeneron has had a stock split, but it might be about time for it to. As of this writing, the company's shares are changing hands for a little under $1,132. Regeneron has also performed incredibly well in recent years, and there is more where that came from, particularly as its most important growth driver, eczema treatment Dupixent, is about to get a significant boost.
Regeneron shares the rights to Dupixent with France-based Sanofi(NASDAQ: SNY). Last year, the partners reported that the medicine had aced two phase 3 clinical trials as a treatment for chronic obstructive pulmonary disease (COPD), making it the first biologic drug to do so. Dupixent recently was given a label expansion for COPD by the European Union's drug regulator. It should soon get a similar expansion in the U.S. as well.
Last year, Dupixent was among the 10 highest-grossing drugs in the world, racking up $11.6 billion in sales. It is still gaining ground even without the added COPD indication. In the first six months of 2024, Dupixent's global sales (recorded by Sanofi) increased 26% year over year to $6.6 billion. While estimates vary, analysts predict that the COPD indication could give Dupixent another $3.5 billion to $6.5 billion in annual sales, and forecast the drug could generate $20 billion in annual revenue by 2026.
In addition, Regeneron has fended off the competition (biosimilar and otherwise) to Eylea, its treatment for wet age-related macular degeneration, the rights to which it shares with Bayer, thanks to the approval of a high-dose formulation of the medicine. Combined U.S. sales of Eylea and Eylea HD increased 2% year over year in the second quarter to $1.53 billion. Regeneron's financial results remain solid: Its revenue rose 12% year-over-year to $3.55 billion in the second quarter.
The biotech is also developing newer products, especially in oncology. And so, barring any overly negative development, Regeneron should continue performing solidly with the stock outperforming the broader market. Consequently, its shares should trade at a price significantly above the already lofty level, by 2027. With that in mind, a stock split could be in the cards for this no-brainer biotech stock.
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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
