According to a sneak peek of the data from one of Eli Lilly's (LLY -1.38%) late-stage clinical trials, the cardiometabolic medicine juggernaut now looks even stronger in comparison to its similarly powerful arch-rival, Novo Nordisk, (NVO -0.32%) and it isn't the first time.
Here's why the stock is worth investing in even more than before.
This is one big step forward in Lilly's most important competitive fight
One of the most important questions about the competitive prospects of Lilly against Novo Nordisk in the market for anti-obesity medicines is, quite simply, which company makes the more effective drug.
While it's typically beneficial to have more than one intervention to choose from, it's also obvious that, on average, physicians will first reach for the tool that's proven to be better, which directly impacts a drug's market share. Considerations like side effects tend to be of secondary importance unless one therapy is significantly more burdensome for patients than another.
On the basis of the clinical trials that led to the approval of tirzepatide, Lilly's drug that's sold under the trade name Zepbound, investors had good reason to suspect that it'd be more effective than Novo Nordisk's candidate semaglutide, which is known by the trade name Wegovy. But, until recently, there has not been any scientifically rigorous investigation that directly compares the two molecules.
Per a preview of a head-to-head phase 3b clinical trial comparing the efficacy of weight loss with Zepbound versus Wegovy published on Dec. 4, Zepbound was the clear winner. After 72 weeks of once-weekly treatment, the Zepbound cohort experienced a loss of 20.2% of their body weight on average, compared to a loss of just 13.7% for the patients treated with Wegovy. For those keeping score, that's 47% more weight loss on a relative basis. But that's not all: 31.6% of the Zepbound patients experienced a weight loss of at least 25% of their total body weight, whereas only 16.1% of Wegovy patients reached the same milestone.
In other words, on average, Lilly's drug was more effective for more people than the alternative. That implies it'll now have a significant advantage in gaining market share, even without spending more on marketing relative to Novo Nordisk. And that's why the bull thesis for buying its stock just got even stronger than it was before.
While the full results of the trial haven't yet been published in a peer-reviewed scientific publication, the company expects to do so sometime in early 2025. Given that clinicians tend to be on the conservative side with their prescribing habits, meaning that they'll wait to see the full data before changing anything, and also that it takes some time for new information to disseminate throughout the medical community, it is reasonable to expect most of the actual financial returns for the business to start to accrue toward the latter half of 2025 at the earliest.
In the third quarter, sales of Zepbound were worth $1.2 billion, making it a blockbuster drug. It hasn't even been on the market for a full year yet. Nor has it been in steady supply for most of the time since its approval; the same applies to Wegovy. So, while it's hard to say with precision how much additional revenue the study's findings will lead to, estimates on the order of another $100 million per quarter probably aren't unrealistic over the next few years.
Don't go all in
As great as the new data are for Lilly and its shareholders, it's best to avoid total exuberance here. There's nothing wrong with the findings of the study. It's just that Lilly's valuation is starting to look a bit stretched, and that means if you're thinking about investing, it's appropriate to show just a tidbit of restraint.
The stock's trailing-12-month (TTM) price-to-earnings (P/E) multiple is 87.6. The average of the overall market is 29.1. These figures do not imply any kind of looming crash or downturn, only that the company's rate of earnings growth will need to remain consistently high to justify its higher-than-average valuation.
With Zepbound acting as an earnings powerhouse, that is likely possible and even probable. However, the risk to new investors is still elevated compared to when the valuation wasn't as lofty. Now, a bump in the road, like a bad quarter or two for earnings, could cause shares to tumble even if the core business is as fundamentally sound as it ever was.
In closing: This stock is worth buying today, even though it isn't cheap. Just don't sell your house for it.
