Pharmaceutical giant Eli Lilly (LLY -1.38%) is having a moment right now. Over the last two years the company has made a splash in the weight loss space thanks to its one-two punch of blockbuster diabetes and obesity care medications, Mounjaro and Zepbound.
The excitement surrounding the weight loss market has fueled a stock-buying frenzy, propelling Lilly to a market capitalization of roughly $720 billion -- making it the most valuable pharmaceutical company in the world.
At first glance, you might think you've missed out and the train has already left the station. However, a recent announcement from the company suggests that notion is far from reality.
Below, I'm going to break down a major update Lilly shared with investors earlier this month, and make the case for why now could still be an incredibly lucrative time to scoop up shares.
What did Eli Lilly just announce?
On Dec. 9, Lilly's board of directors approved a $15 billion stock buyback program. CFO Lucas Montarce said of the share buyback:
As Lilly has entered into a period of rapid growth, our capital allocation priorities remain the same. We will continue to focus on supporting new launches, expanding our manufacturing capacity, and advancing our pipeline through research and development and business development. However, given the strong growth profile of the company, we're also increasing the amount of capital we plan to return to shareholders. We expect to execute this program over the next three years.
Below, I'm going to expand on Montarce's comments and explain why I think this buyback is so pivotal for investors.
Image source: Getty Images.
Why might Lilly be buying back shares?
While there are many reasons a company may decide to repurchase shares, one of the principal motives can be that management feels that the stock is undervalued. To me, Montarce's quote implies that management sees a lot of upside for Lilly, given the company's expansive pipeline and growth opportunities.
Let's take a look at some of Lilly's biggest opportunities, and assess how these could impact the company in both the short term and the long term.
Weight loss
As I alluded to above, Lilly's primary tailwinds in the weight loss market come from its glucagon-like peptide-1 (GLP-1) receptor agonists Mounjaro and Zepbound. And while each of these medications has generated billions of dollars in sales over the last couple of years, there are several reasons to believe Lilly has yet to scratch the surface in diabetes care and chronic weight management.
A couple of months ago, Lilly made some changes to Zepbound's pricing to make it more affordable and accessible to patients who had been opting for GLP-1 alternatives in the form of compounded medications, which are not approved by the Food and Drug Administration (FDA). Earlier this month, Lilly took this effort a step further by partnering with Ro, a direct-to-consumer (D2C) telemedicine platform that will also now serve as a distributor for Zepbound.
Another factor, which I think is being overlooked, is the potential for GLP-1 treatments to become more widely used outside of weight loss. According to a report from J.P. Morgan, GLP-1 medications may have the potential to treat other conditions such as sleep apnea, arthritis, chronic kidney disease, Alzheimer's, and some forms of addiction, and to lower cardiovascular risk.
Given the upside in the GLP-1 market alone, it's not surprising that Lilly is investing billions in manufacturing in an effort to scale up production as it seeks to gain further momentum in the space.
Alzheimer's disease
Back in July, the FDA granted approval for Lilly's Alzheimer's disease drug, Kisunla (donanemab). I see this as a subtle tailwind for Lilly, because the Alzheimer's disease market is incredibly fragmented.
Since there are a number of medications used to treat different symptoms of Alzheimer's, the competitive landscape remains somewhat sparse. According to data compiled by Market.us, the global Alzheimer's therapeutics market will be worth nearly $31 billion by early next decade.
Eczema
Another big win for Lilly this year came when the FDA approved its eczema drug, Ebglyss. The eczema market is more crowded than Alzheimer's disease and weight loss. But what makes Ebglyss a potentially groundbreaking treatment is that it's an injection, whereas most mainstream eczema treatments come in the form of an ointment or topical gel.
While Ebglyss may not carry the same potential as some of Lilly's other innovations, I'm encouraged by the company's foray into yet another pocket of the healthcare realm and its commitment to deepening its platform.
The bottom line
With so many moving pieces involved in Lilly's growth trajectory, I think a good way to value it would be to look at the company's PEG ratio. This is basically a more advanced version of the price-to-earnings (P/E) ratio.
To derive a PEG ratio, you would take the P/E multiple and then divide that figure by the company's estimated earnings per share (EPS) growth rate over a specified period (say, five years). At its core, the PEG ratio helps compare valuation and expected growth.
Generally speaking, a PEG ratio under 1 implies that the stock may be undervalued. Right now, Lilly's PEG ratio is 0.74. Does this inherently mean that Lilly stock is a bargain? Not necessarily.
I see valuing Lilly as a pretty complicated exercise. The company clearly has a lot of runway just in the GLP-1 market alone. And because its presence in the Alzheimer's and eczema markets is so new, it's hard to know with any real accuracy how big an impact Kisunla and Ebglyss will have.
But with the new buyback program and management's comments, I'm cautiously optimistic about Lilly's future, and feel that its valuation is reasonable at the moment. For these reasons, I see Lilly as a no-brainer opportunity to buy and hold if you have a long-term time horizon.
