Eli Lilly (LLY -1.38%) soared more than 60% from the start of the year through its peak this summer, thanks to the company's dominance in one of today's most in-demand areas: the obesity drug market. Lilly sells tirzepatide, a compound sold for weight loss under the name Zepbound and for type 2 diabetes under the name Mounjaro. But doctors have prescribed either one to patients trying to shed pounds, and both have become blockbusters.
These drugs have helped the big pharma player report double-digit quarterly revenue growth. Demand has been so strong, that it earlier surpassed supply and pushed Lilly to increase its manufacturing capacity to keep up.
The supply problem has been one of the biggest risks for Lilly. With the tirzepatide shortage, compounding pharmacies had the authorization to produce their own versions of the drug and sell them. This clearly limited Lilly's revenue opportunity.
In recent days, though, news from the U.S. Food and Drug Administration (FDA) lifted this risk. The regulatory agency declared that there was no longer a shortage of tirzepatide -- and that means compounders must stop selling their alternate versions.
Does this news make Lilly a buy for 2025?
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How Lilly's weight loss drugs work
First, let's consider the full Lilly weight loss drug story. The company's drugs belong to a class known as dual GIP/GLP-1 receptor agonists, products that act on hormonal pathways involved in digestion. These drugs work by controlling blood sugar levels and appetite -- and their results have been fantastic both in clinical trials and in the real world.
In a recent head-to-head study involving Novo Nordisk's Wegovy, Zepbound came out on top, resulting in average weight loss of about 20%, compared to more than 13% for the rival medicine. Lilly and Novo Nordisk both are leaders in this market today.
Meanwhile, further studies of Zepbound are finding that it could address other health issues in those with obesity -- from heart failure to sleep apnea. Lilly has applied for regulatory review of the drug in those indications when accompanied by obesity and recently won approval for use in sleep apnea.
A regulatory nod in these areas could be key for Lilly, and here's why: Today, Medicare only will cover weight loss drugs if they're approved for a second condition. So such an approval could expand the number of Zepbound patients.
The major problem Lilly has faced in recent times, though, is difficulty meeting demand -- and that offered compounders the opportunity to take market share. Compounding pharmacies, as mentioned, are authorized to sell their versions of a pharma company's drug, often for a lower price, if that particular drug is on the FDA shortage list. Once the drug drops off the list, though, compounders must stop selling.
Supply meeting demand
Recently, the FDA removed tirzepatide from the shortage list, saying: "[S]upply meets or exceeds current demand," and based on available information, "[S]upply will also meet or exceed projected demand." This means that compounders now have 60 to 90 days, depending on the type of operation, to stop selling their versions of the drug. The FDA originally declared the shortage over back in October, then reviewed the situation a second time after a lawsuit from a compounding group.
This clearly is positive news for Lilly because it means that patients now must turn to the pharma company for Zepbound or Mounjaro -- and the company can fully benefit from demand for the products. Even during the drug shortage, these products brought in billions of dollars in revenue, so it's likely that moving forward, with increased capacity and compounders' exit from the market, Lilly should see significant growth.
Does this news make Lilly a buy for 2025? It's also important to look at the whole picture.
Lilly sells a wide variety of other drugs across treatment areas, and in the recent quarter, three other major products -- Verzenio for breast cancer, immunology drug Taltz, and diabetes drug Humalog -- each delivered double-digit revenue growth. Today, Lilly stock trades for 57x forward earnings estimates, down from more than 70x just a couple of months ago. At the same time, the future looks brighter than ever, making Lilly a top pharma stock to buy for 2025 and hold onto for the long term.
