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Seemingly bad news can sometimes be really good news. I think a recent study for Eli Lilly's (NYSE: LLY) rival to Novo Nordisk's massively successful Ozempic and Wegovy provides a great case in point.
Results from the Surmount-4 clinical trial were published on the Journal of the American Medical Association's website on Dec. 11, 2023. Researchers found that patients who took Lilly's weight loss drug tirzepatide (marketed as Zepbound for weight loss and Mounjaro for type 2 diabetes) regained roughly half of their weight after they stopped taking the drug for one year.
Investors reacted negatively to the news. Lilly's share price fell around 5% before rebounding somewhat. However, my view is that there's more to the story that many investors are missing. Here's why the recent data actually makes Lilly stock an even better buy.
No Gilead effect here
To make my argument, let me first point to a completely opposite scenario that I think is instructive. A decade ago, Gilead Sciences (NASDAQ: GILD) won U.S. Food and Drug Administration (FDA) approval for Sovaldi. It was the first therapy that effectively cured hepatitis C for many patients.
Over the next few years, Gilead launched even more powerful combination therapies for treating hepatitis C virus (HCV) infection. Harvoni, Epclusa, and Biktarvy -- along with Sovaldi -- all became blockbusters. Gilead raked in money hand over fist.
Everything went great for Gilead Sciences for a while. But then, the company's sales began to decline, as did the price of the biotech stock. What happened?
A person who is cured of hep C doesn't need medications anymore. Gilead began to run out of patients for its HCV drugs.
As I mentioned, this is the opposite scenario than we're seeing for Eli Lilly and Zepbound. Patients have ample motivation to continue taking Lilly's drug. If they don't, they're likely to regain their lost weight.
This means that Lilly isn't going to experience the "Gilead effect." Sales for Zepbound should remain strong as patients continue taking the drug to keep their weight down.
No one should have expected a different outcome, though. Research has also shown that patients who stop taking Novo Nordisk's Ozempic and Wegovy regain weight. In addition, Lilly Chief Scientific and Medical Officer Dan Skovronsky stated earlier this year that "unfortunately, tirzepatide is probably like every other drug we have which requires you to take it to continue to get the benefits." His use of the word "unfortunately" applies to patients and payers -- it's very fortunate for Lilly and its shareholders.