In This Article:
Over the past six months, Eli Lilly (NYSE: LLY) has underperformed broader equities. While that's not much of an issue in the grand scheme of things, it is still a bit surprising, since the pharmaceutical giant is one of the undisputed leaders in the exciting market for weight loss drugs.
It turns out that the anti-obesity space isn't growing as fast as Eli Lilly or analysts anticipated, resulting in lower-than-expected revenue for the company's famous weight management drug, Zepbound.
That's one of the key reasons Eli Lilly hasn't performed as well in recent months. Since many of its prospects are tied to its portfolio of drugs addressing obesity,, some investors might be wondering if it's best to avoid the company right now. Is that the best course of action? Let's find out.
Rich valuation metrics, high expectations
Eli Lilly recently said it would post revenue of about $45 billion for the full fiscal year 2024. While that would represent a year-over-year increase of 32% -- an otherwise incredible performance for a pharmaceutical giant -- it's still $400 million below the low end of the most recent guidance of $45.4 billion to $46 billion it gave in its third-quarter earnings report, which was also a decreased projection.
In a recent press release, Eli Lilly's management said that the U.S. incretin market, which includes drugs like Zepbound and Mounjaro, didn't grow as fast as it anticipated in the fourth quarter. Besides the fact that the market doesn't like a company missing its own guidance, Eli Lilly is held to an especially high standard because of its steep valuation. Its forward price-to-earnings (P/E) ratio is currently just under 36.
LLY PE Ratio (Forward) data by YCharts.
For reference, the average for the healthcare industry is less than half Eli Lilly's at 17. If the drugmaker continues to underperform in the very market where investors have the highest hopes, the company's stock could continue to struggle, at least in the short to medium term.
Not just a weight loss company
We could point out that tirzepatide, the active ingredient in Mounjaro and Zepbound, is still undergoing many clinical trials and should earn key label expansions. Last year, the medicine aced a phase 3 study in which it delayed the onset of type 2 diabetes in patients with prediabetes who were overweight or obese. We could also highlight the fact that Eli Lilly's weight loss pipeline is one of the strongest in the industry.
However, since analysts may have overestimated how large the weight loss market will be, we should look at the rest of Eli Lilly's portfolio. The good news is that the drugmaker has many other medicines that will drive top-line growth, including several new ones. Over the past two years, Eli Lilly has earned approval for such products as Alzheimer's disease (AD) treatment Kisunla, ulcerative colitis drug Omvoh, cancer medicine Jaypirca, and eczema therapy Ebglyss.