Size means little in light of this company’s prospects.
Small-cap stocks have more upside potential since they are riskier assets, so investors demand higher rates of return when investing in them. However, large-cap stocks — even those at or near a $1 trillion valuation — can have plenty of room to run, too. That seems to be the case with Eli Lilly (LLY -1.30%), a pharmaceutical giant firing on all cylinders. As of this writing, the drugmaker’s market cap is $858 billion, but its prospects look incredibly attractive, particularly because of its involvement in the lucrative market for weight loss drugs. Could Eli Lilly make millionaires out of investors at current levels? Let’s find out.
The power of weight loss drugs
Eli Lilly developed a medicine called Zepbound to help with weight loss. It is one of the leading products in this niche, and it is currently posting incredibly fast-growing sales. Despite being approved within the past year, in November 2023, Zepbound is already a blockbuster drug. Medicines typically take years to get to this level, at least the ones that do get that far. Most never do. Why is Zepbound so successful? Several reasons. First, obesity is a severe crisis, especially in the U.S., which has one of the highest obesity rates worldwide.
Of note, the U.S. is by far the largest pharmaceutical market in the world, accounting for about 44.4% of spending as of last year. Any therapy that targets a condition as prevalent as obesity in the country will likely be somewhat successful. Further, obesity is linked to several of the leading causes of death in the U.S., including heart disease, diabetes, and several forms of cancer. Lowering obesity rates, a goal Zepbound could help achieve, would decrease mortality across these other areas.
A recent study found that expanding access to weight loss drugs like Zepbound could help save more than 40,000 lives annually in the U.S.
No end in sight for this tailwind
Here’s what this could mean for Eli Lilly and its shareholders. First, the company will routinely deliver outstanding financial results. Once a pharmaceutical giant’s revenue growth rate is in the mid-teens, that’s already excellent. These past few years, Eli Lilly’s top-line growth was somewhat disrupted by pandemic-related factors. However, the company’s revenue growth has been outstanding over the past 12 months. Zepbound will help it maintain that momentum.
LLY Operating Revenue (Quarterly YoY Growth) data by YCharts
However, Eli Lilly’s success in weight loss also stems from the fact that it is a new field with few competitors beyond Novo Nordisk‘s Wegovy. What would happen if other companies developed more effective therapies and ate Eli Lilly’s lunch? That shouldn’t be a major concern. There will be more competition, but drugmakers often specialize in one or a few specific therapeutic areas. Success in developing drugs in one field leads to more success. Don’t underestimate the power of past successes (and failures) in developing novel medicines.
Eli Lilly has been a leader in the adjacent diabetes field for 100 years. The company has several other exciting weight loss candidates, including retatrutide, which could be even better than Zepbound. The latter is a dual agonist: It mimics the action of two hormones, GLP-1 and GIP (it is the first of its kind). Retatrutide mimics the action of three hormones: GLP-1, GIP, and glucagon. Eli Lilly is calling it triple G.
Meanwhile, the company’s orforglipron is an oral GLP-1 medicine, which some patients might prefer over injectable drugs like Zepbound and retatrutide. Eli Lilly’s work in weight loss should be a significant tailwind beyond the next decade, considering the company is still innovating, and these medicines won’t hit patent cliffs anytime soon.
Beyond weight loss
If you had invested $50,000 in Eli Lilly in November 2012, you would be a millionaire today, assuming you opted to reinvest its dividend. The company’s total return over this period works out to a compound annual growth rate of 29%. So, $50,000 would be worth a little over $1 million.
LLY Total Return Level data by YCharts
In my view, Eli Lilly can pull off a similar performance in the coming couple of decades, but not just because of its incredibly promising weight loss programs. The company is highly innovative. It recently made a breakthrough in Alzheimer’s disease. It is working on several other medicines that could add to its lucrative lineup, which is composed of several non-diabetes drugs whose sales are growing fast.
The company projects average earnings-per-share growth of about 72% through the next five years, which justifies its forward price-to-earnings of 67.26. Of course, Eli Lilly’s dividend will continue to play a major role in its total returns. The company’s business is strong enough to sustain regular dividend hikes. So, despite the drugmaker’s near-$1 trillion valuation, its prospects still look incredibly attractive. The stock can make those who invest a hefty enough sum today millionaires.