Why Eli Lilly stock’s big jump last week could be just the beginning of another big run

For a while it seemed as if the series was over for Eli Lilly (LLY -0.82%). The pharmaceutical giant’s shares rose nearly 160% between the beginning of 2023 and mid-July of this year. After that, however, Lilly’s shares plummeted nearly 19% – until last week.

On August 8, Lilly reported stellar second-quarter results, and the pharmaceutical stock quickly rose more than 15%. Here’s why Lilly’s big jump last week could be just the beginning of another big run.

Mounjaro and Zepbound are becoming increasingly popular

The recent optimism about the stock has been largely driven by robust sales of three products: Mounjaro, Zepbound and Verzenio. While sales of the hit breast cancer drug Verzenio rose 44% in the quarter, investors were even more excited about the results for Mounjaro and Zepbound, which are used to treat diabetes and weight loss.

Mounjaro’s second-quarter revenue more than tripled year-over-year to nearly $3.1 billion. Zepbound, which is expected to receive U.S. Food and Drug Administration (FDA) approval in November 2023, topped $1.2 billion in the second quarter.

Essentially, Mounjaro and Zepbound are the same drug – tirzepatide. Lilly markets Mounjaro in the US as a treatment for type 2 diabetes (T2D) and outside the US for both T2D and obesity. In the US, the company uses the Zepbound brand for the obesity indication.

Lilly raised its full-year 2024 revenue forecast by $3 billion to $45.4 billion to $46.6 billion. Unsurprisingly, the company attributed this improved forecast primarily to “the strong performance of Mounjaro and Zepbound.”

But Mounjaro and Zepbound are just the beginning. Analysts surveyed by FactSet predict that the two products will generate combined sales of over $50 billion by 2029.

More are on the way

The company has other potential young talents in its roster and pipeline.

The FDA approved Kisunla last month as a treatment for early-stage Alzheimer’s disease, and analysts expect the drug to generate peak annual sales of around $5 billion.

Lilly also has high hopes for treating indications other than type 2 diabetes and obesity. The company recently filed for approval of the drug in the US and EU to treat obstructive sleep apnea in adults with obesity. The company reported positive results of the drug in treating patients with heart failure with preserved ejection fraction and obesity earlier this month. Lilly is also testing tirzepatide in a Phase 2 clinical trial for the treatment of metabolic-associated steatohepatitis (MASH).

And Mounjaro and Zepbound may not be Lilly’s only drugs for type 2 diabetes and obesity in the future. The pharmaceutical company has two promising candidates in advanced development that target both indications: orforglipron and retatrutide.

Lilly’s biggest disadvantage

Sales of Mounjaro and Zepbound will almost certainly continue to grow dramatically. Lilly could benefit from FDA approvals and late-stage clinical results from its pipeline programs. The stock could well see another big run.

However, there are a few things standing in the way of this. The competition could gain market share at Lilly’s expense and it is possible that the company’s experimental drugs could flop in clinical trials.

The biggest downside for Lilly, however, is arguably its valuation. The company is now the world’s largest drugmaker, with a market capitalization of over $840 billion and a price-to-earnings ratio of about 65. Huge growth expectations are priced into Lilly’s stock. Any hiccups along the way could prevent the stock from rising. But the chances that Lilly is on the verge of another major uptrend are still pretty good.