2 Reasons Why Eli Lilly's Stock Likely Hasn't Peaked

2 Reasons Why Eli Lilly's Stock Likely Hasn't Peaked

Pharma giant Eli Lilly (NYSE: LLY) has become an unstoppable stock to own lately. Year to date, its share price is up more than 50%. And despite trading at a hefty 130 times earnings, investors continue to buy up more shares of the company. Although it may seem like the stock is approaching a peak, here are two reasons why Eli Lilly's valuation is likely to rise even higher in the future.

1. Eli Lilly is still not meeting demand

Eli Lilly has some incredibly popular treatments in Mounjaro (diabetes) and Zepbound (weight loss). Demand has been exceeding the available supply by a wide margin. That has been the case with other popular drugs as well. The good news is that Eli Lilly is investing in growing its capacity to meet the high levels of demand.

The company doesn't believe it will be able to meet demand even by next year, because its products are highly sought-after. It has invested billions into growing its capacity, with $9 billion alone dedicated to a new manufacturing plant in Indiana, which is the largest such investment in Eli Lilly's history.

Building out and acquiring more manufacturing capacity can take a lot of time (i.e., years), but as it ramps up production for its high-demand products, Eli Lilly's revenue is bound to take off even further. Mounjaro's revenue totaled $1.8 billion in the first three months of 2024, more than tripling from the same period last year. Zepbound brought in $517 million. The recently approved drug had no prior-year comparable, but it has been off to a fast start, already becoming one of the company's top-selling products.

2. Insurance coverage of Zepbound is likely to increase

According to Eli Lilly's management, there is 67% commercial coverage for Zepbound as of April 1. Insurance coverage is important because without it, patients could be paying more than $1,000 per month out of pocket for Zepbound.

One of the reasons that there could be more commercial insurers providing coverage for Zepbound is that weight loss can have a variety of other health benefits, such as reducing cardiovascular risk. Wegovy is a rival weight loss drug from Novo Nordisk, and earlier this year, regulators approved it as a treatment for reducing the risk of heart attack and stroke in high-risk patients.

It's possible that Zepbound could obtain a similar indication in the future. In the near term, Eli Lilly is hopeful that Zepbound may obtain approval for treating sleep apnea. Approval for that indication could come as early as this year. Should that happen, then insurance coverage rates could rise even higher, paving the way for more demand.

It's not too late to invest in Eli Lilly's stock

Eli Lilly is on the cusp of much more revenue growth, and while that is already being priced into its valuation, strong results could confirm its upward trajectory and lead to even greater bullishness.

In the short term, there will inevitably be some fluctuations and uncertainty due in part to its high price. But as Zepbound and Mounjaro obtain approval for more indications, the forecast for these drugs could be lifted, resulting in upgrades for the healthcare stock as well. Provided that you're willing to hang on for the long term and aren't just looking to trade the stock, Eli Lilly could be a great investment to hold on to in your portfolio, even at its seemingly expensive valuation.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.