Wealthy individual Israel Englander Amplified His Investment in Eli Lilly During the Third Period: Is It Advisable?
After soaring high in the first half of the year, pharmaceutical titan Eli Lilly (LLY -0.87%) has seen a dip; the company's shares have dropped by 11% since June 1. However, this healthcare giant still maintains a large fanbase on Wall Street, with notable supporters like Israel Englander, the wealthy founder of Millennium Management, a hedge fund.
Millennium Management boosted its stake in Eli Lilly by 86% during the third quarter. Should you mimic Englander's strategy and expand your stake (or even start one) in Eli Lilly?
What's Hampering Eli Lilly?
Since June 1, Eli Lilly has secured approval for new medications, such as eczema treatment Ebglyss and a potential blockbuster Alzheimer's disease medication, Kisunla. The company reported favorable data readouts for its best-selling new drug, tirzepatide, and its second-quarter results surpassed expectations, resulting in an upward guidance adjustment.
So, what's behind Eli Lilly's poor performance in the latter half of the year? Initially, the stock appears overpriced. Eli Lilly's forward price-to-earnings ratio currently stands at a hefty 54.8, while the S&P 500's average is 22, and the healthcare industry's is merely 17.4.
Eli Lilly has been on an upward trend for some time now, and it was bound to encounter some resistance. Many investors likely decided to cash in substantial profits before that occurred.
Secondly, Eli Lilly's third-quarter earnings fell short of expectations. Despite revenue increasing by 20% year-over-year to $11.4 billion, revenues failed to impress investors, particularly given the company's lofty valuation. Eli Lilly even slightly adjusted its full-year 2024 earnings outlook, causing its share prices to plummet following its latest earnings report.
Plenty of Growth Potential Remains
Eli Lilly may or may not recover by year's end. Predicting its stock performance in the upcoming month, quarter, or even years is a fool's errand. Yet, if we examine the situation beyond five years, we see strong reasons to believe that Eli Lilly can continue delivering superior returns. Here are three such reasons:
First, Eli Lilly's tirzepatide – marketed as Mounjaro for diabetes and Zepbound for weight loss – still has significant untapped potential. The two brands combined for $4.4 billion in third-quarter sales. Tirzepatide was first approved in May 2022, while Zepbound followed in November 2023.
Positive data from late-stage trials have been released for additional tirzepatide applications. One of these potential uses is reducing the risk of heart failure progression in adults with heart failure with preserved ejection fraction and obesity. Tirzepatide also aced phase 3 trials in preventing diabetes in overweight patients with pre-diabetes and effectively treated sleep apnea in overweight individuals.
Tirzepatide's dual action – mimicking GLP-1 and GIP – has shown remarkable success. The sky's the limit for tirzepatide's potential additional applications that haven't yet passed late-stage trials. Analysts' predictions that tirzepatide could achieve peak sales of $25 billion are no exaggeration.
Second, several of Eli Lilly's newer medications apart from tirzepatide are expected to make meaningful contributions in the next five years. While Kisunla looks promising, it isn't the only one. Some estimates suggest that ulcerative colitis treatment Omvoh, first approved last year, will generate $1.2 billion in sales by 2029.
Third, Eli Lilly will make substantial progress in its pipeline over the next few years. One of its promising candidates is retatrutide, a triple agonist. Tirzepatide is a dual agonist, but retatrutide surpasses it by mimicking GLP-1, GIP, and glucagon – earning the nickname "triple G." Advancements in this program could serve as a catalyst for the company. And it's far from Eli Lilly's only compelling candidate.
Thanks to its innovative pipeline, Eli Lilly's drug portfolio should undergo a transformation within the next five years. This will help propel the stock price upward.
Is the Valuation Too High?
Despite Eli Lilly's promising future, you might hesitate due to the elevated forward P/E, which may seem excessive. However, the stock doesn't appear quite as pricey when put in context. The forward P/E represents the market's anticipations for the company. If it consistently meets these expectations, its valuation concerns will subside. In the third quarter, Eli Lilly reported an outstanding adjusted EPS of $1.18, compared to $0.10 in the prior-year period.
In 2023, analysts predict EPS growth of approximately 72%. This increase is hardly surprising given tirzepatide's momentum and the strong performance of Eli Lilly's older medications. The company should maintain this pace as newer drugs come into their own, and tirzepatide receives additional label expansions. In light of my analysis, I believe Eli Lilly is a good investment idea, and following Englander's lead on this matter is sound advice.
Given Israel Englander's increase of 86% in Millennium Management's stake in Eli Lilly during the third quarter, it might be worth considering investing or expanding your stake in Eli Lilly as well. Despite the recent dip in Eli Lilly's shares, with a 11% decrease since June 1, the company's future prospects are promising, particularly due to the success of its new drug tirzepatide, which has significant untapped potential and could potentially reach peak sales of $25 billion.
