The health of a pharma company often depends on it bringing new drugs to market through the rigorous and expensive three-stage clinical trial process. This is true in a growing economy and even more critical during a recession, explains Tony Daltorio, editor of Market Mavens.
Ideally, a pharmaceutical firm will have limited exposure to a patent cliff and is also well on its way to developing promising new drugs. There is one company that meets those criteria: Eli Lilly (LLY).
Lilly's Promising Drug Pipeline
Perhaps Lilly's most promising product is a type 2 diabetes drug called tirzepatide, which the FDA approved in May for treating diabetes. Lilly originally developed tirzepatide to improve blood sugar control, but the injection has also proven to be highly effective as a weight-loss therapy in ongoing trials.
Results of a phase 3 study published last month showed that around 90% of patients treated with the drug lost at least 5% of their body weight. That is the threshold for clinical meaningfulness. The study's authors called this an "unusually substantial degree of weight reduction" for an anti-obesity medication.
And with adult obesity now more common than under-nutrition globally, the market for an effective weight loss drug is vast. However, keep in mind that the FDA has yet to approve tirzepatide for treatment of obesity — so it may be years before Lilly actually gets revenues for the drug from treating obesity.
Another promising drug in Lilly's pipeline is donanemab, an Alzheimer's treatment that was granted Breakthrough Therapy status by the FDA last year after preliminary evidence suggested it offers substantial improvements over other available treatments.
The Breakthrough designation by the FDA means donanemab is eligible for an expedited review process by the regulator. Though this sounds like good news, the outlook is more complex, as the drug's approach is not universally accepted by scientists. Investors will have to wait for the release of phase 3 trial data in the second quarter of next year for more information.
Lilly's highly promising drug pipeline means its shares look expensive when compared to its peers. Bullish proponents of LLY argue the premium price reflects the company's commitment to research. Consensus projections indicate that earnings will rapidly ascend to $14.60 a share by 2025.
And indeed, the company tends to spend low to mid-20% of its sales on financing the development efforts of new drugs, much higher than the high-teens industry average commitment to research.
I tend to agree with the bulls: Lilly's near-term cash flow sets the company apart from its peers. With its excellent drug development track record, Eli Lilly stands out as a beacon of stability in the current turbulent market climate. Its stock is up 38% over the past year and 20% year-to-date. It's a buy in the $310 to $330 per share range.