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Lilly is the first pharmaceutical company to reach $1 trillion in valuation on weight loss demand

Eli Lilly's market value surpassed $1 trillion on Friday. It is the first pharmaceutical company to join the exclusive club of tech giants, and it highlights its growth as a weight loss powerhouse.

The explosive growth in the weight loss drug market has been a major factor behind the more than 35% increase in the stock price of the company this year.

As new and highly effective treatments for obesity have hit the market in the past two years, this category has become one of the most profitable segments in healthcare.

The world's top-selling drug is now Lilly's Tirzepatide. It's marketed under the brand names Mounjaro and Zepbound, respectively.

Novo Nordisk was the first to market, but Mounjaro & Zepbound are now a huge hit and have helped the company surpass its competitor in prescriptions.

Lilly gained ground in part due to the fact that Novo's Wegovy release in 2021, which was delayed by a shortage of supplies, gave Lilly more room for growth. Lilly's drugs also have a higher clinical efficacy and the U.S. firm has been quicker to increase manufacturing and distribution.

The shares of the company, which briefly reached a record-high, were trading at $1,051.

LSEG data shows that Lilly is now trading at one of the highest valuations among big pharma companies, with a 50-fold multiple on its expected earnings for the next year. This reflects investors' expectations that the demand for obesity drugs would remain strong.

The shares have also outpaced the overall U.S. equity markets. Lilly's shares have risen by more than 75% since the launch of Zepbound late in 2023. The S&P 500 has risen by over 50% in the same time period.

Lilly's obesity and diabetes business generated combined revenues of over $10.09 billion in the last reported quarter. This represents more than half its total revenue, which was $17.6 Billion.

The current valuation reflects investor confidence in the long-term sustainability of the company's metabolism health franchise. Evan Seigerman of BMO Capital Markets said that Lilly is preferred by investors in the obesity arms-race.

Lilly's revenue forecast for the year ended October was increased by $2 billion, based on a surge in global demand for its diabetes and obesity drugs.

Wall Street predicts that the global weight-loss drugs market will be worth $150 billion in 2030. Lilly and Novo are expected to control the majority of the projected sales.

Investors now focus on Lilly’s orforglipron oral obesity drug which is expected be approved in early 2019.

Citi analysts wrote in a note published last week that the latest generation GLP-1 drugs are already a "sales phenomena" and orforglipron will benefit from "the gains made by its predecessors when used as injectables."

SUSTAINING MOMENTUM

Lilly will benefit from an agreement with the Trump Administration and its planned investment of billions to boost U.S. manufacturing.

Analysts said that the White House pricing agreement may have a negative impact on revenue in the near term, but it will significantly increase access to the treatment of obesity. This could add up to 40 million new potential candidates in the U.S.

James Shin, Director of Biopharma Equity Analysis at Deutsche Bank said that Lilly has started to resemble "the Magnificent Seven", referring to tech giants such as Nvidia and Microsoft, which have fueled much of this year's market returns.

Investors once considered it to be part of the elite group. However, after some disappointing earnings and headlines, it fell out of favor.

He added that it could be an option for investors now, given the recent concerns about and weakness of some AI stocks.

Analysts and investors will be watching to see if Lilly is able to maintain its current growth, as the prices of Mounjaro, Zepbound, and its diversified pipeline come under pressure. They'll also be looking at whether its scaling-up plans and its dealmaking, combined with its diversified portfolio, can offset a possible margin squeeze.

(source: Reuters)