Pharma’s weight loss king only as good as the next hit
If the ‘Magnificent Seven’ US stocks had a reserve player, Eli Lilly – maker of Mounjaro – would be it. So what’s the company’s next big thing?
David Ricks reckons the pharma industry has a lot to learn a lot from tech companies.
It’s a telling comment given Eli Lilly, the drug company he runs, is often described as the Nvidia of the healthcare world.
Indeed the once little known Lilly, with its headquarters anchored in the US steelmaking city of Indianapolis, is today one of the hottest plays on Wall Street.
If the so-called “Magnificent Seven” had a reserve player, Lilly would be it. The drug maker’s market value has more than doubled in the past year and during the week it went through $US760bn ($1.1 trillion), extending its lead as the biggest big pharma in the world. Its nearest competitor, the Danish Novo Nordisk, is $US560bn.
Many believe Lilly is on track to hit the $US1 trillion mark in coming years as it rides the wave of its two blockbuster drugs: Mounjaro (that tackles weight loss) and its soon-to-be approved drug Donanemab that has made a major breakthrough in slowing early onset Alzheimer’s.
Ricks, Lilly’s global chief executive, won’t be drawn on the $US1 trillion tag. But he says thinking about Lilly’s valuation first is like looking at the world all backwards.
“We will be rewarded if we do more valuable things,” he says in an interview with The Weekend Australian in Sydney.
“I’m focused on doing more valuable things and having to create the next generation of obesity (drugs). How can we not just treat Alzheimer’s but prevent it? I think when we do those things, the valuation will be fine – It’ll take care of itself.”
It wasn’t always like that for Lilly, the company that is nearly 150 years old and carries the name of its founder, an American Civil War union colonel.
When Ricks took charge eight years ago it was floundering. A number of its legacy cash-cow drugs had come off their patent protection and had hit the generic market.
Worryingly, its drug pipeline was running dry. Lilly was reeling after it set a benchmark for big pharma fines in the midst of the global financial crisis. It copped a $US1.4bn penalty linked to its anti-psychosis drug Zyprexa that was sold through the 1970s.
Like tech with innovation, a company like Lilly lives or dies on the strength of its research and development.
With its pipeline running empty early last decade, Lilly had little choice but to start pumping up its spend. Ricks doubled down on that so now a hefty 25 per cent of Lilly’s revenue is spent on R&D.
“When we are successful it’s very rewarding.”
At the current rate that translates to a staggering $US11bn a year – more than most large countries spend on health research. For a benchmark, Australia’s annual health and medical research spend across government and the private sector is $7.3bn.
“When we are successful it’s very rewarding and we’re enjoying that period now,” Ricks says. “But it’s like quicksand under your feet. If we stand still right now and we cut R&D to become super profitable you’d see the smart investors sell our stock.
“What they really need to buy into isn’t just Mounjaro or a great drug that can affect Alzheimer’s. They need to buy into the fact that Lilly can continue to create meaningful new medicines for big problems”.
Today Lilly has a packed pipeline with hundreds of drugs under research, including a new wave of diabetes, weight loss and Alzheimer’s drugs in final stage trials. Other early stage studies underway involve drugs that treat arthritis, dermatitis, Parkinson’s disease and cancer.
But the star drug, Mounjaro, was only approved by US authorities two years ago. It is a new class of drug known as GLP-1 agonist to help lower blood sugar after meals and is already delivering rapid growth to powering Lilly’s sales and profits.
The drug is approved for use in the US, the UK and for diabetes treatment in Australia. However it is not on the public pharmaceutical benefits scheme here – Lilly has applied – but approval is expected to take some time as regulators here consider the impact versus the cost. Indeed the drug comes at a high cost – in the hundreds of dollars a month – and this is stoking a new debate around value of medication.
The next frontier
Ricks says Lilly’s studies show Mounjaro has pronounced metabolic control and weight loss with patients losing on average about 23.5 per cent of their body weight, which ranks up with surgical procedure.
He says obesity is a combination of biology and environment, which is why diet and exercise – even intensive – is not always successful.
Obesity is an epidemic in the US, and nearly a third of the adult population there is considered overweight. Some 20 per cent of the Australian adult population is classed as overweight.
“That in many ways is the precursor for adult diseases of all sorts,” Ricks says. “We can treat a lot of people economically for a very common condition.
“Everything from cancer rates, auto-immune conditions, of course cardiovascular disease, even certain forms of dementia, not the Alzheimer’s forum, but vascular forms are attributed back to obesity.”
This financial upside is significant. Lilly and its nearest competitor in anti-obesity research Novo Nordisk, with its Wegovy drug both have years headstart in the field on rival firms. Brokerage UBS has tipped Lilly’s Mounjaro could hit annual sales of $35bn by 2035. Last year it did $US5bn, with nearly half of that coming in the December quarter alone.
The drug is an “overnight success that took 20 years” Ricks says and the investment in the drug runs in the multiple billions. For every blockbuster there is also a number of costly misses, he points out which is why R&D is so expensive.
“When you buy a Manjaro or a Lilly medicine 25 per cent of the price is going directly back into research for a disease you may not have for someone you may not know.”
Although he pushes back on the comparison to the red hot AI chip star Nvidia, Ricks says it’s through research where there are parallels between tech and drug players. Indeed Ricks straddles both worlds by sitting on the board of $US240bn software player Adobe.
He points out tech companies look at how to continually add value to their products in a way that creates very difficult for competitors to follow. And it is also speed of delivery.
“We always in our sector have a big breakthrough and then a big pause … but you’re always going to lose your patent so it’s about moving your innovation engine faster than anyone else”.
The other thing tech is good at is to focus on problems that have a wide impact and selling a solution to the widest amount of people.
“I think Lilly is for taking on diseases that are very common. This comes back to obesity and dementia, and maybe other common conditions like diabetes and cardiovascular, where literally there’s hundreds of millions or billions of people on the planet, people that can benefit,” he says.
“And if we can make one thing that actually dramatically improves their lives we’ll be worth more than others because people want what we’re making and it’s changing lives.
“It’s an honour to be considered valuable, but most important is that our medicines are valuable. That’s the thing that drives the stock price.”