In a year and a half, Eli Lilly (NYSE: LLY) has roughly doubled in value. It is now the most valuable pharmaceutical company in the world. It took that mantle from the long-held dominance by Johnson and Johnson (NYSE: JNJ) back in May of 2023 and hasn’t looked back since. However, much of that increase in value has come due to multiple expansions; the market is now paying more for every dollar of the company’s earnings.

Revenues at Johnson and Johnson are still over double those of Eli Lilly over the last twelve months. Looking at net income, the relationship is similar. Compared to the beginning of May 2023, investors have now accepted paying around 2.8 times more for each dollar of earnings Eli Lilly has already generated. But, investors are paying around 40% less for each dollar of already generated J&J earnings.

However, the stock market largely attributes value to a company based on its ability to generate earnings in the future. Based on Lilly’s next twelve months forward P/E ratio, investors are paying about the same now for each dollar of future earnings as they were in May of 2023.

The gap between the backward-looking P/E and the forward-looking P/E suggests a belief that the company's earnings will rise strongly in the future. This would align its true earnings power with the stock price. In order to justify this, Lilly’s earnings need to continue rising strongly in line with expectations. I will detail how the company plans to do this. I will also discuss potential catalysts that could help it exceed its high expectations.

Eli Lilly Is Growing Fast and Continues to Innovate

Much of the company’s increase in value has come from intense excitement over its weight loss and diabetes drugs. Specifically, Zepbound and Mounjaro have experienced rapid sales growth. The former grew sales by 140% in just one quarter, based on the latest financial results. The older Mounjaro saw sales rise 72%. Although this growth is very impressive, the company needs to continue innovating to stay ahead of the game. Many smaller firms have seen the massive demand developing for these drugs over the years and are working on treatments to take a slice of the pie.

Lilly is pursuing an oral weight loss drug. Other companies are doing this too, but Lilly’s drug is comparatively further along than many others. The company could release Phase 3 Food and Drug Administration (FDA) results in mid to late 2025.

In contrast, Novo Nordisk (NYSE: NVO) recently released Phase 2 and Phase 1 results for oral weight loss treatments, which delays their potential timeline to market. This could allow the company to take on significant initial growth based on its already established reputation and first-mover advantage for patients who want this version of the drug.

The company also announced a $4.5 billion investment. It will build a new factory to ramp up production of unapproved drugs. This will allow it to hit the ground running if the drugs get approved.

Lilly Is Fighting Back Against Copycats and Expanding Its Market

Lilly also recently began a program where patients can directly purchase Zepbound for 50% less than the normal price from the company. However, patients can make these purchases with cash only; they cannot use insurance coverage. Zepbound is designed to treat obesity, not diabetes. So, many insurance plans do not cover it. This includes Medicare, the largest payer of healthcare services in the country.

This expands the market that the company can sell to and helps the firm fight back against unauthorized copycat distributors of the drug. It also provides some help to the company’s inability to keep up with demand for its drug. It comes in a vial rather than an injectable pen. Not being able to make enough pens has been a key source of the undersupply.

On Oct. 3, the FDA removed Zepbound and Mounjaro from its drug shortage list, another positive sign. Additionally, Lily doesn’t have all its eggs in the weight loss and diabetes market. These drugs made up 66% of revenue last quarter, but its two other largest treatment areas are also growing solidly. Immunology revenue increased by 30%, and oncology revenue increased by 20% last quarter.

Lilly Can Stay Top Dog

Overall, I am impressed by Lily’s ability and willingness to find innovative solutions and stay ahead of the curve. I believe this bodes well for the future of the company and that the firm will continue to stay at the top of the heap in pharmaceuticals.