Should Be Cautious or Enter as Lilly's Valuation Grows?

$Eli Lilly(LLY)$ is now one of the most valuable healthcare companies globally, boasting a market cap of over $800 billion. With its stock price surging more than 50% in the past 12 months, some investors may feel hesitant due to its price-to-earnings (P/E) ratio exceeding 100 times.

However, there are strong reasons to consider Eli Lilly despite the high valuation. Here are three factors that suggest its valuation could continue to climb in the coming months and years:

1. Tirzepatide's Undervalued Potential

Eli Lilly has seen major success with FDA approvals, notably for the weight-loss drug Zepbound and the diabetes drug Mounjaro, both containing the same active ingredient: tirzepatide.

These drugs are in the early stages of their growth cycles, and analysts expect tirzepatide to generate over $50 billion in peak revenue. However, this estimate could be conservative, as tirzepatide may gain approvals for additional indications.

For instance, Zepbound has shown potential in reducing heart failure risk, and studies suggest it could treat sleep apnea. These opportunities could expand tirzepatide’s revenue ceiling, making Eli Lilly’s current valuation more justifiable.

2. Capacity Expansion

One of the company’s current hurdles is meeting demand. The explosive success of Mounjaro and Zepbound has led to a supply strain. Eli Lilly is aggressively investing in increasing production capacity, with plans to spend $9 billion building a new manufacturing facility in Indiana.

These investments will help the company meet growing demand, accelerating its already impressive growth trajectory, which could further fuel bullish investor sentiment.

3. Pipeline Investments

Eli Lilly is not resting on its laurels. CEO Dave Ricks recently expressed his vision of not just maintaining but capitalizing on its lead in the obesity market.

To this end, the company has announced a $4.5 billion investment in a research and production center focused on innovative, efficient processes to speed up new drug development.

Is It Too Late to Invest?

While investors are paying a premium for Eli Lilly stock, the company’s growth prospects could justify the current price.

Many expect it to become the first healthcare company to surpass a $1 trillion market cap. For those willing to hold long-term, Eli Lilly could be a valuable addition to their portfolio.