Eli Lilly’s Alzheimer’s Drug Obtains FDA Approval. Here’s Why the Stock Isn’t Taking Off.

Eli Lilly (NYSE: LLY) received some great news from regulators last week: Its Alzheimer’s treatment obtained the green light from the Food and Drug Administration (FDA).

The new drug, Kisunla, has the potential to be a blockbuster for the company and generate billions in revenue. But despite the recent approval, Eli Lilly’s stock isn’t skyrocketing.

Normally, when a healthcare stock receives positive news surrounding a much-anticipated treatment, there’s some surge in the share price. In Lilly’s case, that just hasn’t happened. It even briefly declined following the news. Why isn’t the stock taking off?

The approval was already priced into the stock’s valuation

The simple reason behind Eli Lilly’s non-move following the FDA’s decision is that it wasn’t unexpected. Now, if regulators had come out and said they weren’t going forward with approving it, that would have likely resulted in a sizable decline for the healthcare stock. But a month earlier, investors learned that an FDA advisory panel was unanimously in favor of approving the treatment, and that any risks associated with it were outweighed by its benefits.

And even before that, there were signs that the drug would likely obtain approval. In clinical studies, donanemab (Kisunla’s generic name) was performing similarly to Leqembi, a drug from Biogen that obtained approval last year. For donanemab to not obtain approval would be a big surprise given the comparable results it has demonstrated thus far.

This looks to be a classic case of “buy the rumor, sell the news” with Lilly’s stock, especially when you consider the brief dip in price last week. But there’s another reason investors shouldn’t be surprised by the stock’s fairly tame movements of late.

Eli Lilly has become a GLP-1 stock

Kisunla has the potential to bring in $5 billion in annual revenue at its peak. It’s a great product for Lilly and a way for it to diversify its revenue mix, while growing its operations. But the reason the stock has doubled in the past year isn’t due to its Alzheimer’s treatment or even its solid financials. It’s to do with its potential in the anti-obesity market.

Lilly has multiple glucagon-like peptide 1 (GLP-1) treatments that have the potential to be game changers for its business. Zepbound and Mounjaro are the names investors often think of when they hear about the company. The former is approved for weight loss while the latter is a treatment for diabetes. They both contain the same active ingredient, tirzepatide, which analysts say could generate $50 billion in peak annual revenue.

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Adding more products into the mix is great news for Eli Lilly, but it’s ultimately GLP-1 that has gotten investors so excited about the stock in recent years, and that’s what will likely move the needle in the future. Obtaining approval for Kisunla is a positive development for the drugmaker, but investors shouldn’t be surprised that it’s not resulting in big gains for the stock given that the approval was highly probable.

Is Eli Lilly stock still a buy?

Even though Lilly’s stock isn’t taking off after the approval of Kisunla, that doesn’t mean shares have peaked. There’s still a lot more growth ahead for the business, particularly as it invests more into building out and expanding its production capacity.

The stock is trading at a fairly high valuation of more than 130 times earnings, but given how quickly the company’s top and bottom lines could grow in the future, it still might not be too late for long-term investors to buy shares of Eli Lilly.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.

Eli Lilly’s Alzheimer’s Drug Obtains FDA Approval. Here’s Why the Stock Isn’t Taking Off. was originally published by The Motley Fool