Shares of Eli Lilly (LLY) jumped Monday, in what was an otherwise mixed day for the broader U.S. stock market after six straight weeks of losses for the S&P 500.

• The positive move in Lilly to start the new week comes after the Food and Drug Administration on Friday approved the drugmaker’s new treatment for type 2 diabetes called Mounjaro.

• The FDA said Mounjaro advances treatment of type 2 diabetes. The drug was shown to be more effective at improving blood sugar levels in patients than other diabetes treatments it was compared to in clinical studies.

Business Impact

Sales estimates for Mounjaro vary across Wall Street. Cowen, which has an overweight rating on LLY shares, expects $250 million in sales in 2023, growing to $4.5 billion in 2027. Morgan Stanley analysts project $12.2 billion of Mounjaro sales in 2030 related to diabetes. They said the FDA’s approval of the diabetes therapy is “another important de-risking event” for the drug and LLY shares, which they also rate overweight.

An important thing to know about this drug is that in addition to treating diabetes, it may also become a way to treat obesity. When factoring that in, Morgan Stanley believes the drug could reach total sales of $17.2 billion in 2030.

Clinical trials of Mounjaro specifically as a weight-loss treatment are still ongoing, so Eli Lilly isn’t in a position to file for regulatory approval just yet for that purpose. It’s more of a down-the-road event, depending on how the trials progress, but it’s another promising avenue in the coming years.

Stock outlook

Monday’s strong performance for Eli Lilly shares represents a continuation of what we’ve seen over the past year. Year-to-date, the stock clearly has been an outperformer, up 10.4% compared with more than 15% decline for the S&P 500. We’ve been in and out of Lilly stock as it charges forward and then pull back, with the most recent buy just last month. We think over the long-term, this is absolutely the right name to own. Tactically, we wouldn't recommend buying all at once (as we never do), because there are always opportunities to improve your cost basis. 

Bottom Line

Eli Lilly was widely expected to earn U.S. regulatory approval for the diabetes treatment. Friday’s official clearance is good news for Lilly in the near and long term, helping support our belief in the company’s innovation prospects. 

However, we believe Lilly's outperformance on Monday is not totally attributable to this news. There’s big-picture context to consider:

• The S&P 500′s Pharmaceuticals, Biotechnology & Life Sciences group is one of the best performing industry indexes Monday. While Eli Lilly was the top gainer within the cohort, other drug stocks were moving higher, too.

• This may be because the group is not economically sensitive, and we just got some weak economic economic data out of China, partly attributed to Covid lockdowns in cities including China’s biggest, Shanghai.