Riding the (Weight Loss) Wave: Balancing FOMO with Prudent Risk Management

Apr 8, 2024

The past year has witnessed a spectacular rise in the stock prices of certain companies. Indianapolis-based pharmaceutical giant Eli Lilly (LLY) and microchip producer Nvidia (NVDA) have captured significant investor attention, boasting impressive gains of nearly 150% and 250%, respectively, over the past twelve months alone.

While the allure of chasing hot stocks can be strong, investors must navigate markets with a clear head and a well-defined strategy. Making emotional decisions based on the fear of missing out (FOMO) or the illusion that the momentum of perpetual bull markets will always continue (MOMO) can be detrimental. Before you succumb to those potential pitfalls, it's important to take a deeper look at the factors shaping Eli Lilly's future.

FOMO and MOMO: Don't Let Emotions Cloud Your Judgment

The fear of missing out (FOMO) is the anxiety and regret associated with missing out on potential gains. It can lead investors to make impulsive decisions based on emotion and can be a challenging motivator to overcome, especially in a bull market when you feel the buzz from others around you.

Similarly, the recent surge in LLY stock price may make you think the upward trend will continue indefinitely. This is the allure of MOMO, where past performance is mistakenly seen as a guarantee of future success. However, market corrections are inevitable, and blindly assuming a never-ending upward trajectory can lead to significant losses. Prudent investing must consider the stock's underlying fundamentals and the company's future prospects.

Mounjaro's Success Story: 

The primary driver of Eli Lilly's performance has been the phenomenal success of its new drug, Mounjaro. Originally developed as a treatment for type-2 diabetes, it was discovered that Mounjaro also had the unexpected side effects of weight loss and addiction cessation. It was recently approved by the FDA as a weight-loss treatment (and subsequently rebranded as Zepbound), which fueled a tidal wave of investor enthusiasm into the realm of euphoria.

Medicare Coverage—A Double-Edged Sword: 

Zepbound is an extremely expensive medication (the estimated cost of treatment is over $15,000 per year), which is great for the company's revenue. However, its high cost could limit consumer uptake. Additionally, whether Medicare will cover Zepbound as a weight-loss treatment remains a key question.

While wider accessibility could boost patient numbers and revenue, Medicare coverage would likely come with lower negotiated prices and decreased profit margins. Depending on the breadth of coverage (it is estimated that over 41% of Americans over 60 years old are obese), if approved for Medicare at its current price, the costs associated with covering Zepbound alone would take up a substantial portion of Medicare's budget – certainly an unrealistic outcome considering Medicare is already a hot topic for the U.S.'s current debt situation.

Ultimately, the revenue that Eli Lilly will get from these price negotiations is unknown, but the stock continues to trade with the most favorable outcome priced in.

Beyond Mounjaro: 

Eli Lilly's future hinges not just on Mounjaro/Zepbound's success but also on its ability to develop and commercialize other promising drugs in its pipeline. Investors should monitor the progress of these potential growth drivers as well.

Summary

Eli Lilly's future holds immense potential, but a balanced perspective is crucial. While Mounjaro/Zepbound's success and potential Medicare coverage are exciting developments, the impact of price negotiations, administrative hurdles, and overall effectiveness requires careful consideration. Maintaining a diversified product portfolio and a strong commitment to R&D will also be essential for Lilly's long-term success. Investors should carefully analyze these factors to avoid the FOMO investment pitfalls.

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