Should You Forget Eli Lilly and Buy These Unstoppable Stocks Instead?

Over short periods, Wall Street is driven by emotions. Over the long term, fundamentals start to matter. Right now, investors are extremely excited about GLP-1 weight loss drugs. That focus has Eli Lilly (NYSE: LLY) in the spotlight. Other drugmakers are waiting in the wings and may present a more compelling investment story if you think in decades and not days.

The problem with Eli Lilly

Eli Lilly is a well-run pharmaceutical company. Right now, it has the leading GLP-1 drugs, with its injection-based Mounjaro and Zepbound. GLP-1 drugs represent a major advance in weight loss treatment, so the excitement around them isn't misplaced. However, Wall Street has gotten a bit overexcited about Eli Lilly's future, pushing its price-to-earnings ratio up to 51. That's a massive figure on an absolute basis, noting that the S&P 500's (SNPINDEX: ^GSPC) average P/E is around 28.

If you care about valuation at all, you'll likely want to avoid Eli Lilly. Notably, it is already facing competition in the GLP-1 space, with Novo Nordisk (NYSE: NVO) recently introducing a pill version of its weight loss drug. Consumers tend to prefer pills over shots. The big takeaway from this new GLP-1 variant, however, is that Eli Lilly's position at the top of the GLP-1 pack isn't guaranteed. The lofty valuation the stock is being afforded could quickly shrink if another company's GLP-1 drug is better received by the market.

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Two pharma alternatives outside of the GLP-1 niche

If you are looking at the drug niche of the healthcare sector, you don't have to focus exclusively on GLP-1 drugs. That's just one treatment category. Merck (NYSE: MRK) is focused on cardiometabolic therapies, cancer, and infection treatments. Bristol Myers Squibb's (NYSE: BMY) focus is on cardiovascular ailments, cancer, and immune disorders. All are large and important drug niches.

The lack of exposure to GLP-1 drugs has Merck and Bristol Myers Squibb flying under the radar right now. There's also the issue of upcoming patent expirations for each company. When a blockbuster drug loses patent protection, revenue and profits can decline rapidly. This is known as a patent cliff, and thus, there are legitimate concerns about these two drugmakers' businesses in the near term. But patent cliffs are a normal event in the pharma sector.

Both Merck and Bristol Myers Squibb have proven over time that they can develop new drugs to offset patent cliffs. The timing may not line up perfectly, but it is highly likely that these unloved drug stocks will not only survive but thrive over the long term. You simply need to take a contrarian view of the situation and be willing to buy while others are selling.

What about the valuation story? While Eli Lilly's valuation is worryingly high, Merck and Bristol Myers Squibb look relatively cheap. Merck's P/E ratio is just over 14, and Bristol Myers Squibb's P/E is 18. You have to make a judgment call, and it involves trusting in the ability of long-successful drug companies to be innovative. However, that doesn't seem like too big a stretch.

Price versus value

There's nothing inherently wrong with Eli Lilly's business. It is operating at the top of its game right now. The problem is that Wall Street has afforded it a high valuation based on its current dominance of the GLP-1 space. That dominance could be transitory given the ongoing developments in the pharma sector.

If you have a value bias, you'll probably want to forget about Eli Lilly and look at out-of-favor drug stocks like Merck and Bristol Myers Squibb. Both are relatively cheap and have equally strong histories in research and development.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Merck. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.