If you looked solely at its stock price, you might get the idea that Eli Lilly (NYSE: LLY) is having a bit of an off quarter. Over the past 30 days, its shares fell by about 10%, though they are still up by around 37% so far this year. And, if management is correct, one cloudy trend driving their recent decrease in performance is more likely to stick around than shareholders would prefer.
Nonetheless, things aren’t anywhere near as bad as they might seem at the moment. And Eli Lilly’s cloud also has a pair of silver linings that investors will want to hear about.
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Lilly’s newest cash cow, tirzepatide — a therapy for type 2 diabetes and weight loss that’s sold under the names Mounjaro and Zepbound — is selling a bit slower than anticipated. Though its total revenue in the U.S. in the third quarter was $7.8 billion, up 46% from a year prior, $1.2 billion of which was derived from sales of Zepbound (the weight loss brand), the market’s expectations were even higher.
The reason for the disconnect between expectations and outcomes is twofold. First, pharma wholesalers overbought Mounjaro and Zepbound in Q2, so they didn’t need to restock their inventories as much as anticipated in Q3, leading to lower sales for Lilly. Second, the previously declared shortage of tirzepatide is over. Now, for the first time, sales will be constrained by demand rather than by how many doses it can supply.
That is likely to result in relatively gloomy numbers for a couple of reasons, at least temporarily. In the Q3 report, management trimmed its guidance for 2024’s revenue to a maximum of $46 billion, just three months after increasing its annual guidance in Q2 to a high point of $46.6 billion. The flip-flopping outlooks may leave investors with a sense that future guidance figures could be cut just as quickly.
More importantly, investors need to recognize that the most hectic period of the gold rush for the company’s weight loss drug is calming down. Currently, there’s no sign that the market for GLP-1 medicines has become saturated, or even done with its initial growth spurt. However, Lilly may need to spend more money in the future in its efforts to capture a larger slice of the market .
These cloudier conditions will persist for a time, but not because eligible patients are becoming less interested in getting treatment.
By necessity, the company is balancing its capital between demand-generating activities like marketing and advertising, and investing in even more manufacturing capacity to meet the demand. Eventually, it’ll need to more aggressively fight competitors like Novo Nordisk for market share, and the outlays required for that fight will be headwinds to its earnings until expenditures reach a steadier state.
