Persistent Challenges and Two Positive Aspects for Eli Lilly's Share Value
If you merely examine its share price, you might conclude that Eli Lilly (LLY 1.35%) is experiencing some hiccups this quarter. Over the past 30 days, its shares have decreased by approximately 10%, although they've still risen by around 37% for the year. However, if management's analysis is accurate, a specific trend contributing to their recent performance drop is more likely to persist than shareholders would prefer.
Nevertheless, the situation isn't as dire as it might seem initially. And Eli Lilly's cloud also carries a couple of welcome surprises that investors will appreciate hearing.
Tirzepatide sales present an unexpected slowdown
Lilly's latest financial lifeline, tirzepatide – a diabetes and weight loss treatment sold under the brands Mounjaro and Zepbound – is selling less than initially expected. Despite generating $7.8 billion in U.S. revenue during the third quarter, a 46% increase from the previous year, $1.2 billion of which originated from Zepbound sales, the market's expectations were even higher.
The discrepancy between expectations and results can be attributed to two factors. First, pharmaceutical wholesalers purchased an excessive amount of Mounjaro and Zepbound in the second quarter, so they didn't require as much replenishment as anticipated in the third quarter, resulting in lower sales for Lilly. Secondly, the previously announced tirzepatide shortage has now been resolved, meaning that sales will now be limited by demand rather than production capacity.
This situation could lead to modestly disappointing figures for a few reasons, particularly in the short term. In the third-quarter report, management reduced its 2024 revenue forecast to a maximum of $46 billion, a mere three months after increasing its annual guidance in the second quarter to a high of $46.6 billion. The shifting outlook may leave investors feeling uneasy that future guidance figures might be adjusted as swiftly.
More significantly, investors should recognize that the initial frenzy surrounding Lilly's weight loss medication is starting to subside. Those signs do not indicate that the market for GLP-1 medications has reached saturation or even the end of its initial growth spurt. However, Lilly may need to invest more money to secure a larger share of the market in the future.
These less favorable conditions will endure for a while, but not because eligible patients are losing interest in treatment.
To address this challenge, the company must allocate its capital between demand-generating activities such as marketing and advertising, and expanding manufacturing capacity to meet demand. Eventually, it will have to become more competitive with companies like Novo Nordisk for market share, and these additional expenditures will serve as headwinds to earnings until the costs stabilize.
Demand remains robust
Despite the aforementioned, there are still reasons to remain optimistic about this investment choice.
The first ray of hope is that tirzepatide remains a highly successful drug, and demand for it is significantly more likely to rebound than to persist at its current level. The company is conducting further research and development to expand the eligible indications for the treatment, and this expansion of the market has already surpassed the size of the market when the drug initially gained regulatory acceptance. Additionally, as Lilly's manufacturing capacity expands, it will be able to recapture some of the revenue it is currently losing to third-party compounding pharmacies manufacturing tirzepatide on a temporary basis to alleviate shortages.
The second significant advantage is that, as demonstrated by Lilly's global portfolio of medicines in the third quarter, the company has ample room to boost earnings by increasing prices, regardless of whether there is a greater demand than can be supplied. Worldwide, a 6% price increase and a 15% increase in prescription volume led to a 20% increase in quarterly revenue to $11.4 billion. If it continues to encounter underperforming sales volumes in the U.S., increasing prices before entering new international markets could help bridge the revenue gap.
In summary, don't bet against Lilly due to a single quarter that didn't meet expectations. The company still has a great deal of growth ahead, and it's set to arrive shortly.
Investors may need to consider reallocating funds for promoting tirzepatide further and expanding manufacturing capacity, as the market for GLP-1 medications is expected to grow, but competition from companies like Novo Nordisk will increase expenses. Despite the temporary decrease in tirzepatide sales, the drug's market potential is significant due to its continued success and the expansion of eligible indications, which will help recover lost revenue.
The company's financial performance can be bolstered by harnessing the potential of its global medicine portfolio. For instance, increasing prices and prescription volume internationally could contribute to a 20% boost in revenue, bridging any revenue gap from underperforming sales in the U.S.
