Undercurrents Suggest Opportunity for Purchasing Dip in Eli Lilly Shares' Value?
Ever since pharmaceutical giant Eli Lilly (LLY -1.19%) disclosed their earnings for the third quarter on October 30th, investors have been harsh towards the company. Currently, the shares are down by as much as 14% since the Q3 earnings report, and they're trading 6% lower than before the report was released.
This steep decline has brought Lilly's stock close to its lowest levels in half a year. In the sections that follow, I'll delve into the reasons behind this decline and evaluate if it's an opportune moment to invest during this dip.
What's causing the decline in Eli Lilly stock price?
Two primary factors are contributing to Lilly's current downturn.
Firstly, investors were unimpressed with the financial performance of the company's diabetes and obesity care drugs - Mounjaro and Zepbound. Despite being significant sources of revenue, Lilly has an issue of not meeting demand with their supply, leading investors to question if the company is effectively managing and distributing its primary growth drivers.
Secondly, the supply constraints allow competitors to capitalize on market demand, such as telemedicine company *Hims & Hers Health*. They're currently offering patients with compounded versions of mainstream weight loss treatments, which are not authorized by the Food and Drug Administration (FDA).
Does Eli Lilly have any catalysts?
Even though Lilly's supply challenges for diabetes and obesity treatments might seem concerning, management is proactively addressing this issue. I've outlined some of the measures they're taking below to improve their weight loss operations, and other opportunities they have in the pipeline.
- Facility upgrades: Earlier this year, Lilly acquired a manufacturing facility from Nexus Pharmaceuticals. Lilly's goal with this acquisition was to improve its manufacturing capabilities to better handle supply and demand issues for its medications. Lately, the company announced it will invest an additional $3 billion into this new facility, indicating their products remain in high demand and their long-term outlook is still promising.
- Expanded distribution channels: Throughout the year, Lilly has formed new partnerships to increase access to its weight loss treatments. For instance, they entered agreements with Amazon Pharmacy and start-up Ro, each offering patients a user-friendly direct-to-consumer (D2C) platform.
- Changes for tirzepatide: This week, news broke that the primary component in Mounjaro and Zepbound, called tirzepatide, has been removed from the FDA shortage list. As Lilly works to enhance its manufacturing efforts and expand alternative distribution outlets, competition from compounding drug producers like Hims & Hers seems less of a concern.
- Gaining the edge over competitors: Currently, the top players in obesity care are Novo Nordisk's (NVO -1.88%) Wegovy and Lilly's Zepbound. A recent study found that Zepbound led to a 47% greater relative weight loss compared to Wegovy. During the trial, patients on Zepbound experienced a 20% reduction in weight compared to Wegovy users, who lost around 14%. Furthermore, a report released Friday suggests that Novo's new GLP-1 product, CagriSema, fell short of management expectations. Despite appearing to be a stronger drug than Novo's Ozempic and Wegovy, CagriSema's performance appears to be on par with Lilly's Mounjaro and Zepbound. By mid-day trading on Dec. 20th, Novo share prices fell by about 20%, while Lilly stock increased around 5% on the news.
- A promising clinical pipeline: Both Mounjaro and Zepbound lack an advantage in delivery method, as they're administered via injection, which can be an inconvenience for some patients. Lilly is aggressively working on an oral form of its glucagon-like peptide-1 (GLP-1) receptor agonists. Its leading candidate, orforglipron, has shown some promising signs during clinical trials. If orforglipron receives FDA approval, Lilly might stand to gain additional market share in the weight loss space from its main competitor, Novo Nordisk.
- Opportunities beyond weight loss: Even though the majority of attention on Lilly centers around their weight loss advancements, investors would be wise to explore further. This year alone, the company received approval for new medications aimed at treating Alzheimer's disease and eczema. Industry research suggests that the combined total addressable markets (TAMs) for treating Alzheimer's and eczema are in excess of USD 60 billion.
- Rewarding shareholders: On top of its investments in manufacturing and new medications, Lilly is also rewarding its shareholders. Recently, the company announced a USD 15 billion share buyback program, signaling that management may see the stock as undervalued.
Significant drops like this one are uncommon for corporations such as Lilly. If you're a long-term investor, I view the present price fluctuations as an excellent chance to grab the dip and decrease your investment cost.
The finance department at Eli Lilly might be under scrutiny due to the company's struggle to meet demand for its diabetes and obesity care drugs, Mounjaro and Zepbound, which has led to money losses for investors. This situation has also opened opportunities for competitors like Hims & Hers Health to capitalize on the market demand.
Despite these challenges, Eli Lilly is taking proactive steps to improve its manufacturing capabilities with facility upgrades and additional investments, aiming to address its supply issues and increase demand for its weight loss treatments. These efforts, along with promising clinical trials for an oral form of its GLP-1 receptor agonists, suggest potential for financial growth and increase in shareholder value.
