Eli Lilly plummets, "weight loss drug" hits a wall?

Financial report "explosion," industry giants' stock prices fall below key levels, and the "hot" weight loss drugs are also facing a demand crisis?

Affected by the poor sales of popular weight loss drugs Zepbound and Mounjaro, Eli Lilly's Q3 revenue and profit both fell short of expectations, and the company also lowered its full-year financial guidance. As a result, the company's stock price dropped by as much as 12% in pre-market trading on Wednesday, closing down 6% for the day, breaking through the 200-day moving average.

The current focus of controversy is whether the demand for weight loss drugs has declined. Eli Lilly executives attributed the poor sales to pharmaceutical wholesalers reducing inventory and reiterated that there is "no problem" with drug demand. However, some analysts believe that the wholesalers' sales of inventory drugs can only partially explain the sales decline, and whether popular weight loss drugs are facing a turning point in demand is currently "shrouded in fog."

It is worth noting that Eli Lilly's downward revision of sales expectations is not an isolated case. In August, another weight loss drug giant, Novo Nordisk, also lowered its full-year profit forecast, with the quarterly sales of its popular weight loss drug Wegovy rarely falling below expectations.

Management says demand is "fine," but wholesalers prioritize inventory reduction?

In terms of financial report data, Eli Lilly's popular weight loss drugs Zepbound and Mounjaro's Q3 sales data significantly deviated from market expectations: Mounjaro's quarterly sales were $3.11 billion, below the market expectation of $3.77 billion; Zepbound's quarterly sales were $1.26 billion, below the market expectation of $1.73 billion.

Regarding the poor sales of weight loss drugs, Eli Lilly attributed the issue in the conference call to pharmaceutical wholesalers reducing the inventory of Zepbound and Mounjaro. Traditionally, pharmaceutical wholesalers purchase drugs from manufacturers and then sell them to hospitals, clinics, pharmacies, and other healthcare providers.

Eli Lilly stated that due to ongoing capacity expansion, the increase in supply allowed the company to fulfill wholesalers' past backlog orders in the second quarter, leading to an increase in the inventory of Zepbound and Mounjaro.

However, despite strong demand, wholesalers reduced new drug orders in the third quarter, primarily digesting existing inventory, which ultimately suppressed drug sales revenue.

Eli Lilly's executives insisted that the potential demand for weight loss drugs remains strong. The company's CEO stated:

Is there a demand problem? No! There is a significant issue with channel stocking at present.

The reality is that Eli Lilly's downstream customers, wholesalers, and retailers are deciding for themselves at what level to stock which of the 12 different dosage forms.

Mizuho Securities analyst Jared Holz commented that currently, the company's management and wholesalers are sending out "confusing signals":

"De-inventory"—that is, selling existing drug inventory rather than hoarding more drugs—was surprising, especially given the high demand for these therapeutic drugs.

Some analysts question whether inventory issues can explain the entire decline in drug sales in Q3. Barclays analyst Carter Gould stated in a report on Wednesday that inventory issues may only account for "a small portion" of the revenue decline for these two drugs, around 20%.

Citigroup analyst Geoff Meacham is relatively optimistic, stating that the poor performance of weight loss drug sales is not due to "weak demand." Given that Eli Lilly has the "strongest fundamentals" in the healthcare sector, we will "actively buy" during periods of weak stock prices.

Is there a "new balance" in the supply and demand of weight loss drugs?

In the real world, the supply and demand for popular weight loss drugs face a more complex game.

As a "cash cow" for pharmaceutical manufacturers, one reason why popular weight loss drugs like Zepbound are so profitable is their high pricing: the monthly cost for Zepbound is approximately $1,000. Due to the lack of alternatives and high demand, patients have to accept this price but are constantly looking for cheaper versions.

Some generic drug manufacturers previously took advantage of the supply shortage of weight loss drugs to produce lower-priced generic versions.

According to the regulations of the U.S. Food and Drug Administration (FDA), when a drug is in short supply, the FDA allows pharmacies and generic drug manufacturers to produce similar compounded or modified versions of the drug, provided they meet specific regulatory requirements. Eli Lilly's Zepbound has been in short supply for most of the past year, which has led several generic drug manufacturers to produce and sell cheaper versions of the brand weight loss drug (compounding pharmacies).

Eli Lilly is trying to close this loophole. In terms of supply, Eli Lilly has spent $10-15 billion this year alone to expand the production of weight loss drugs, and the supply tightness issue has been partially alleviated.

Earlier this month, the FDA announced that the shortage of the active ingredient tirzepatide in Eli Lilly's Zepbound has been resolved, and Eli Lilly quickly began issuing cease-and-desist letters to companies selling generic products.

An industry organization representing compounding pharmacies subsequently sued the FDA. These compounding pharmacies produce customized, often cheaper alternatives to the brand-name drugs that are in short supply. The organization stated that tirzepatide is still in short supply and should remain on the shortage list, urging the FDA to reconsider its decision.

While closing the supply loophole, Eli Lilly also plans to implement promotional strategies to increase sales.

Eli Lilly's management stated in a conference call on Wednesday that the company has not yet begun what is called "demand stimulation activities" for Zepbound, which includes advertising and promotional activities. These promotional activities will begin in November. The company will also heavily invest in its direct-to-consumer website, which offers telemedicine prescriptions and direct delivery services for certain medications to expand patient access to the drugs However, after continuous expansion, the weight loss drug market may face a "new normal" in supply and demand: Novo Nordisk's popular GLP-1 weight loss drug semaglutide has not reached such a peak again after setting a historical single-quarter sales record of $30 billion last December