Facing Tough Questions: Why We’re Downgrading Lilly After the Obesity Pill Setback

Eli Lilly recently reported impressive second-quarter earnings, but its stock price took a significant hit—falling over 14%. This decline raises some tough questions for investors who once viewed Lilly as a solid choice.

In the quarter that ended on June 30, Lilly’s revenue soared by 38% to $15.56 billion, outpacing expectations of $14.71 billion. Their adjusted earnings were also impressive, reaching $6.31 per share compared to the anticipated $5.46. Despite these wins, Lilly’s stock sank to around $640, reflecting concerns over a key drug trial’s results.

While Lilly’s financial numbers looked promising, the frustration came from the performance of orforglipron, an experimental weight-loss drug. Although it met its trial goals, investors were hoping for even greater results. The drug, designed to compete in the rapidly growing GLP-1 obesity market, fell short of expectations since it only achieved an average weight loss of 12.4%. Investors had been looking for results closer to 15%, largely because Novo Nordisk’s Wegovy, a competitor, hit that target in its trials.

Orforglipron is significant because it’s a daily pill, unlike injectables that have complex manufacturing and distribution needs. Many patients prefer a simpler, oral option. Eli Lilly’s CEO, David Ricks, defended the trial results in a recent interview, emphasizing the need for a scalable oral medication for a mass market.

Another layer of complexity is added by Novo’s recent partnership with CVS Health, which might allow it to undercut prices and regain market share lost to Lilly. This situation has led some analysts to downgrade Lilly’s stock, advising a cautious approach given the company’s high valuation amidst broader industry skepticism.

Despite these setbacks, Lilly’s performance in the quarter was robust. Mounjaro and Zepbound, both successful diabetes and obesity treatments, showed strong sales. Lilly raised its annual sales outlook, now forecasting between $60 billion and $62 billion—beyond the previously anticipated range. This confidence is built on a strong market share increase in the incretin class, where Lilly has been gaining traction.

Looking ahead, Eli Lilly is still set to submit official data to U.S. regulators for orforglipron by the end of the year, hoping for a market launch next year. While the recent results have complicated the narrative around the company, there remains optimism about the potential of oral GLP-1 medications.

In summary, while Eli Lilly has faced challenges, it’s also positioned itself well in a growing market. Their ability to adapt and deliver innovative products could be crucial in turning around investor sentiment.

For further reading, you can check out more details on Eli Lilly’s financial performance and drug trials on CNBC.

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