Eli Lilly’s Q3 Miss for Mounjaro, Zepbound Shows Wholesaler Dependency

Eli Lilly and Company faced a significant setback in its third-quarter earnings report, falling short of analysts' expectations and prompting a downward revision of the company's full-year 2024 guidance. This development led to a notable drop in the company's stock, plummeting more than 13% in morning trading on Wednesday.

The primary reason behind the disappointing sales figures for Lilly's type 2 diabetes drug Mounjaro and weight loss medication Zepbound was attributed to a decrease in inventory within the wholesaler channel. These drugs, which share the active ingredient tirzepatide, did not meet Wall Street’s forecasts largely due to wholesalers cutting back on their stock levels after a period of high inventory in the previous quarter.

Dave Ricks, the CEO of Lilly, addressed this issue during the earnings call, emphasizing that the revenue shortfall was not due to supply issues but rather to the decisions made by wholesalers regarding their inventory. He explained that wholesalers and retailers independently decide on the quantities and dosage forms they wish to stock, a factor beyond the company's control.

The supply chain for GLP-1 drugs, which includes products from Lilly and its competitor Novo Nordisk, has been notably unstable. Both companies have invested heavily in expanding their manufacturing capabilities to meet the high demand, resulting in shortages that placed their drugs on the FDA’s shortage list. Although the FDA recently removed Mounjaro and Zepbound from this list, the agency is reconsidering its decision. On the other hand, the FDA announced that all doses of Novo Nordisk’s Ozempic and Wegovy are now available.

CFO Lucas Montarce estimated that the decrease in inventory levels impacted the sales of Mounjaro and Zepbound by mid-single digits in terms of the percentage of aggregate U.S. sales. He noted that although demand for these drugs remains strong and is growing, the revenue growth for 2024 has been affected by supply chain and channel dynamics.

Analysts have provided further insights into the situation. David Risinger from Leerink Partners shared that Lilly's Investor Relations mentioned wholesalers are under financial pressure and are managing working capital tightly, which may lead them to maintain minimal inventory levels of tirzepatide, especially since Lilly is unlikely to increase list prices. Risinger observed that wholesalers benefit from holding inventory when manufacturers raise prices, implying that the current scenario does not incentivize them to stock large quantities of these drugs.

Srikripa Devarakonda from Truist Securities pointed out that wholesalers might be facing challenges in managing the stocking of up to 12 different dosage forms of cold-chain products, which include Lilly's and Novo's franchises. This complexity could be contributing to the conservative stocking approach by wholesalers, which is a new experience for them and potentially capital intensive.

Evan Seigerman from BMO Capital Markets expressed concerns about the pressure on Lilly to deliver strong results in the fourth quarter. He stated that the upcoming quarter will be critical for the company, with little room for error.

Ricks, however, remained optimistic, highlighting the robust and growing demand for Mounjaro and Zepbound as the company continues to expand access and supply. He acknowledged the crucial role that maintaining adequate inventory levels will play in achieving a successful fourth quarter, though he stressed that wholesaler stocking decisions remain a significant factor outside of the company’s control.