Shares of Lilly are cratering, but investors may be surprised to learn what’s influencing the volatility.
Owning shares of pharmaceutical giant Eli Lilly (LLY -1.54%) has generally been a great idea over the past year. Lilly’s diabetes medication Mounjaro and its sibling treatment for chronic weight management Zepbound have evolved into blockbuster drugs in short order — helping fuel Lilly stock to new all-time highs earlier this year.
However, Lilly’s shares (like pharmaceutical companies in general) tend to be quite volatile. As I write this, the stock has fallen by 12% just in the month of November. With the price now down 22% from intra-year highs, is now a good time to buy the dip in Eli Lilly stock?
Let’s take a look at what could be influencing the ongoing sell-off. From there, the case for or against investing in Lilly should become much clearer.
Eli Lilly’s earnings report was a letdown
On Oct. 30 Eli Lilly published financial results for the third quarter. To be blunt, its latest earnings were disappointing. Lilly missed Wall Street’s expectations on both the top and bottom lines. To make matters worse, one of the primary culprits behind the swing and miss is the company’s weight loss segment.
If you’ve been following Lilly over the past year or so, you already know that balancing supply and demand for Mounjaro and Zepbound has been a daunting task. While Lilly has invested in manufacturing, these infrastructure investments will take time before the company can meet demand trends and scale its diabetes and obesity care medications consistently and seamlessly.
Until that happens, Lilly is likely to continue experiencing outsized ebbs and flows in inventory levels for its medications. In turn, the pace at which it can accelerate revenue and profits will remain protracted.
Image source: Getty Images.
More headaches could be on the horizon
In the chart below, you can see Lilly’s third-quarter earnings date annotated with the purple circle labeled “E.” It’s pretty obvious that shares of Lilly have been cratering since the company reported earnings.
However, around Nov. 6 it looks like the post-earnings sell-off reached a bottom, and the stock started to rebound. What’s curious is that after remaining flat for a few days in early November, shares of Lilly have dropped again over just the last couple of days.
LLY data by YCharts
Two factors could be taking a toll on Lilly’s share price right now.
The first is competition. Lilly’s biggest competitor in the weight loss realm is Novo Nordisk — the maker of Ozempic and Wegovy. Over the last few weeks, however, some other pharma players eyeing the weight loss market have been reporting progress updates on their clinical trials. Most notably, Viking Therapeutics is believed to be working on a quadruple-pathway obesity drug that could, if approved by the Food and Drug Administration (FDA), pose a serious headwind to incumbents such as Lilly.
Then there’s Amazon. On Nov. 14, the e-commerce and cloud computing juggernaut announced a host of updates for its telemedicine service, Amazon One Medical. The company has a long history of entering and disrupting new industries, and so it is natural that some investors might get spooked by Amazon’s entrance into the healthcare arena.
It’s not time to panic
As I’ve often emphasized in my articles, panic-selling is rooted in emotion and rarely comes from a place of sound, reasonable judgment.
As far as competition goes, Eli Lilly is one of the two current leaders in the weight loss space, along with Novo Nordisk. And while Viking and others are working on intriguing alternatives to Mounjaro, Zepbound, Ozempic, and Wegovy, I remain skeptical that any of these potential new medications will pose much of a threat.
What’s more, the total addressable market for these new weight loss treatments — known as glucagon-like peptide-1 (GLP-1) agonists — is expected to be $100 billion by 2030. In my eyes, the diabetes and obesity care markets are big enough, and therefore not a winner-take-all opportunity.
On top of that, I see the announcement from Amazon as a benefit rather than a threat. Remember, Lilly already has a partnership with Amazon Pharmacy, which serves as an additional distribution channel for Lilly’s weight loss medications. In addition, Amazon’s announcement seems to be focused on lifestyle products for hair regrowth, eyelash growth, and more. I see this move as much more of a threat to Hims & Hers Health, which has been trying to encroach on Lilly’s territory by selling compounded versions of mainstream weight loss treatments.
While I can’t say for certain that Amazon’s moves or updates regarding Viking’s GLP-1 pipeline really had anything to do with Lilly’s sell-off over the last few days, the timing of these announcements and the sharp periods of selling do seem closely aligned:
LLY data by YCharts.
Despite all these unknowns, there are a couple of concrete catalysts for Lilly that seem to be overlooked right now. The company recently received FDA approval for an Alzheimer’s drug and an eczema medication. Both of these markets represent over a $60 billion opportunity for Lilly in the long run.
To me, buying Eli Lilly shares right now is a no-brainer. I think the recent sell-off is not warranted, and investors are missing the forest for the trees. The sell-off is a compelling opportunity to buy the dip in a company on the verge of revolutionizing multiple pockets of the healthcare realm.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Spatacco has positions in Amazon, Eli Lilly, and Novo Nordisk. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
