It's rare for a business to warn investors that worse-than-expected earnings are coming without taking a hit to its share price, but in its third-quarter release on Nov. 2, Eli Lilly (LLY 0.18%) managed an even more uncommon feat. After management lowered its full-year earnings guidance, Lilly's shares jumped by 5%.
Due to the reasons for the downward revision, it probably won't do an encore performance. But that doesn't mean there's any bad news. On the contrary, Eli Lilly's stock is likely to continue marching upward.
NYSE: LLY
Key Data Points
Mounjaro reigns supreme
While management sharply slashed the company's anticipated earnings per share (EPS), dialing the top of its guidance range down to $6.15 from $8.10 previously, its revenue forecast didn't change. Management still expects a top-line haul of as much as nearly $34 billion. But the culprit behind the downward revision isn't anything nefarious.
In Q3, Eli Lilly spent close to $3 billion to acquire DICE Therapeutics, Versanis Bio, and Emergence Therapeutics, a trio of biotechs with valuable pipeline assets. It will likely take a few years to extract the value from those purchases by moving the programs it acquired through the R&D process and commercializing those treatments that earn approval (assuming that regulators give it). Investors shouldn't get scared off by the new earnings guidance, as the company could well see large returns on those investments in the future.
So why'd the stock go up after the quarterly report? The answer to that question is, quite simply, Mounjaro.
Mounjaro is currently approved for type 2 diabetes, but it's awaiting regulatory review as a treatment for obesity, and is being studied for a handful of other conditions as well. In the third quarter alone, Mounjaro sales were more than $1.4 billion, contributing significantly to Lilly's top line of nearly $9.5 billion. Total revenue for the quarter was 37% more than a year prior. And pretty much everyone agrees that Mounjaro's earning potential is still in its early innings.
Next year could be great
Eli Lilly has had a total return of 60% over the last 12 months, and its gains could get even better. This is only Mounjaro's first full year on the market, and demand is only going to get even hotter once the Food and Drug Administration (FDA) approves it to treat obesity, which could occur before the end of 2023. The drug is already in short supply in the U.S., and management believes the situation will continue for quite some time. The good news is, the company is planning to double its production of the medicine, a huge green flag to invest in the stock.
Moreover, Mounjaro is hardly the only medicine in Eli Lilly's portfolio. Its ulcerative colitis therapy, Omvoh, just nabbed an approval from the FDA. Lilly's also waiting to hear back from regulators regarding its candidate to treat early-stage Alzheimer's disease, which should happen sometime in Q1 2024.
Furthermore, there is a high chance that the company will be able to work out the concerns that regulators have regarding its third-party manufacturing partners in the context of its biologic therapy for atopic dermatitis, lebrikizumab, which saw its bid for approval rebuffed by the FDA in early October. Given that the regulator did not find any issue with the medicine's safety or efficacy, it is very likely that once the manufacturing issues are addressed, lebrikizumab will be approved and commercialized next year. And that'll drive even more revenue growth.
In a nutshell, investors should anticipate Eli Lilly's pace of growth will remain rapid. While it's true that Mounjaro will be competing head-to-head against Novo Nordisk and its blockbuster type 2 diabetes and anti-obesity medicines Ozempic and Wegovy, a total victory in those markets is not necessary for Lilly's quick growth to continue, at least for the time being. Keep an eye out for the FDA's official ruling on expanding Mounjaro's indications to include treating obesity. If the regulators do what shareholders are hoping for, it'll send the stock up even further.
