Eli Lilly (LLY) reported mixed fourth-quarter results Thursday morning, but we’re looking through the stock’s post-earnings sell-off because there’s no change to the pharmaceutical giant’s bright long-term potential. Notably, the company’s potential blockbuster obesity drug remains on track to be cleared by U.S. regulators by the second half of this year — encouraging news for shareholders, like us at the Club, whose investment case counts on the weight-loss therapy’s success. Revenue fell nearly 9% year-over-year, to $7.3 billion, missing analysts’ expectations for $7.33 billion, according to estimates compiled by Refinitiv. Much of the sales decline is tied to the loss of Covid-19 antibody revenue. Adjusted earnings-per-share (EPS) of $2.09 comfortably beat analysts’ forecasts of $1.78, according to Refinitv. Bottom line There’s definitely some noise surrounding Eli Lilly’s results, including sales of its key diabetes drug Mounjaro. But that’s not the only reason for the stock’s more than 5% decline in Thursday trading. A lot of this move lower is due to a vicious market rotation out of stocks that did well in 2022 like health care, energy, and consumer staples in favor of technology and other areas that were crushed last year by inflation and massive slowdowns in their business. Lilly is a high-quality company with a great long term outlook and no major patent cliffs in the near term. With the market putting it on sale Thursday, we are upgrading our rating to a 1 , meaning we would buyers right here. Q4 commentary Investors are intently focused on Mounjaro’s sales because it is the same molecule — known scientifically as tirzepatide — that’s being studied for obesity treatment. Launched in June 2022, Mounjaro is currently approved to treat only Type 2 diabetes. Optimism around the drug is rooted in its promise to treat multiple conditions, including obesity, dramatically expanding its sales potential and fueling Lilly’s growth for years to come. Sales of Mounjaro in the three months ended Dec. 31 came in at $279.2 million, under the Key Product Sales category in the table, compared with FactSet’s consensus forecast of $319.3 million. That may have disappointed some investors, but we’re less concerned about the specifics of Mounjaro’s quarterly performance right now and more focused on the big picture: its expansion into obesity. In a CNBC interview Thursday, Eli Lilly CEO Dave Ricks said that in the second quarter of this year, the company should have the final piece of obesity trial data required for Food and Drug Administration approval. Then, he said, “the review should complete some time in the back half of calendar ’23.” Eli Lilly began its rolling submission to the FDA in late 2022. The regulatory timeline is consistent with existing expectations. But given all the high financial hopes surrounding the obesity drug, it’s notable that there haven’t been any unexpected delays to the projected rollout. After all, it was only two weeks ago that Lilly’s Alzheimer’s drug hit a minor hurdle with the FDA . A few factors likely contributed to Mounjaro’s fourth-quarter revenue shortfall. None of them undercut the multiyear Eli Lilly investment story, making Thursday’s stock sell-off an attractive buying opportunity. With existing trial data showcasing Mounjaro’s weight-loss potential, once the drug hit the market for type 2 diabetes, some people began to take it “off-label,” meaning not for its FDA-listed use. This probably added to demand for the drug, which has recently faced supply shortages . Ricks acknowledged those shortages Thursday on CNBC and explained that, late last year, the company took steps to limit Mounjaro’s ability to be accessed off-label. Those actions “made an impact in some of this non-indicated use,” Ricks said. “We were happy with that, because our commitment is really to patients who need the medicine for what it’s for right now and who can get insurance coverage and who have already started the drug,” Ricks said. “So, we’ll stay on that path. When the obesity indication is approved by the FDA, we’ll have more supply at that time and expand our programs then.” Indeed, Eli Lilly is investing heavily into expanding manufacturing capacity for Mounjaro. It is a “very complicated” process to make that kind of drug, Ricks said, so it cannot just scale up overnight. In late January, the company announced it was spending another $450 million to expand capacity at an existing facility in North Carolina. “The ramp won’t be as fast as any of us want, but it will happen,” Ricks said. “We project to exit this year with 50% more capacity than what we started with, and that will continue into ’24 and ’25.” Fourth-quarter revenue for diabetes drug Trulicity — Eli Lilly’s best-selling product right now — came in lighter than expected, at $1.94 billion. That compares with estimates of $2.13 billion, according to FactSet. On Thursday’s earnings call, management indicated that the launch of Mounjaro hasn’t started to eat further into Trulicity sales. Just under 10% of Mounjaro prescriptions are written for patients who had been on Trulicity. Management gave the same figure on the company’s third-quarter earnings call in November. Outlook Eli Lilly maintained its full-year revenue guidance between $30.3 billion and $30.8 billion. However, the company raised its adjusted 2023 earnings-per-share forecast to between $8.35 and $8.55. That’s up from prior guidance of $8.10 and $8.30. The earnings revision is “due to a tax-rate assumption change,” according to Ricks. So, it’s not a surprise that Lilly shares did not react positively to the tweak. Stocks trade higher on positive earnings updates when it’s driven by operations, not lower taxes. (Jim Cramer’s Charitable Trust is long LLY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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David Ricks, CEO, Eli Lilly
Scott Mlyn | CNBC
