Eli Lilly’s Miss Q3 for Mounjaro, Zepbound highlights reliance on wholesalers

Just when things were going well for Eli Lilly, he reported third quarter earnings on Wednesday, which were well below analysts’ expectations. Sales of Lilly’s type 2 diabetes drug Mounjaro and weight loss drug Zepbound, which have the same active ingredient, tirzepatide, both came in below Wall Street forecasts. It was a rare quarterly miss for Lilly that prompted the company to cut its full-year 2024 guidance and sent the company’s shares down more than 13% in early Wednesday trading.

The culprit behind Mounjaro and Zepbound’s disappointing Q3 sales? “(I)nventory declines in the wholesale channel” following higher inventory levels at the end of Q2, according to the company’s earnings announcement. In short, Lilly blamed the wholesaler for reducing stocks of blockbuster drugs that had been built up in previous quarters.

Anyone who has followed the heated GLP-1 market is well aware of the volatile supply chain that Lilly and rival Novo Nordisk have tried to navigate, with both companies investing billions of dollars to ramp up their manufacturing capabilities in an attempt to keep up. . with unprecedented demand. Both companies’ doses of GLP-1 have hit the FDA’s shortage list. The agency recently removed Mounjaro and Zepbound from the list, but it is currently reconsidered that decision. Meanwhile, the FDA declared this week that all doses of Ozempic and Wegovy from Novo Nordisk are now available.

Lilly’s Q3 results on Wednesday added another wrinkle to already challenging supply chain dynamics. Lilly CEO Dave Ricks in Wednesday’s winning call told analysts that the revenue miss for GLP-1 drugs was not a function of supply, but rather due to wholesalers reducing their inventories. Lilly’s wholesalers and retailers “make their own decisions about which of the 12 different dosage forms they want to stock” and at what levels, Ricks said — something he acknowledged “we don’t control or try to do “.

Also on the call, CFO Lucas Montarce estimated that inventory declines in the wholesaler channel hurt single-digit sales of Mounjaro and Zepbound as a percentage of aggregate U.S. sales of those products. “While demand for Mounjaro and Zepbound remains strong and growing, quarterly revenue growth in 2024 was impacted by supply and channel dynamics,” said Montarce.

Leerink Partners analyst David Risinger said in a note that Lilly’s Investor Relations (IR) provided his firm with additional insights into how channel destocking works in the U.S., including that wholesalers are facing financial pressures and are tightly managing capital. thing.

“In light of IR’s comments, we are surprised that wholesalers are likely inclined to maintain minimum tirzepatide inventory levels as LLY is unlikely to increase list prices,” Risinger wrote, noting that “wholesalers enjoy additional profits from stocks held when manufacturers raise list prices. “

Truist Securities analyst Srikripa Devarakonda also pointed out that wholesalers “can find themselves in uncharted territory when it comes to accurately stocking and managing up to 12 different cold-chain cans of product (in addition to franchise Novo) in volumes they might be unfamiliar with. to, which can be quite capital intensive.”

While Devarakonda called it “growing pains” and a learning curve, BMO Capital Markets analyst Evan Seigerman was less sanguine in his assessment that Lilly is now under “immense pressure” to perform in Q4.

Seigerman warned in a note to investors that the fourth-quarter results “will become a defining moment for the company — there is no room for error.”

While Ricks emphasized that US demand for Mounjaro and Zepbound “has been strong and continues to grow as we expand both access and supply,” Seigerman noted that building inventory will be key to a successful fourth quarter . The problem, as Ricks explained on this week’s call, is that Lilly is at the mercy of wholesaler stocking decisions.