Eli Lilly’s blowout quarter should quiet investor concerns about the stock

Eli Lilly on Thursday reported a home-run quarter fueled by sales of its blockbuster obesity and diabetes drugs, quieting any lingering investor concerns in the stock. Revenue in the second quarter jumped 36% year over year to $11.3 billion, easily topping expectations of $9.92 billion, according to estimates compiled by LSEG. Adjusted earnings per share (EPS) in the three months ended June 30 totaled $3.92, far outpacing the $2.60 estimate, LSEG data showed. On an annual basis, adjusted EPS jumped 85.8%. Eli Lilly Why we own it: Eli Lilly’s best-in-class drugs should enable growth above the industry average for many years to come. The portfolio is anchored by its GLP-1 franchise, which currently consists of Mounjaro for type-2 diabetes and Zepbound for obesity. The fast-growing class of drugs has the potential to treat other conditions, such as sleep apnea and reduce the risk of stroke. Lilly’s pipeline of Alzheimer’s treatments, including the recently approved Kisunla, add to the stock’s long-term appeal. Competitors: Novo Nordisk , Biogen , Eisai, Merck and Pfizer Weight in portfolio: 2.75% Most recent buy: Feb. 7, 2023 Initiated: Oct. 8, 2021 Bottom line Investors were on edge heading into Eli Lilly’s report. The stock was down nearly 20% since closing at a record high of $950.46 on July 15, with its latest leg lower coming Wednesday after a disappointing report from its main competitor in the GLP-1 drug market, Wegovy maker Novo Nordisk , raised concerns about pricing pressures. They will sleep a bit easier now. Eli Lilly not only crushed estimates on all the most important items — profits and sales of diabetes treatment Mounjaro and weight loss drug Zepbound — but the company also hiked its full-year guidance for revenue, earnings and gross margin. It’s no wonder shares surged more than 8%. “Eli Lilly was a legitimate blowout on every single line,” Jim Cramer said Thursday. The report left little doubt that Eli Lilly’s best days are ahead, driven by the growth of GLP-1s. While primarily used for treating obesity, in recent months Lilly released promising data showing the drugs can also improve sleep apnea and reduce the risk of heart failure. Zepbound eclipsed $1 billion in quarterly sales for the first time during the April-to-June period, just seven months after hitting U.S. pharmacy shelves . Even with the eye-popping sales, Lilly CEO David Ricks argued the obesity market is still nascent. “I think we’re like in the bottom of the first inning here. It’s really early” for Zepbound, Eli Lilly CEO David Ricks said in a CNBC interview Thursday. “We’re not really promoting. We’re not launching in 40 countries we have approvals in, and we haven’t even gotten to most of the medical benefit proof that’s happening.” A key reason that Eli Lilly hasn’t aggressively promoted Zepbound in the U.S. or entered into more international markets: Demand has far outstripped supply. But the good news is Eli Lilly’s multibillion dollar investments to expand manufacturing capacity are paying off. Last week, the Food and Drug Administration said all doses of Zepbound were now available after being in short supply. The same is now true for Eli Lilly’s other blockbuster GLP-1, Mounjaro, which also has faced supply constraints. Mounjaro, which secured U.S. approval for type-2 diabetes in May 2022, shares an active ingredient with Zepbound called tirzepatide. GLP-1s mimic a hormone in the gut to improve blood sugar control and effectively suppress appetite, contributing to weight loss. Mounjaro and Zepbound are given through injections. LLY YTD mountain Eli Lilly’s year-to-date stock performance. Lilly executives offered encouraging thoughts on the company-specific issues hurting the stock lately: emerging competition in GLP-1s, which has been a worry in recent weeks after positive announcements from Roche and smaller biotech firm Viking Therapeutics , and pricing pressures, which came to the forefront in Wednesday’s session following Novo Nordisk’s report. It’s too early to think Lilly will lose its leadership position in the fast-growing market. It has a significant head start over everyone, except co-leader Novo Nordisk — on the call, executives said Lilly first shared Phase 1 data for tirzepatide eight years ago. The Roche news that just spooked Lilly investors ? Both datasets were from early stage Phase 1 trials. While Viking Therapeutics is farther along, preparing to start a late-stage Phase 3 trial for its lead injectable obesity drug , there is still a long way to go before it’s on the market. Analysts at Leerink estimate a 2028 launch. And then there’s the hurdle that has tripped up even an established, well-capitalized drugmaker like Eli Lilly: manufacturing capacity. Lilly and Novo Nordisk have spent billions to boost manufacturing of injectable GLP-1s, which aren’t easy to make and must be compliant with strict standards by regulatory bodies like the FDA. This is a significant advantage for the incumbent players. Eli Lilly also has next-generation GLP-1s in its pipeline being developed that appear to be even more effective than its current lineup. On pricing pressures for GLP-1s, Lilly management said the company is modeling for stable pricing quarter to quarter in 2024. There was “nothing unusual” between the first and second quarters, interim CFO Gordon Brooks said, adding that its guidance assumes that will continue in the second half of the year. We’re reiterating our buy-equivalent 1 rating on Eli Lilly, though it’s not our style to buy a stock during a single-session surge like Lilly shares are seeing Thursday. Our price target remains $1,000 a share, as well. Guidance Eli Lilly now expects full-year sales in the range of $45.4 billion to $46.6 billion, an increase of $3 billion at both the low and high end. Wall Street had been projecting $43 billion in 2024 revenue, according to FactSet. The Indianapolis-based drugmaker now expects full-year adjusted earnings per share between $16.10 and $16.60, up from a range of $13.50 to $14. The consensus EPS estimate had been $13.69, per FactSet. Meanwhile, its adjusted gross margin range has been raised to between 37% and 39%, up from 33% to 35%. On the supply front, Lilly executives reiterated that production of sellable doses of GLP-1s in the second half of 2024 should be at least 1.5 times year-ago levels. Some analysts had wondered if the hiked revenue guidance could lead to a change in their supply targets, but that was not the case. Ricks told analysts on the conference call that 1.5 times is “the floor” for second-half volume. He said improved supply in the second quarter was due to overall performance across its manufacturing network, rather than a major step up in production from any one facility such as Research Triangle Park in North Carolina. Still, Ricks said the RTP facility is on track. Quarterly commentary As seen in the chart above, there’s not much to dislike in the quarter. Sure, cost of sales of $2.17 billion came in ahead of expectations, but that is spending to support drug launches. And based on the EPS and margin performance, clearly it was not an issue for the bottom line. Gross margin of 82.03% and operating margin of 37.95% both exceeded estimates and were up nicely year over year. Unsurprisingly, Eli Lilly’s second-quarter sales in the U.S. were up a robust 41.7% year over year, an acceleration from the 28.4% growth rate in the January-to-March period. But the company’s performance in Europe is worth highlighting, even though it’s much smaller than the U.S. business. Sales were up 19.2% on an annual basis, with Mounjaro serving as the main driver of the growth in markets such as the U.K. and Germany. Outside the U.S., Lilly is rolling out Mounjaro with a delivery method called KwikPen, which is different than the autoinjector pens used domestically. That is helping supply and leading to an increase in volumes. Additional progress on the KwikPen presentation is something to watch in the quarters ahead. Overall, sales of Mounjaro totaled $3.09 billion in the quarter, well ahead of the $2.43 estimate, according to FactSet. Zepbound sales of $1.24 billion also easily surpassed the $927 million estimate. Demand for both drugs remains fervent, though interim finance chief Brooks noted that some of the second-quarter performance was impacted by inventory levels being rebuilt as supply improved. Breast cancer drug Verzenio gets far less attention than the GLP-1s, but it continues to be an underappreciated driver of companywide growth. Sales of $1.33 billion in the quarter were an all-time high, up 44% year over year. Sales of Trulicity — another type-2 diabetes treatment and the company’s top-selling drug last year — continued a trend of softness for a variety of factors. Some of it is patients switching to Mounjaro, but supply constraints are an issue for the product, too. One drug that didn’t get much attention at all on Thursday’s earnings call: Kisunla, its recently approved treatment for Alzheimer’s. It’s not expected to be a big contributor to revenue this year, though management noted some patients have already began receiving the medicine. While we’re upbeat on the long-term benefits of the drug, analysts and investors are understandably more focused on Zepbound and Mounjaro at this point. (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Eli Lilly & Co. Mounjaro brand tirzepatide medication arranged at a pharmacy in Provo, Utah, US, on Monday, Nov. 27, 2023.

George Frey | Bloomberg | Getty Images

Eli Lilly on Thursday reported a home-run quarter fueled by sales of its blockbuster obesity and diabetes drugs, quieting any lingering investor concerns in the stock.