Taking A Look At Eli Lilly’s Q3 2024 Revenue Miss Amid Supply Chain Challenges

Summary:

• Eli Lilly had $11.4 billion in revenue for the quarter (up 20% versus Q3 figures from last year), with a net income of $970 million after expenses.
• Analysts at the various Wall Street firms expected Lilly to have brought in about $12.2 billion. And if you look at the sales figures for the company’s GLP-1 drugs, you see a shortfall there.
• Lilly’s stock took quite a notable hit after these results were released. The Street loves increasing earnings and hates downside misses and uncertainty, and Lilly offered up both of those.

Since it’s that season, let’s dive into the wonderful world of corporate earnings, using Eli Lilly (NYSE:LLY) as an example. Many readers here navigate this stuff all the time, but if you’re not used to it, parsing earnings statements can be like working your way through a mirror maze. Lilly’s Q3 statement is a fine example.

First off, the company made money. Of course they made money; they’ve got (along with Novo Nordisk (NVO)) some of the hottest prescription drugs in the world right now in their GLP-1 portfolio. The company had $11.4 billion in revenue for the quarter (up 20% versus the third quarter figures from last year), with a net income of $970 million after expenses. Sounds pretty good, right? But now we start appending asterisks to those numbers.

Right off the top, the company noted that there was a $2.8 billion charge against revenues due to their acquisition of Morphic during this quarter (a company that’s developing orally dosed integrin ligands for inflammatory bowel disease and related conditions). Analysts following Lilly were surely expected some sort of charge from that acquisition, though, but the company is mentioning it specifically because that $11.4 billion figure was, in fact, a disappointment.

These analysts (at the various Wall Street firms) expected Lilly to have brought in about $12.2 billion instead. And if you look at the sales figures for those GLP-1 drugs, you see a shortfall there: the two forms of tirzepatide they sell are Mounjaro (for diabetes), which brought in $3.1 billion when the expected number was $3.6, and Zepbound (for obesity), which brought in $1.3 billion rather than the $1.7 billion expected. That’s a particular concern for those following the stock, because, as you’d imagine, sales of those two are currently the big driver for earnings expectations. And as for those expectations for the whole year, Lilly had previously estimated their earnings per share for the year to be $16.10-16.60, but have now revised that down to between $13 and $13.50. That sort of revision is going to make your stock go down, and indeed, Lilly’s stock took quite a notable hit after these results were released.

It’s easy to see why: the Street loves increasing earnings and hates downside misses and uncertainty, and Lilly offered up both of those. The feeling is that a company this size with drugs that are this important to its business should have had a better handle on how much of them they would be able to produce and sell. But apparently they don’t (as witness this earnings surprise). Of course, all of the GLP-1 drugs have famously been in short supply as the companies involved have frantically been adding more manufacturing capacity – being caught short by the demand to that degree already shows that their forecasts were not the most reliable to start with. (And that shouldn’t be too much of a surprise either, although it always seems to be: forecasts for the sales of new drugs can be significantly off in either direction.)

Lilly’s CEO said, though, that the revenue miss for the GLP-1 drugs was “not a function of supply”, but was rather due to wholesalers cutting down on their inventories. I am not equipped to say how plausible that is, but it’s certainly true that the supply chain for these drugs has been disrupted all to hell. And that’s well-illustrated by the huge amount of grey market supply movement and the number of compounding pharmacies offering both the Lilly and Novo Nordisk drugs. The law says that they can do that when the regular drugs are officially in short supply (as they have been), but you may have seen the headlines earlier this month that the FDA decided to take tirzepatide off that list. That brought in huge protests from the compounding pharmacies, including a lawsuit and a subsequent court order, and the agency last week announced that they would not take action against the compounding pharmacies for violating the shortage rule. But they naturally reserved the right to take regulatory action in the case of substandard or mislabeled products made in this manner.

That’s not making either Lilly or Novo Nordisk very happy, and Novo has petitioned the FDA to put its drug (semaglutide) on a list of compounds that are banned from being compounded due to their manufacturing complexity. This is one of those times that I am glad that I don’t work for the FDA, because they are getting it from all sides here: manufacturers, patients, insurance companies, physicians, investors, and the compounding pharmacies. There is no way to make all of these people pleased with you at the same time. The agency is going for increasing the supplies to patients as the first priority, it seems, which is certainly a reasonable route (unless you’re at Eli Lilly or Novo Nordisk), but they can’t go on like this forever either. This month’s decision was a trial run for getting back to the usual framework, and it didn’t go well.

Note that Lilly did not explictly blame the compounding pharmacy situation for their earnings miss, although their CEO did say that they agreed with the FDA’s original decision that tirzepatide was no longer in shortage. But at the same time, the company talked about all the measures that they’re taking to improve manufacturing capacity through next year, so if it’s not in shortage, it sure ain’t in surplus either. You can expect the wild earnings calls to continue, in other words…

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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.