Eli Lilly Earnings: Maintaining Our Fair Value and Long-Term GLP-1 Forecast Despite Weaker Q3

Key Morningstar Metrics for Eli Lilly

• Fair Value Estimate: $580.00
• Morningstar Rating: 1 star
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Eli Lilly’s Earnings

We’re maintaining our fair value estimate of $580 per share for Eli Lilly LLY following the firm’s somewhat disappointing third-quarter results. We think most of the pressure on GLP-1 sales results from inventory fluctuations and not slowing demand growth. We still expect fourth-quarter results to significantly improve, as we have a positive near-term view of Lilly’s GLP-1 growth potential. We also think Lilly is positioned to remain the largest player in a potential $200 billion global GLP-1 market by 2031; we model more than $70 billion in Lilly GLP-1 sales that year.

However, we continue to see the shares as overvalued. We think the market is extrapolating incredibly strong recent growth too far into the future, given potential headwinds like insurance difficulties, long-term compliance issues, pricing pressure, and new competition.

Lilly’s third-quarter revenue grew 20% as the sale of rights to the Zyprexa franchise (more than $1.4 billion in sales in the year-ago quarter) weighed on year-over-year growth. Excluding this sale, revenue grew 42%, led by Mounjaro ($3.1 billion in global sales) and Zepbound ($1.3 billion). Management lowered the midpoint of revenue guidance by $300 million to $45.7 billion, which investors will likely see as a disappointment after the $2 billion guidance raise in the first-quarter results and the $3 billion raise in the second.

Wholesaler GLP-1 inventories rose in the second quarter (high-teens to mid-20s percentage of US GLP-1 sales) but appear to have reversed somewhat in the third, lowering Mounjaro and Zepbound US sales by mid-single digits. In addition, management said heavy manufacturing investments have been prioritized over marketing. Lilly shares declined following the earnings release, as we think investors are concerned that we are rapidly moving from a market of unlimited demand constrained by supply to one with sufficient supply and high but not unlimited demand.