Eli Lilly assures investors it can overcome the high-quality problem of too much demand

Published Tue, Apr 30 20241:52 PM EDTUpdated Wed, May 1 202411:51 AM EDT

Kevin Stankiewicz @in/kevin-stankiewicz-b5593466 @kevin_stank

Eli Lilly 's raised guidance stole the show Tuesday, offsetting mixed first-quarter results and propelling shares higher by nearly 6%. The numbers leave little doubt that the long-term Eli Lilly success story remains intact, as demand for its new diabetes and obesity drugs, Mounjaro and Zepbound, outstrips supply. Revenue in the three months ended March 31 rose 26% year over year to $8.77 billion, shy of the $8.92 billion expected by analysts, according to estimates compiled by LSEG. Adjusted earnings per share in the first quarter came in at $2.58, topping the consensus estimate of $2.46, LSEG data showed. 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 experimental Alzheimer's treatments add to the stock's long-term appeal. Competitors: Novo Nordisk , Biogen , Eisai, Merck and Pfizer Weight in portfolio: 2.7% Most recent buy: Feb. 7, 2023 Initiated: Oct. 8, 2021 Bottom line Eli Lilly checked all the boxes that matter to long-term investors, including the Club, which is why it's no surprise to see the stock having one of its best days of the year. At their highs of the morning, shares of Eli Lilly traded above their all-time closing high of $792.28 set on March 4. Demand for Mounjaro and Zepbound — which share an active ingredient known as tirzepatide — is off the charts. But, equally as important, management is deftly handling the complex, expensive process of boosting production capacity for the injectable drugs to alleviate supply constraints. That needs to happen for Lilly to meet Wall Street's lofty growth expectations. "It's the highest-quality problem," Jim Cramer said Tuesday, referring to Mounjaro and Zepbound demand far outpacing availability. LLY .SPX 5Y mountain Eli Lilly's stock performance over the past five years compared with the S & P 500. Eli Lilly expects meaningful increases in shipment volumes for Mounjaro and Zepbound in the second half of 2024. That's enabled management to raise its full-year revenue and profit guidance less than three months after it was initially given — quieting noise around first-quarter results. "I like everything I heard" from Eli Lilly on Tuesday, added Jim, who has long said tirzepatide could become the best-selling drug of all time. Indeed, nothing contained in Tuesday's report dims the likelihood of that happening in the years to come. We're maintaining our 2 rating and $850-per-share price target on the stock. Quarterly commentary In its first full quarter on the U.S. market, Zepbound sales trounced Wall Street expectations, totaling $517.4 million in the three months ended in March, compared with estimates of $373.3 million, according to FactSet. Insurance coverage for Zepbound, a crucial piece to its long-term financial success, is "rapidly" improving, CFO Anat Ashkenazi said on the post-earnings conference call. As of April 1, Zepbound has approximately 67% access in the commercial insurance market, up from about 33% on Feb. 1, according to the company. Zepbound was approved by U.S. regulators in early November and hit pharmacy shelves a few weeks later. In the fourth quarter, Zepbound revenue was about $176 million. First-quarter sales of Mounjaro more than tripled to $1.81 billion but missed Wall Street estimates. That's not exactly a surprise given the supply constraints. Lilly's other GLP-1 for type-2 diabetes on the market, Trulicity, saw sales drop 26% to $1.46 billion. It also missed revenue estimates. Like Zepbound and Mounjaro, Trulicity is facing shortages. Historically, some patients also switch onto Mounjaro from Trulicity. According to a Food and Drug Administration database, most doses of Zepbound and Mounjaro are expected to see limited availability through the end of the second quarter in June. It's a similar timeline for most doses of Trulicity, which was first approved nearly a decade ago . All three drugs are once-weekly injectables, and patients scale up the dosage amount during the course of treatment. "Unprecedented demand" for Eli Lilly's so-called incretin medicines — a group that consists of Zepbound, Mounjaro and Trulicity — is contributing to the shortages, Ashkenazi said on the call. "In the short to mid-term, we expect sales growth to primarily be a function of the quantities we can produce and ship," she said. The quantities remain poised to increase. Eli Lilly's production of incretin doses in the second half of 2024 is still on track to be about 1.5 times where it was in the same period last year, Ashkenazi said. The company has six production facilities under construction or ramping up, Ashkenazi said. Last week, it announced a deal to acquire a seventh facility from Nexus Pharmaceuticals located in Wisconsin. Eli Lilly estimates production there could commence at the end of next year. Eli Lilly's main competitor in the GLP-1 market, Ozempic and Wegovy maker Novo Nordisk , also is investing heavily to overcome shortages for its drugs. "Our top priority is making more product," Eli Lilly CEO Dave Ricks told CNBC earlier Tuesday. "We're doing everything we can to do that. This is one of the most technically complicated medicines we've ever made." Eli Lilly also said the FDA advisory panel that plans to review the safety and efficacy of its experimental Alzheimer's treatment donanemab has yet to schedule the meeting. However, it is expected to take place in the middle of the year, with management reiterating their confidence in the drug's ability to slow the progression of the memory-robbing disease. Eli Lilly had previously planned for regulatory approval at the end of March. Guidance Eli Lilly now expects full-year sales between $42.4 billion and $43.6 billion, up $2 billion at both ends of the range. Its revised adjusted earnings per share outlook is between $13.50 and $14.00, compared with $12.20 to $12.70 previously; that's about 10% higher at the midpoint. Eli Lilly also boosted its adjusted operating margin outlook to between 33% and 35%, up from 31% to 33%. The changes were driven by the strong performance of Mounjaro and Zepbound, along with "greater visibility" into Eli Lilly's production expansion plans, the company said in a release. Those are exactly the reasons you would want Lilly to hike guidance. In general, the more-bullish financial outlook helps make Eli Lilly's high price-to-earnings ratio coming into earnings more tolerable for investors. Eli Lilly's full-year outlook for other income and its tax rate were unchanged. The company does not offer quarter-by-quarter guidance. (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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An injection pen of Zepbound, Eli Lilly’s weight loss drug, is displayed in New York City, Dec. 11, 2023.

Brendan McDermid | Reuters