Eli Lilly and Company’s LLY shares declined 13.5% in the past three months. Though demand for its popular tirzepatide drugs, Mounjaro and Zepbound, remains massive, their sales were hurt due to inventory issues in the third quarter. This led the shares of the company to drop following third-quarter results after a powerful first-half performance.

Meanwhile, the overall drug and biotech sector has also done poorly in the past three months after Trump announced the appointment of Robert F. Kennedy Jr., a vaccine skeptic, as the head of Health and Human Services, the agency that oversees the FDA.

This, coupled with disappointing third-quarter sales and profits, guidance cuts and pipeline setbacks, took a toll on the overall drug and biotech industry’s performance.

LLY’s price drop in the past three months has left investors wondering whether they should buy, hold or sell the stock. It has also brought up new questions about whether the sky-high expectations for Mounjaro and Zepbound are justified.

Let’s understand the company’s strengths and weaknesses to better analyze how to play the stock after the price drop.

Mounjaro & Zepbound: Key Top-Line Drivers for Lilly

Tirzepatide is a dual GIP and GLP-1 receptor agonist (GIP/GLP-1 RA). The GLP-1 segment is a very important class of drugs for multiple cardiometabolic diseases and is gaining significant popularity.

Despite a short time on the market, Mounjaro and Zepbound have become key top-line drivers for Lilly, with demand rising rapidly. Mounjaro and Zepbound generated sales of $11.0 billion in the first three quarters of 2024, accounting for around 45% of the company’s total revenues.

However, the quarter-over-quarter growth of Zepbound and Mounjaro in 2024 has been impacted by supply and channel dynamics. In the second quarter, increased supply led to higher shipments, which allowed the company to fulfill all backorders for its wholesales. However, channel inventory decreased at wholesalers in the third quarter, which hurt sales of the drugs. It is difficult to predict the demand/inventory dynamics of these products with the potential for lumpiness in channel stocking.

LLY’s Efforts to Drive Mounjaro & Zepbound Sales

The company is balancing the demand and supply of Mounjaro and Zepbound and the launch of the drugs in international markets. Lilly expects to increase demand activities for Mounjaro and Zepbound which should benefit sales in 2025. The launch of Mounjaro in new international markets is expected to contribute to the drug’s sales in the fourth quarter and in 2025. Since 2020, Lilly has committed more than $23 billion for manufacturing capacity for Zepbound and Mounjaro in the United States and Europe, which should help increase supply to meet the huge demand

Tirzepatide is also being developed for other indications. In late December, the FDA approved Zepbound for its second indication, moderate-to-severe obstructive sleep apnea (OSA) in adults with obesity. Lilly has also filed regulatory applications in the United States and EU to seek approval for tirzepatide for heart failure with preserved ejection fraction (HFpEF). A phase III cardiovascular outcome study is also ongoing. A phase II study in metabolic dysfunction-associated steatohepatitis (MASH) met its primary endpoint in 2024. Approval for these expanded indications can further boost tirzepatide’s sales.

In December, Zepbound outperformed rival Novo Nordisk’s NVO Wegovy (semaglutide) in a weight-loss head-to-head study. In the phase IIIb 72-week study, Zepbound led to an average weight loss of 20.2% of body weight in obese or overweight adults, compared to 13.7% for Wegovy, representing a 47% greater relative weight loss for Zepbound users. The data bodes well for Lilly. It can help drive market share and potentially establish Zepbound as the new standard for obesity medications. Last month, Novo Nordisk announced disappointing data from a late-stage study on its next-generation obesity drug, CagriSema, which too pulled up LLY’s stock.

In December, the FDA removed tirzepatide from the drug shortage list after determining that Lilly’s supply is currently meeting or exceeding demand and will continue to do so in the future. The regulatory body concluded that the shortage of tirzepatide medicines is now resolved. However, NVO’s semaglutide is still on the list, which should give Lilly a competitive advantage.

LLY’s New Drugs & Pipeline Success

Other than Mounjaro and Zepbound, Lilly has gained approvals for some other new drugs in the past couple of years. These include Omvoh for ulcerative colitis, BTK inhibitor Jaypirca for mantle cell lymphoma and chronic lymphocytic leukemia, and Kisunla (donanemab) for early symptomatic Alzheimer's disease. All these new drugs should continue to support Lilly’s top-line growth in future quarters.

Competition Heating Up in the Obesity Space

The obesity market is heating up and is expected to expand to $100 billion by 2030, according to data from Goldman Sachs. Lilly and Novo Nordisk are presently dominating the market.

Lilly is investing broadly in obesity and has 11 new molecules currently in clinical development. These include two late-stage candidates, orforglipron, an oral GLP-1 small molecule and retatrutide, a GGG tri-agonist and some mid-stage candidates, bimagrumab, eloralintide and mazdutide. Several phase III data readouts are expected in 2025.

Several companies like Amgen AMGN and Viking Therapeutics VKTX are also making rapid progress in the development of GLP-1-based candidates in their clinical pipeline.

AMGN and VKTX’s products can pose strong competition to Mounjaro/Zepbound and NVO’s Ozempic/Wegovy in the future.

LLY’s Stock Price, Valuation and Estimates

Lilly’s stock has risen 24.9% in the past year against a decrease of 2.9% for the industry. The stock has also outperformed the sector as well as the S&P 500, as seen in the chart below.

LLY Stock Outperforms Industry, Sector & S&P 500   

Image Source: Zacks Investment Research

The stock is trading at a premium to the industry, as seen in the chart below.

LLY Stock Valuation

Image Source: Zacks Investment Research

Estimates for Lilly’s 2025 earnings have risen from $23.71 to $24.05 per share in the past 60 days.

LLY Estimate Movement

Image Source: Zacks Investment Research

Stay Invested in LLY Stock

The stupendous success of Mounjaro and Zepbound has made Lilly the largest drugmaker with a market cap of more than $734 billion. Lilly’s stock has gone up by 479% in the past five years, mainly due to its successful new drug launches, particularly Mounjaro and Zepbound, and its solid pipeline potential. Lilly’s revenue growth is being driven by higher demand for Mounjaro, Zepbound, Verzenio and others, making up for the decline in sales from Trulicity.

Though the disappointing sales of Mounjaro and Zepbound in the third quarter have created a bearish sentiment around the stock, we believe that over time, the supply issues for Mounjaro and Zepbound should be resolved as the company increases production capacity. Also, Lilly looks well placed to get approval for several new drugs and label expansions for marketed drugs, including Mounjaro and Zepbound, in the next few years.

The board of directors of Lilly approved a new $15 billion stock buyback plan and also announced a 15% increase in its quarterly dividend, which bodes well for the stock.

Though the stock looks quite expensive, we suggest investors who own this Zacks Rank #3 (Hold) company retain it as it still has robust growth prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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