Should Current Market Conditions Present an Opportunity to Purchase Undervalued Eli Lilly Shares?
Owning shares of pharmaceutical giant Eli Lilly (LLY 0.87%) has generally been a profitable move over the past year. Lilly's diabetes medication Mounjaro and its sibling treatment for chronic weight management Zepbound have quickly become thriving medications - helping boost Lilly's stock to new record highs earlier this year.
However, Lilly's shares (similar to other pharmaceutical companies) are known for their volatility. As I write this, the stock has dropped by 12% just in the month of November. With the price now down 22% from its peak, is this a good time to capitalize on the downturn in Eli Lilly stock?
Let's examine the potential factors influencing the current downtrend. Understanding these factors should clarify whether investing in Lilly is a worthwhile move.
Eli Lilly's earnings report fell short of expectations
On October 30, Eli Lilly published its financial results for the third quarter. To put it bluntly, its latest earnings report did not live up to Wall Street's expectations. Lilly missed its targets on both revenue and profit. To make matters worse, one of the primary reasons for the shortfall was the company's weight loss segment.
If you've been following Lilly in recent times, you already know that managing supply and demand for Mounjaro and Zepbound has been a considerable challenge. While Lilly has invested in manufacturing, these infrastructure investments will take time before the company can meet demand trends and offer diabetes and obesity care medications consistently and smoothly.
Until that happens, Lilly is likely to continue dealing with significant ups and downs in its medication inventory levels. This, in turn, will slow down the pace at which it can boost its revenue and profits.
More challenges may be in store
In the chart below, you can see Lilly's third-quarter earnings date marked with a purple circle labeled 'E'. It's easily noticeable that shares of Lilly started to decline sharply after the company reported earnings.
However, by around November 6 it looks like the post-earnings sell-off reached a bottom, and the stock started to rebound. What's intriguing is that after remaining relatively stable for a few days in early November, shares of Lilly have dropped again over just the last couple of days.
Two potential causes for Lilly's current stock price drop could be at play.
The first is competition. Lilly's main rival in the weight loss sector is Novo Nordisk - the manufacturer of Ozempic and Wegovy. Over the past few weeks, other pharmaceutical companies aiming to enter the weight loss market have been releasing updates on their clinical trials. Notably, Viking Therapeutics is rumored to be working on a four-target obesity drug that could, if approved by the Food and Drug Administration (FDA), pose a significant threat to incumbents such as Lilly.
Then there's Amazon. On November 14, the e-commerce and cloud computing behemoth announced several updates for its telemedicine service, Amazon One Medical. While some investors may be concerned by Amazon's entry into the healthcare industry, it's important to note that its announcements seem to be focused on lifestyle products for hair regrowth, eyelash growth, and more. To me, this move appears more of a danger to Hims & Hers Health, which has been trying to expand into Lilly's territory by selling compounded versions of popular weight loss treatments.
There's no need to panic
As I've often mentioned in my articles, panic-selling is driven by emotion and rarely comes from a rational, thoughtful perspective.
When it comes to competition, Eli Lilly is currently one of the two leading players in the weight loss market, alongside Novo Nordisk. While Viking and other companies are developing promising alternatives to Mounjaro, Zepbound, Ozempic, and Wegovy, I remain unconvinced that any of these potential new medications will pose a significant threat.
Moreover, the total addressable market for these new weight loss treatments - known as glucagon-like peptide-1 (GLP-1) agonists - is projected to reach $100 billion by 2030. In my opinion, the diabetes and obesity care markets are large enough to prevent this from being a winner-take-all opportunity.
Additionally, I view Amazon's announcement as a positive rather than a threat. After all, Lilly already has a partnership with Amazon Pharmacy, which serves as an additional distribution channel for Lilly's weight loss medications. Plus, Amazon's focus seems to be on lifestyle products that pose little threat to Lilly.
While I can't definitively say that Amazon's movements or updates regarding Viking's GLP-1 pipeline had anything to do with Lilly's recent drops, the timing of these announcements and the subsequent selling do seem to align closely:
Despite all these uncertainties, there are a few concrete catalysts for Lilly that seem to be overlooked right now. The company recently received FDA approval for an Alzheimer's drug and an eczema medication. Both of these markets represent over $60 billion in potential revenue for Lilly in the long term.
To me, buying Eli Lilly shares right now is an opportunity not to be missed. I believe the recent downturn is unwarranted, and investors are missing the bigger picture - the compelling chance to buy the dip in a company poised to revolutionize multiple sectors within the healthcare market.
Given the current volatility in Eli Lilly's stock due to various factors, such as the company's shortfall in its third-quarter earnings report, intense competition in the weight loss sector from companies like Novo Nordisk and Viking Therapeutics, and Amazon's entry into the healthcare industry, some investors might question if now is a good time for finance-focused individuals to invest in Lilly's shares. However, considering Lilly's partnership with Amazon Pharmacy, strong position in the weight loss market, and the potential revenue from recent FDA approvals for an Alzheimer's drug and an eczema medication, some might argue that it presents an attractive opportunity for investing in finance and capitalizing on the downturn in Eli Lilly stock.
