Eli Lilly's quarter was messy. What to do with the stock is more clear-cut

Eli Lilly shares fell Wednesday after the diabetes-and-obesity drug giant posted disappointing third-quarter results and lowered its full-year sales guidance. The report was messy, but it doesn't dim Eli Lilly's bright multiyear outlook, rendering the dip in the stock as a chance to buy. Revenue in the three months ended Sept. 30 rose 20% from the year-ago period to $11.44 billion, below the analyst consensus of $12.11 billion, according to LSEG. Adjusted earnings per share (EPS) of $1.18 missed the $1.47 estimate, LSEG data showed. The Club stock opened down nearly 12% Wednesday, before paring some of those losses — a sign we're not alone in viewing the pullback as excessive. Eli Lilly had risen roughly 55% this year through Tuesday's close. We took profits around $961 a share on Sept. 3, sticking to our discipline to avoid being greedy. Now we're seeing a chance to buy some back at a lower price. For better or for worse, Eli Lilly has become a momentum stock as investors bet big on the long-term potential of an emerging drug class, known as GLP-1s, to treat type-2 diabetes and obesity. In recent years, it's mostly been for the better — shares have more than tripled since the start of 2022 while the broader health-care sector has advanced merely 5%. Lilly's steep pullback Wednesday, though, shows the risks of momentum status. The margin for error is small and profit-takers are lurking. LLY .SPX 5Y mountain Eli Lilly's five-year stock performance compared with the S & P 500. Bottom line We're upgrading Eli Lilly to our buy-equivalent 1 rating and leaving our price target of $1,000 a share unchanged. On Wednesday's Morning Meeting, Jim Cramer said he wanted to repurchase the 10 shares of Eli Lilly we sold in September at much-higher levels. We are currently restricted from trading the stock, though, because Jim discussed it on CNBC within the past 72 hours. Nuance is required to parse through Eli Lilly's third-quarter results. Sales of its two most important GLP-1 drugs by far — Mounjaro for diabetes and Zepbound for obesity — came up well short of Wall Street expectations and drove the top-line miss. The lowered full-year guidance also is tied to GLP-1s. At first glance, that's not great. But management had an explanation that, while not as simple as demand simply far outstripped supply, helps us see the forest from the trees. It starts with what happened in the second quarter, when Mounjaro and Zepbound sales far exceeded estimates, partly because wholesalers and retailers in the U.S. built up inventory of the drug in the April-to-June period. That stocking benefit did not continue throughout the third quarter, as some analysts had expected and therefore built into their revenue forecasts. Inventory levels in the wholesale channel actually decreased in the period, which Eli Lilly estimated impacted sales of the drugs by a mid-single digit percentage of U.S. revenue. In a note to clients Wednesday, JPMorgan analysts said the Mounjaro and Zepbound destocking dynamic "accounts of the majority of the miss." The other part of the story is demand, and CEO David Ricks said Eli Lilly made some decisions that impacted the results and guidance. Some important context before getting into Ricks' explanation: Eli Lilly and its main rival in the GLP-1 space, Novo Nordisk , have aggressively invested in manufacturing capacity for the drugs to meet booming demand. Even still, supply shortages have been a big issue in recent years. The active ingredient in both Mounjaro and Zepbound, known as tirzepatide, came off the Food and Drug Administration's shortage list in August . Semaglutide, the molecule behind both Novo Nordisk's Ozempic for diabetes and Wegovy for obesity, had remained in shortage — though, as of Wednesday, the FDA's website listed all doses as available. The supply constraints have given rise to so-called compounded versions of GLP-1 medications, which the FDA allows other companies to make and sell when shortages are in place. Eli Lilly has sought to crackdown on compounded versions of its drugs, warning about safety risks and suing companies that they say are making false statements in their marketing of the products. Novo Nordisk has taken similar steps and recently asked the FDA to prevent compounded versions of Ozempic and Wegovy made all together . Now, back to Ricks' comments on demand. In a CNBC interview, the CEO said Eli Lilly opted to delay the launch of its marketing campaign for Zepbound in the U.S. and slow its rollout into new international markets due to concerns about supply. "If we had juiced promotion in the quarter, we might have risked on some dosage forms people having a bad experience — going to the pharmacy counter and not having it available, etcetera," Ricks said on CNBC. "We're on track to hit our [supply] goal of at least 50% year over year growth in the second half of this year versus the second half of last year. But when people go and they can't get their medicine, they're very frustrated. They tell us that. So, we didn't want to send more people to do that, necessarily." The CEO said underlying sequential prescription growth was up 25% in the third quarter versus the second quarter. "So, a lot more people went to get the prescription even though we did not promote. But we are going to start that because we do expect even greater expansion in our manufacturing capacity exiting the year and into next year," he said. 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 pipeline of Alzheimer's treatments, including the recently approved Kisunla, add to the stock's long-term appeal. Competitors: Novo Nordisk , Biogen , Eisai, Merck and Pfizer Weight in portfolio: 2.38% Most recent buy: Feb. 7, 2023 Initiated: Oct. 8, 2021 The situation on compounded GLP-1s is something all investors will watch closely as supply at both Eli Lilly and Novo Nordisk improves. To be sure, Lilly executives said multiple times on Wednesday's earnings call that the company does not really see a financial impact from compounded GLP-1s. "I think the problem is people are being harmed and duped, right? And so that's kind of what we like to see stop," Ricks said. There's no doubt that Wednesday represented Eli Lilly's messiest earnings report in quite a bit, especially after such a strong second-quarter release in August. But our faith in the company and its leadership is not shaken. We continue to believe the GLP-1 market will grow in the coming years, as the broader health benefits of the drugs become more evident and insurance coverage grows. "We feel good about where we are," Ricks said on the call. "Obviously, there was some choppiness this quarter, but I think underlying growth here is as strong as we would have hoped." Guidance Eli Lilly lowered its full-year revenue guidance to a range of $45.4 billion to $46 billion — down $600 million at the high end. That puts the midpoint of the forecast at $45.7 billion, compared with $46 billion previously. As of Tuesday, the Wall Street consensus stood at $46.24 billion, according to FactSet. The revision comes less than three months after Lilly upped its full-year sales outlook by $3 billion at the low and high ends. The company also reduced its EPS outlook for 2024, largely due to accounting charges tied to the acquisition of Morphic Holding, which makes inflammatory bowel disease drugs. Lilly now expects adjusted EPS in the range of $13.02 to $13.52 versus its previous target of $16.10 to $16.60. Quarterly commentary Despite more than doubling year over year, Mounjaro third-quarter sales of $3.11 billion missed expectations of $3.77 billion, according to FactSet. Revenue was up less than 1% on a sequential basis. The U.S. was responsible for $2.4 billion of revenue, matching second-quarter performance. International sales were $728 million, up $51 million from the April-to-June quarter. Zepbound, in its third full quarter on the market, saw sales of $1.26 billion in the July-to-September period, below the FactSet analyst consensus of $1.73 billion. Sequentially, Zepbound sales rose 1.1%. A geographic sales breakdown was not provided. Type-2 diabetes treatment Trulicity continues to post year-over-year sales declines — driven in part by patients shifting over to Mounjaro. But the 22.2% decline in the third quarter was a moderation compared with the 31.3% and 26.3% drops observed in the second and first quarters, respectively. Sales of $1.3 billion topped estimates by $100 million. While GLP-1s are by far the most important part of the Eli Lilly investment story, breast cancer drug Verzenio deserves some attention. Sales of $1.37 billion were a bit light compared with the $1.41 billion estimate, but still rose 32% from the year-ago period to a new all-time high. It was the company's second-largest drug by revenue for the second quarter in a row. Eli Lilly's new Alzheimer's drug Kisunla, which was approved by the FDA in July, was not a major focus on the call. Executives said the launch is "underway and progressing." (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 . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Eli Lilly shares fell Wednesday after the diabetes-and-obesity drug giant posted disappointing third-quarter results and lowered its full-year sales guidance. The report was messy, but it doesn't dim Eli Lilly's bright multiyear outlook, rendering the dip in the stock as a chance to buy.