Zepbound is off to a strong start, but here’s what Eli Lilly investors are watching
Hopes are sky-high for Eli Lilly’s recently launched weight loss drug Zepbound. Investors will be tuning into the company’s fourth quarter earnings call on Feb. 6, eager to hear more about how that rollout is going. One key statistic will be the number of commercial health insurers providing coverage of the drug, which was approved by the Food and Drug Administration on Nov. 8. Lilly also is expected to reveal its outlook for 2024 for the first time. Zepbound, a once-a-week injection, has only been available in pharmacies since early December, but the average analyst expects that the drug’s sales reached $75 million in the fourth quarter, according to StreetAccount. More importantly, by the end of 2024, analysts expect sales to ramp up to $3.79 billion, then more than double to $7.83 billion by 2025. Those estimates have been creeping higher heading into Eli Lilly’s report, and analysts see the potential for further upside when Lilly provides its outlook. ‘Off to a strong start’ “While we acknowledge that the launch is off to a strong start, with Zepbound achieving greater TRx [total prescription] volume than Mounjaro on a launch-adjusted basis, we are relatively conservative in our 4Q estimate based on the timing of the launch (late in 4Q) and what we expect will be relatively high gross-to-net discounts (in the ~80% range),” wrote Goldman Sachs analyst Chris Shibutani in research note on Sunday. Goldman Sachs said the data from market researcher IQVIA suggests that Zepbound is capturing market share from Novo Nordisk’s anti-obesity drug Wegovy, but the entire category has been growing. “We view payor access and supply as key debates in the early launch — where access is gated not only by formulary adoption, but also employer opt-ins; and supply continues to be tight across LLY’s portfolio of incretin products,” Shibutani said. Lilly’s Mounjaro and Zepbound both use tirzepatide as an active ingredient, but Mounjaro is indicated for type 2 diabetes, while Zepbound aids weight loss. Tirzepatide mimics two incretin hormones in the body, GLP-1 and GIP, to regulate insulin and control hunger. Trulicity, another diabetes treatment sold by Lilly, also is considered an incretin. Drugs like Wegovy and Zepbound have been hailed for their ability to help patients shed more pounds than earlier types of weight loss medications, with Zepbound’s average success even topping Wegovy’s in clinical trials. Still, patients seeking these drugs can face significant hurdles. For example, patients covered by Medicare cannot get coverage for these drugs due to federal regulations. However, at least 16 states have expanded access to some anti-obesity medications, according to Bank of America. Some commercial insurance plans require prior authorizations or have limitations on the use of these drugs. Paying out of pocket isn’t an option for many patients as the drugs both have list prices that top $1,000 for a month’s supply. According to Bank of America, more than 80% of commercial insurance plans have put Wegovy on the formulary (the list of covered drugs) and about half of employers have opted into it. It took time for Novo Nordisk to reach that level of access. Investors are curious to learn if Eli Lilly’s path is any easier. Access is only one barrier. Novo and Lilly have also been working hard to boost manufacturing capacity, but supply has been strained trying to meet the demand. A rich valuation LLY 1Y mountain Eli Lilly shares over the past year. But even good news about Zepbound’s launch might not be enough to propel Lilly’s stock higher. Goldman’s Shibutani has a neutral rating on Lilly shares and a price targe of $600, which implies shares could fall nearly 5% from they started the week. His expectations are considerably lower than the average analyst price target of about $653, according to FactSet. Shibutani’s view speaks to Lilly’s rich valuation. While most pharmaceutical companies tend to trade at around 18 times earnings and Lilly’s historic average over the past decade is around 22 times, its shares have lately been approaching a multiple of nearly 40 times earnings. While Lilly’s opportunity in obesity treatments steals most of the attention these days, the Indianapolis-based company also has other promising products in its pipeline, leaving some analysts more upbeat about the stock’s outlook and the potential for further upside. Bank of America analyst Geoff Meacham is in this camp. He has a buy rating on Lilly shares, and expects the stock could hit $700 over the next 12 months. Lilly is one of Bank of America’s favorite large-cap biopharma stocks because of its “best-in-class” portfolio, including promising immunology and oncology treatments. In the near future, the FDA is expected to approve donanemab, an Alzheimer’s disease treatment. Other potential catalysts for the stock later this year will be readouts on research Lilly is conducting on tirzepatide as it explores its potential as a treatment for other conditions such as non-alcoholic steatohepatitis (NASH), a type of liver disease, and obstructive sleep apnea. These studies could expand the number of patients who will be able to use Mounjaro and Zepbound. ‘A lot of angst’ But heading into earnings, next due on Feb. 6, Meacham said there’s often “a lot of angst.” One area that could prove trickly is Lilly’s 2024 earnings forecast. Morgan Stanley analyst Terence Flynn said his view was 3% below the average estimate on Wall Street at the time he wrote a Jan. 11 research note, as he expects a “more significant step up” in operating expenses. “We see the set up for the stock similar to the company’s 2023 guidance outlook — where revenue was slightly ahead of consensus and EPS was below, but investors are generally focused on the top-line growth outlook nearer-term,” said Flynn, who has the equivalent of a buy rating on Lilly shares. Zepbound is tracking above Morgan Stanley’s prior estimates, which prompted Flynn to raise his 2024 sales estimate for the product to $5.5 billion from $3 billion previously. At the same time, he anticipates that the number of prescriptions for Trulicity and Mounjaro will be lower than previously forecast. This trend could be occurring as patients switch to Zepbound from Mounjaro or Trulicity. According to Flynn, Lilly has said that about a third of Trulicity patients stop taking the drug each year for one reason or another. By 2025, Flynn estimates Mounjaro and Zepbound supply challenges will ease, allowing Zepbound sales to reach $11 billion, which is higher than his prior estimate of $5 billion, and the average analyst consensus. Add in Mounjaro and the tirzepatide drugs as a class will reach $23 billion, he said. But even if Lilly shares sell off on the earnings news, the investment case is likely to remain intact because “there’s just such a scarcity of value and growth names like this one,” Meacham told CNBC. “I’d say in the past couple of quarters, the stock has really been under pressure because they’re going to disappoint somebody … but the fundamental case is 100% supported, even with this multiple, so I think that’s why usually the stock sells off, and then the next day more than makes it up.” —CNBC’s Michael Bloom contributed to this report.
