Why Eli Lilly (LLY) Is Stumbling

Eli Lilly is a U.S. pharmaceutical company.

Powered by its obesity treatments, this company had been leading the market, but recently it has started to stumble.

The main reason you decided to become a Lilly shareholder is probably something like this:

For more than 10 years, the stock has climbed steadily with little volatility, which is extremely attractive for investors.

And when you realize that this sustained upward momentum is being driven by treatments for diabetes, cancer, and obesity, it feels like this growth could continue well into the future.

We already know how serious the obesity problem is. (See the link below.)

Please Help Me Lose Weight: Why the FDA Is So Tough on Obesity Drugs

If you imagine Lilly dominating the obesity market and its share of the heatmap expanding, it’s an exhilarating thought.

But recently Eli Lilly’s share price has fallen nearly 20% from its peak, delivering a major disappointment to shareholders.

Because Lilly had been inching up with low volatility, that disappointment feels even greater.

Why is this happening? Is it time to sell, even now?

It’s time to explain the weak share-price performance of Eli Lilly.

In a joint op-ed, U.S. President Joe Biden and Senator Bernie Sanders criticized these pharmaceutical companies for charging “outrageously high prices” on July 2. Naturally, Lilly was called out as well.

Biden and Sanders argued that the prices set in the United States are several times higher than in other countries, making it difficult for Americans to afford the medicines they need,

and that because high drug prices place a heavy burden on the U.S. healthcare system, government intervention is necessary.

Their criticism did not immediately translate into action, but following publication of the op-ed, Eli Lilly’s share price fell 2% and then recovered about half of that drop by the close.

Wegovy, the obesity treatment from Novo Nordisk, Eli Lilly’s competitor, first ran into supply shortage issues in March 2022. As a result, sales were temporarily halted at the time, and its rollout in Europe was delayed.

Similarly, Eli Lilly’s Zepbound also faced supply problems in early 2023.

Demand outstripping supply is, on its face, something to welcome. It means the product is selling well and that there is room to sell even more going forward.

But there is one thing that can’t be overlooked — Lilly is not the only supplier.

If Lilly were a monopolist, this would of course be unambiguously good news. In reality, however, there are competitors circling, eager to grab market share. If Lilly fails to supply the market in a timely manner, it effectively opens the door for rivals to enter — missing the chance to row while the tide is high.

From the two reasons we just examined, we can see that there is an underlying fear of new competitors entering the field. Prices are sky-high and supply is tight — and now, at this very moment, a rival shows up? That is extremely bad news. Unfortunately, those fears have now materialized.

On July 16, Roche released the Phase 1 clinical trial results for its obesity drug candidate CT-996.

Participants who took the drug showed encouraging results, with their average body weight falling 7.3% over four weeks, and the next day Lilly’s share price fell 3.82%, followed by a further 6.26% drop the day after. And it’s even a pill (oral formulation). Lilly’s treatment is an injection.

On July 25, Viking Therapeutics announced the results of its Phase 2 clinical trial for obesity drug candidate VK2735.

Obese patients who received the drug showed positive results, with average body weight decreasing by up to 14.7% over 13 weeks, and after the announcement, Lilly’s share price fell an additional 4.6%.

As we’ve seen, competitors are moving quickly in the obesity drug market and eroding Lilly’s growth engine.

This raises a question.

First, there is the doubt over whether it makes sense for Lilly’s share price to be this volatile over obesity drugs alone, given that the company doesn’t only sell obesity treatments.

Second, if Roche’s and Viking Therapeutics’ clinical announcements really did move Lilly’s share price, then logically, clinical announcements from other long-standing competitors should also have affected Lilly’s stock.

Eli Lilly doesn’t just sell obesity drugs; it has other product lines as well, so some might wonder whether it’s reasonable for the stock to fall this much over a single obesity-related issue.

As one example, analysts covering Eli Lilly projected that its Alzheimer’s drug donanemab would generate $240 million in sales in 2024 and become a blockbuster, reaching $1.01 billion in revenue by 2026.

The takeaway is that Lilly can drive solid revenue even without obesity drugs.

That’s true. The Alzheimer’s market clearly has substantial potential. Lilly even secured accelerated approval from the FDA in July 2024, a positive signal for its Phase 3 results, so there may be no major hurdles to its entry into the Alzheimer’s space.

However, I believe that for Lilly, obesity drugs matter more in the near term.

First, Alzheimer’s treatments come with a high risk of controversy over clinical efficacy. Biogen’s Aduhelm saw its commercial success constrained by debates over price and clinical benefit. Roche also reported negative Phase 3 results for gantenerumab. Alzheimer’s is a neurodegenerative disease of the brain, and because its exact cause and disease mechanism are not fully understood, it is technically a much harder problem to solve than obesity, whose metabolic pathways are already well characterized.

Next, there is an incumbent competitor already on the market. Leqembi, co-developed by Biogen and Eisai, received full FDA approval in 2023 and, as an antibody therapy targeting beta-amyloid plaques, is similar to Eli Lilly’s donanemab.

Lastly, the obesity market may grow faster than the Alzheimer’s market. Obesity is linked to complications such as diabetes and cardiovascular disease, and obesity drugs can be used not only for obesity itself but also for weight management, cosmetic purposes, and general health management, giving the category significant potential. Compared with Alzheimer’s, which mainly affects the elderly and has a relatively low prevalence, you can see that there is a clear difference in market opportunity.

Next, if we look at Eli Lilly’s 2023 sales by product:

You can see that Mounjaro, Trulicity, Jardiance (including Glyxambi, Synjardy, and Trijardy XR), and Humalog together account for 62.5% of total sales as diabetes treatments. There is only one obesity drug, Zepbound.

Note: The Alzheimer’s treatment donanemab is excluded because it was approved by the FDA in July 2023.

If obesity drugs account for only 2.2% of total revenue, saying that they are moving the stock price makes no sense.

To understand this, you need to know about the receptors related to obesity drugs: GIP (Gastric Inhibitory Polypeptide) and GLP-1 (Glucagon-Like Peptide-1).

So obesity drugs work by activating these two receptors.

Lilly’s Zepbound uses this mechanism, and the diabetes drug Mounjaro also activates both GIP and GLP-1 receptors, while Trulicity activates the GLP-1 receptor. In other words, they are both diabetes and obesity treatments.

Among Lilly’s diabetes drugs, only Jardiance—which is formulated primarily for blood sugar control and not for weight loss—and Humalog, which uses an insulin analog called insulin lispro and does not contribute to solving obesity, fall outside this mechanism.

If we recalculate reflecting this point—

You can see that the obesity market is important at roughly 50% of Lilly’s revenue.

If the clinical announcements from Roche and Viking Therapeutics affected Lilly’s share price, it would be logical that the clinical trial results of other companies that have long been competing in this space should also have affected Lilly’s stock.

Below is a table summarizing all of Eli Lilly’s competing obesity treatments.

Among competitors, the only periods when clinical readouts overlapped with a decline in Lilly’s share price were for Roche’s CT-996 and Viking Therapeutics’ VK2735. Again, something feels off here.

Novo Nordisk

Roche

Viking Therapeutics

Amgen

Structure Therapeutics

Let me lay this out neatly.

First, starting July 29, three days after Viking Therapeutics’ clinical data release, Viking’s share price weakened alongside Roche and Lilly. The broader market appeared to wobble on macro concerns. This suggests that the issue that meaningfully affected Lilly’s share price was Roche’s CT-996 clinical announcement. It is hard to argue that Viking’s data release and Lilly’s share price were meaningfully correlated.

The fact that Novo Nordisk’s announcement of Amycretin led to a share price move opposite to Viking Therapeutics suggests that the two therapies’ similarities matter.

But there are far too many therapies that could be described as similar to Lilly’s Zepbound. Everyone is targeting GIP and GLP-1. Roche’s CT-996 even acts only on GLP-1.

When an investigation hits a dead end, you need to get closer to the core.

All an obesity drug needs to do is reduce weight.

In that sense, Lilly is nearly perfect. But awareness of obesity as a disease is relatively low. That’s even more true today, when freedom and individual rights are highly valued. Demand for side-effect-free, convenient weight loss is likely to be very strong.

Roche’s CT-996 is an oral formulation. As mentioned earlier, patients prefer pills to injections.

But Novo Nordisk and Structure Therapeutics also have oral formulations. Here is where the difference emerges: it can be taken without being affected by meals.

This is an advantage unique to Roche’s therapy: its blood concentration is not affected by food intake.

Earlier, when comparing the Alzheimer’s and obesity markets, I noted that obesity has greater potential because it can be used for “weight management, cosmetic purposes, and overall health management”. The advantage of a pill that is not affected by meals makes the therapy well suited for use across these various areas.

Next, Roche’s CT-996 acts on only one receptor. And for this therapy, acting on just one receptor is enough.

First, CT-996 should be viewed as being more focused on cosmetic and general health management than on treating disease. Obesity progresses very slowly, and the market potential investors see in obesity lies in the stage before it becomes severe enough to require hospital treatment. If obesity issues are resolved at the “pre-severe” stage that CT-996 targets, those severely ill patients simply never appear. That means Lilly’s bowl gets smaller. Lilly’s Zepbound is a dual agonist because it aims to make weight loss more effective. Faced with a choice between getting injections for more effective weight loss and just taking a pill in my room and losing a bit less, I would choose the pill.

Dual agonists also have more complex side-effect profiles. When you are targeting a different segment of the market, there is no reason to take on the risk of a dual agonist format.

To summarize the issues with Eli Lilly discussed so far:

Let’s look at them one by one.

You cannot simply look at manufacturing costs when criticizing high drug prices. Companies need to recoup investments in R&D budgets and production facilities, secure funding for subsequent projects, and recover capital sunk into past projects that failed.

Roche accelerated its obesity drug development by acquiring Carmot Therapeutics for $2.7 billion at the end of 2023, and Eli Lilly has invested roughly $18 billion since 2020 to strengthen its manufacturing capabilities.

Roche’s CT-388 and CT-996 are in Phase 2 and Phase 1 trials, respectively, while Viking Therapeutics’ VK2735 is in Phase 2. Typically, the cost from Phase 3 through commercial launch runs from hundreds of millions to several billions of dollars. Large-scale clinical trials and building out manufacturing facilities, in particular, require additional capital.

Roche and Viking Therapeutics have not disclosed their pricing plans for these therapies, but it is clear they cannot set low prices if they are to recoup their investments and continue to grow. In other words, this is not a risk unique to Lilly.

The administration that has been calling out high drug prices is the Biden administration. With the more business‑friendly Trump currently leading in the polls, it is somewhat of a stretch to argue that drug pricing will immediately become a major risk factor.

(Reference: What does ‘Biden dropping out of the race’ mean for Vice President Harris, the Democratic Party, and candidate Trump?)

On June 14, 2024, Eli Lilly held a tour of its plant in North Carolina. The facility is designed to ease supply bottlenecks for GLP‑1 injectables such as Mounjaro and Zepbound.

The facility is scheduled to come online in 2025, which suggests that Lilly’s supply‑related risks have room to gradually diminish going forward.

According to the FDA, current doses of Mounjaro and Zepbound are listed as “available”.

This reflects the payoff from Lilly’s ongoing investments in manufacturing capacity, and indicates that the company is relatively better positioned than Novo Nordisk—where some products still face supply constraints—when it comes to resolving supply issues.

On June 26, 2023, Eli Lilly released new Phase 2 clinical trial data for Retatrutide, its next‑generation weight‑loss drug.

This drug builds on Mounjaro and Zepbound, which target two hormones—GIP and GLP‑1—by also acting on a third hormone, glucagon (GCG). Over a 48‑week treatment period, it delivered an average weight loss of up to 24.2%.

Its safety profile was similar to other incretin‑based therapies, and it also showed additional positive effects such as improvements in cardiovascular markers.

Eli Lilly has been highly successful at developing effective drugs. However, the fact that it has not targeted more casual health and beauty needs, like Roche’s CT-996 does, is in my view a cause for concern going forward.

CT-996 is still only in Phase 1 clinical trials. We will have to watch how it develops from here.