Eli Lilly’s Make-or-Break Moment: Can Blockbuster Drugs Rescue Earnings or Will the Stock Plunge?

$Eli Lilly(LLY)$ is poised to release its earnings report for the year ended December 31, 2024, on February 6, 2025, before the market opens. As a prominent investor in the U.S. healthcare sector, it's crucial to analyse the company's performance, guidance, and the broader market dynamics to make informed investment decisions.

Company Guidance vs. Analysts' Forecasts

In its latest update, Eli Lilly projected full-year 2024 revenue of approximately $45.0 billion, representing a 32% increase compared to the previous year. However, this figure is about $400 million below the low end of the company's earlier guidance issued in October 2024. The shortfall is attributed to slower-than-anticipated growth in the U.S. incretin market and lower-than-expected channel inventory at year-end.

Analysts had anticipated higher revenues, especially given the strong demand for Eli Lilly's incretin-based therapies. The company's flagship drugs, Mounjaro and Zepbound, have been significant revenue drivers, but recent sales figures fell short of expectations. For instance, in Q3 2024, Mounjaro sales reached $3.11 billion, missing the forecasted $3.77 billion, while Zepbound sales were $1.26 billion, below the anticipated $1.73 billion.

Key Drivers

Positive Drivers:

1. Strong Demand for Incretin Therapies: Despite recent shortfalls, the demand for Mounjaro and Zepbound remains robust, driven by their efficacy in treating diabetes and obesity. The company plans to increase production by at least 60% in the first half of 2025 to meet this demand.

2. Diversified Portfolio: Beyond incretin therapies, Eli Lilly has a strong lineup in oncology, immunology, and neuroscience, contributing to a 20% growth in non-incretin revenue in Q4 2024 compared to the same quarter in the previous year.

Negative Drivers:

1. Inventory Management Issues: The company faced challenges with lower-than-expected channel inventory at year-end, impacting Q4 revenues. This suggests potential inefficiencies in supply chain management.

2. Market Saturation Concerns: The slower-than-anticipated growth in the U.S. incretin market indicates potential saturation or increased competition, which could pressure future sales.

Risks and Opportunities

Risks:

• Regulatory Challenges: The pharmaceutical industry is subject to stringent regulations. Any adverse regulatory decisions or delays in drug approvals can significantly impact Eli Lilly's operations and financial performance.

• Supply Chain Disruptions: Global supply chain issues, exacerbated by geopolitical tensions and trade policies, could affect the company's ability to manufacture and distribute its products efficiently.

Opportunities:

• Expansion into New Markets: Eli Lilly's plans to launch Mounjaro in international markets present significant growth opportunities, especially in regions with rising diabetes and obesity rates.

• Pipeline Development: The company's ongoing investments in research and development could lead to new product approvals, further diversifying its revenue streams and strengthening its market position.

Impact of Tariffs on Imported Products

The imposition of tariffs on products imported from Canada, Mexico, and China by the previous U.S. administration could have affected Eli Lilly's supply chain costs, especially if raw materials or finished products are sourced from these countries. However, the company has not explicitly stated the impact of these tariffs on its financials. It's essential to monitor any updates from the company regarding potential cost increases or supply chain adjustments resulting from these trade policies.

Trading Ideas

Based on the current analysis, here are two trading strategies with a high probability of profit:

1. Bullish Call Spread:

   Rationale: Given the strong demand for Eli Lilly's incretin therapies and the company's plans to ramp up production, there's potential for the stock to appreciate in the coming months.

   Strategy: Buy a call option with a lower strike price and sell a call option with a higher strike price, both with the same expiration date.

   Example: Buy the LLY May 2025 $850 call option and sell the LLY May 2025 $900 call option.

2. Protective Put:

   Rationale: To hedge against potential downside risks, such as supply chain disruptions or regulatory challenges, a protective put can safeguard profits from existing holdings.

   Strategy: Purchase a put option for shares you already own to protect against a decline in stock price.

   Example: If holding LLY stock currently trading at $826.07, buy the LLY May 2025 $800 put option.

These strategies aim to capitalize on Eli Lilly's growth prospects while mitigating potential risks. As always, it's crucial to conduct thorough due diligence and consider your risk tolerance before executing any trades.