Should Eli Lilly Investors Worry About This Unexpected FDA Move?

Eli Lilly (NYSE: LLY) sells treatments for a wide variety of therapeutic areas, but one portfolio in particular has driven major gains in recent times. And that's the company's weight loss drugs. Lilly sells the compound tirzepatide under two different names -- Mounjaro for type 2 diabetes and Zepbound for weight loss. But doctors have prescribed either for the weight loss indication. These drugs have become blockbusters, bringing in more than $1 billion each in annual revenue.

The one problem Lilly has faced is meeting the soaring demand for these products. In fact, they are so popular that the U.S. Food and Drug Administration (FDA) placed tirzepatide on its drug shortage list two years ago -- demand had outstripped supply. The move allowed compounding pharmacies to mix their version of the drug for patients, and as a result these players saw revenue soar.

Earlier this month, though, the FDA removed tirzepatide from the list as Lilly's investment in manufacturing bolstered supply. This was good news for the pharma giant, as it meant Lilly now would be the sole seller of tirzepatide and could benefit from every sale of the drug. But in an unexpected turnaround late last week, the FDA said it would reconsider its decision -- and that compounding pharmacies could continue selling tirzepatide in the meantime.

Should Lilly investors worry about this FDA move? Let's take a deep dive into the matter and find out.

Image source: Getty Images.

Mounjaro and Zepbound

So, first, a bit more detail on these top-selling Lilly drugs. Mounjaro and Zepbound activate both GIP (glucose-dependent insulinotropic polypeptide) and GLP-1 (glucagon-like peptide-1) hormone receptors, regulating blood sugar levels and appetite. They've been highly effective in clinical trials and in the real world, and that's why patients have flocked to the drugs -- making it difficult for Lilly to keep up with demand.

The FDA initially placed Mounjaro on the shortage list two years ago, then added Zepbound earlier this year -- the agency approved Zepbound about a year ago. Since Mounjaro was placed on the list, compounding pharmacies have sold their form of the drug to patients and at a lower price. Once a drug is no longer on the list, though, compounders no longer have the right to sell it.

Lilly has been working to address the shortage by ramping production capacity, and since 2020, the company has spent $23 billion on infrastructure to do so. The company also has worked on making tirzepatide less expensive to produce. Patients self-administer these drugs with an injection pen weekly, but Lilly recently launched single dose vials -- an option that's faster and cheaper for Lilly to manufacture, therefore it will help increase supply. The company then passes some of this cost savings on to patients: Single dose vials are 50% cheaper than the injection pen form, a move to help a wider range of patients more easily access the drugs.

The weight loss drug shortage

All of these efforts led the FDA to declare the tirzepatide shortage over early this month. To make this decision, the FDA says it takes into account various factors, such as the company's ability to meet demand and the amount of drug in stock just to name a couple. The result of the decision meant that compounding pharmacies had to stop making tirzepatide and turn the entire market over to Lilly.

In a surprise move about 10 days later, the FDA issued a court filing saying compounders could continue making and selling tirzepatide while the agency reconsiders its decision to remove the drug from the shortage list. This followed a compounding trade group's move to sue the FDA, saying the drug supply remains limited.

Meanwhile, a Lilly spokesperson said doses of both Mounjaro and Zebound remain available, according to an NBC News report.

How the FDA decision may impact Lilly

Now, let's consider how all of this may impact Lilly and whether investors should worry. The best-case scenario for Lilly, of course, is that the FDA soon will reaffirm its original decision, closing the door to compounders. This would allow Lilly to serve all patients prescribed tirzepatide. That said, some patients who can't afford the drug may go for compounded versions of similar drugs -- so every patient of a compounding pharmacy won't necessarily become a Lilly patient. Still, it's clear the move would broaden Lilly's revenue opportunity.

If the FDA decides to keep tirzepatide on the shortage list, this wouldn't be fantastic news for Lilly because it would limit the revenue opportunity. That said, it wouldn't be disastrous either. It's important to remember that even with tirzepatide on the list, Lilly has managed to generate billion-dollar revenue from Mounjaro and Zepbound. And drugs don't remain on shortage lists forever, so as Lilly ramps up production, it's likely tirzepatide would come off the list at some point in the near future anyway.

All of this means Lilly investors shouldn't panic. Even in the "worst case," Lilly's weight loss drugs have driven major revenue growth, and this is likely to continue -- whether compounders halt sales soon or a bit farther down the road.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.