Eli Lilly’s worst day in nearly 17 years: Strategist Jared Holz on Q1 results

Key Concepts

• GLP-1 drugs (Wegovy, Mounjaro, Orforglipron)
• PBM (Pharmacy Benefit Manager) - CVS Caremark
• Formulary (standard formularies list)
• Market share
• Valuation (relative to peers)
• Earnings guidance
• Oral vs. injectable GLP-1s
• Pipeline acquisition

Eli Lilly's Stock Drop and CVS Caremark Decision

• Significant Drop: Eli Lilly (LLY) experienced a significant stock drop of over 11.5%, marking its worst day since the financial crisis.
• CVS Caremark Impact: The primary driver was CVS Caremark's decision to make Novo Nordisk's Wegovy the preferred GLP-1 drug and to remove Lilly from its standard formularies list.
• Earnings Context: While Lilly's earnings beat estimates, the stock was negatively impacted by trimmed guidance and the CVS Caremark news.
• Analyst Perspective (Jared Holz, Mizuho): The drop was likely a combination of factors: broader pharma sector weakness (2-3%), rotation dynamics, and the CVS/Novo news (estimated at 5%).

Impact of Losing CVS Caremark

• Uncertainty: The exact impact of losing preferred status with CVS Caremark is unknown.
• Prescription Still Possible: Doctors can still prescribe Lilly's drugs, particularly for patients seeking additional weight loss.
• Patient Switching: Many patients start on Novo's drug (Wegovy) but switch to Lilly's (Mounjaro) due to adverse events or a desire for greater weight loss.
• Potential for Limited Impact: The initial advantage for Novo may diminish over time.

Novo Nordisk's Position

• Relative Value Trade: The CVS Caremark decision doesn't necessarily shift the relative value trade significantly towards Novo Nordisk (NVO).
• Valuation Concerns: Novo's valuation has been a long-standing concern due to its high multiple compared to peers.
• Bullish Sentiment: Despite valuation concerns, the analyst had previously been bullish on Novo at $70.

Recommendation: Buy Lilly on Weakness

• Opportunity: The 11-12% pullback in Lilly's stock presents a buying opportunity.
• Oral GLP-1 (Orforglipron): Lilly has an oral GLP-1 (Orforglipron) expected to launch next year.
• Solid Fundamentals: Lilly's earnings remain strong, and the CVS Caremark decision doesn't fundamentally alter the trajectory of its drugs.

Valuation Considerations

• Bubble Territory: Lilly has been trading at a premium valuation compared to its peers (Pfizer, Merck, Bristol-Myers Squibb).
• Fundamental Strength: Despite the high valuation, Lilly's fundamentals remain strong.
• Buying on Weakness: The recommendation is to buy Lilly on weakness, suggesting that the long-term outlook remains positive.

Novo Nordisk's Potential Acquisitions

• Acquisition Strategy: The question is raised whether Novo Nordisk will acquire assets or drugs in the pipeline, similar to Pfizer's strategy.
• Market Leader Stance: Novo may be hesitant to make acquisitions due to its position as a market leader.
• Need for Oral Offering: As time goes on, Novo may need to acquire an oral GLP-1 offering to compete with Lilly's Orforglipron.

Conclusion

The drop in Eli Lilly's stock price due to CVS Caremark's decision presents a buying opportunity, as the company's fundamentals remain strong and it has an oral GLP-1 in development. While Novo Nordisk benefits from the CVS Caremark decision, its high valuation remains a concern, and it may need to consider acquisitions to maintain its competitive edge in the long term, particularly in the oral GLP-1 space.