• Eli Lilly's blockbuster weight loss drug Zepbound and diabetes treatment Mounjaro posted weaker-than-expected sales for the third quarter, even as both medicines have largely recovered from widespread shortages in the U.S.
• The drugmaker blamed the misses on drug wholesalers cutting inventory of Zepbound and Mounjaro.
• Eli Lilly executives insisted that underlying demand for the medicines remained strong and that the company has enough supply available.

Eli Lilly's blockbuster weight loss drug Zepbound and diabetes treatment Mounjaro posted weaker-than-expected sales for the third quarter, even as supply of both medicines has largely recovered from widespread shortages in the U.S. 

The reason for the disappointing sales, according to the company, is not an issue of demand or supply. 

During an earnings call Wednesday, Eli Lilly instead blamed it on drug wholesalers cutting inventory of Zepbound and Mounjaro. Wholesalers purchase medicines from manufacturers and sell them to hospitals, clinics, pharmacies and other health-care providers.

Supply increases allowed Eli Lilly to fulfill back orders for wholesalers in the second quarter, which led to increased inventory of Zepbound and Mounjaro during the period, according to the pharmaceutical giant.

But those wholesalers tapped into some of that existing stock in the third quarter instead of buying more from the company, which dampened revenue from both treatments, Eli Lilly said. 

Mounjaro's third-quarter sales of $3.11 billion fell well short of the $3.7 billion analysts had expected, according to estimates compiled by StreetAccount. Sales of Zepbound were $1.26 billion in the quarter, missing the $1.76 billion expected by analysts. 

"The primary culprit was an inventory hit to Mounjaro and Zepbound ... not weaker demand," Citi analyst Geoff Meacham wrote in a research note Wednesday. 

Jared Holz, Mizuho health-care equity strategist, wrote in an email that "destocking" — or selling existing inventory for the drugs rather than stocking up on more — came as a surprise, especially with the high level of demand for the treatments.

But he said Eli Lilly has invested $10 billion to $15 billion to expand manufacturing capacity for its injectable drugs in this year alone, which should "help to reverse some of the trends reported in this period."

Still, some analysts question whether the inventory issue can explain all of what happened with the sales of Zepbound and Mounjaro in the third quarter. That factor likely explains "only a fraction," or around 20%, of the drugs' revenue misses, Barclays analyst Carter Gould wrote in a note Wednesday. 

Demand for weight loss and diabetes injections has outpaced supply over the past two years. 

But Eli Lilly's supply woes began to ease earlier this year, and the Food and Drug Administration removed tirzepatide, the active ingredient in Mounjaro and Zepbound, from its shortage list.

Earlier this month, a trade group representing compounding pharmacies, which make customized and often cheaper alternatives to branded drugs in shortage, sued the FDA. The group said tirzepatide is still in short supply and should therefore remain on the shortage list, which led the agency to reconsider its decision.

On the earnings call, Eli Lilly executives insisted that underlying demand for the medicines remained strong. 

"Is there a demand problem? No," Eli Lilly CEO Dave Ricks said, pointing instead to "a lot of lumpiness in channel stocking."

"I think what we really don't control and don't attempt to but as a reality is that downstream customers from Lilly, wholesalers and retailers, are making their own decisions about which of the 12 different dosage forms they want to stock in at what level," Ricks said. 

He noted that wholesalers are dealing with some limitations, including financial pressures. They also have to deal with "cold chain" capacity constraints, or maintain a temperature-controlled supply chain that ensures the quality of the drugs from production to delivery. 

Ricks said Eli Lilly had yet to begin what the company calls "demand-stimulating activities," or advertising and promoting, for Zepbound. The drugmaker will start those efforts in November, he said.

That will include providing drug samples to health-care providers. 

Eli Lilly is also investing heavily in its direct-to-consumer website, which offers telehealth prescriptions and direct home delivery of certain drugs to expand patient access, executives said during the call. 

Ricks dismissed the idea that the disappointing sales in the quarter was due to competition from compounded versions of Mounjaro and Zepbound. 

"We don't really see a financial impact on Lilly of compounding," Ricks said.