Why Eli Lilly Stock Sank 18% This Week

Key Points

• Eli Lilly is seeing strong growth from its weight loss drugs.

• Investors are nervous about tariffs on drugs and weak data from its upcoming pipeline.

• The stock is cheaper but still trades at a premium valuation.

• 10 stocks we like better than Eli Lilly ›

Shares of Eli Lilly (NYSE: LLY) sank 18% this week, according to data from S&P Global Market Intelligence. The drugmaker with a market cap of over $500 billion is in a sharp drawdown due to previously high expectations and weak data on its obesity drug pipeline.

Even though the stock is in a 35% dip from all-time highs, Eli Lilly is up 300% in the last five years on the back of its blockbuster weight loss drugs.

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Here's why Lilly stock dipped after posting its second-quarter results.

Expansion of weight loss drugs miss expectations

The top-line figures looked strong for the second quarter. Revenue grew 38% year over year to $15.5 billion, driven by gains for its weight loss drugs.

Mounjaro revenue grew 68% year over year to $5.2 billion in the quarter, while Zepbound grew 172% to $3.4 billion. Net income was also rock solid, up 91% to $5.56 billion. Investors were likely pleased to see these revenue gains and profit margins expand. There is still plenty of opportunity to get more and more obese people taking these weight-loss drugs around the globe, given that there are an estimated 1 billion or more obese people today.

So why did the stock drop? For two reasons: First is the uncertainty over pharmaceutical tariffs placed by the United States on foreign imports, which could have a large impact on Eli Lilly's cost structure.

Second is the data on results from a new weight-loss drug called orfoglipron showing that it had large drop-out rates when taken during a trial. This made investors pessimistic on the company's drug pipeline.

Image source: Getty Images.

Time to buy the dip?

Eli Lilly is guiding for just over $20 in earnings per share (EPS) this year, and it trades at a forward price-to-earnings ratio (P/E) of 28. This is much cheaper than it traded at a year ago, but it is not a dirt cheap valuation and a bit of a surprise for a stock in a 35% drawdown. Its previous P/E was quite the premium.

Growth from these blockbuster drugs should continue through the rest of this decade, which will lead to further operating leverage and growth for Eli Lilly in EPS. For that reason, the stock is likely a good buy for investors searching for a solid stock in the midst of this booming bull market.

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Brett Schafer 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.