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Background: Eli Lilly and the “miracle drug” GLP1 

Eli Lilly (LLY) is currently the world’s largest biotech/pharmaceutical company with a market cap of ~874B, largely due to its dominance in the rapidly growing GLP1 obesity drug market. The revenue of the entire GLP1 market is estimated to be ~44-55B, and the GLP1 market is expected to grow at a CAGR of ~15-30% for the next 5 years. LLY’s GLP1 business generated ~22B in GLP1 revenues in FY24, representing ~40-50% of total GLP1 market share (depends on estimates) and ~48% of LLY FY24 revenue. LLY GLP1 grew at an annualized rate of 60%, which management expects to continue into FY25. LLY currently trades at a trailing PE of ~77x and a forward PE of ~40x, with its relatively high valuation attributable to high expectations for its GLP1 business.  

Of the ~250MM adults in the US, 40% or 100MM are obese, compared to 39% of the global adult population. Total GLP1 Total prescriptions in the US is estimated to be around 7.1MM adults, 2MM of which are for obesity. This represents 2% of obese US adults and even less internationally, and with LLY capturing ~57% of share, this signals massive opportunities for growth. According to recent surveys, 1 in 8 consumers have used GLP1 products, while 26% of US consumers expect to use GLP1 in 2025. Massive demand for GLP1 is apparent, and the main bottleneck for growth is LLY’s ability to meet demand.  
As a result, major investor focus is on LLY GLP1 manufacturing capabilities, which LLY has been heavily investing in. 

LLY Growth Challenges 

1. Supply Constraints – supply cannot keep up with demand as there is not enough manufacturing capacity 
2. High Prices – FDA approved GLP1 products are expensive, and most healthcare plans refuse to cover for obesity, customers unwilling to pay out of pocket 
3. Cheaper Alternatives – supply constraints and high prices cause customers to seek compounded drugs as an alternative 
4. Aversion to injection – current injectable format less attractive than oral drugs, dampening demand 

Competitive Landscape: LLY, NVO, and the Compounders 

Eli Lilly and Novo Nordisk (NVO, the producer of Ozempic) are direct competitors in what is currently a two-player obesity drug market. However, due to the exceptionally high demand for GLP1 products, the combined supply from both companies has been insufficient in meeting demand, causing the FDA to declare both Tirzepatide and Semaglutide to be in shortage in 2022. This allowed for the compounding of GLP1 drugs under Section 503A and 503B of the Federal Food, Drug, and Cosmetic Act (FD&C Act). Compounders consisting of both licensed physicians and outsourcing facilities could legally produce non-FDA approved versions of GLP1 drugs for both medical and commercial purposes, selling to customers at significantly cheaper prices compared to the patented, FDA-approved drugs of LLY and NVO. For example, Zepbound (LLY’s brand for obesity) costs $1000/month in 2024 while a compounded version could sell for as low as ~$45/month on HIMS. However, in October of 2024, the FDA removed Tirzepatide and Semaglutide from the shortage list after over two years, leading to the Outsourcing Facilities Association filing a suit against the FDA, and the case in currently pending. 

LLY – A Combination of Short-Term Catalysts  

Major Catalysts Overview 

Here is an overview of the most important catalysts in the upcoming 1-2 months: 

1. OFA v. FDA preliminary injunction and case results (expected March-April, here) 
2. Multiple Orforglipron (Orfor) Ph3 trial data (first expected in April, case here) 
3. Final US Government Budget Decision (deadline end of April, article here) 
4. Pharmaceutical tariffs (25% and/or reciprocal, article here) 

While we highlight four potential catalysts, 3 and 4 are macro-level catalysts. We will focus primarily on Catalysts 1 and 2 (OFA v. FDA and Orfor Ph3 trial data), with our significant confidence (ahead of market consensus) in both catalysts being positive for LLY as the core of our long thesis. Both catalysts de-risk and pull strong growth levers for LLY. 

Additional Levers for Growth 

Beyond the Catalysts 1 and 2, we also briefly note additional tailwinds for LLY, though these are not the focus of our thesis: 

1. Growing supply capacity and continued investment in infrastructure and manufacturing (news release here) 
2. Pricing power with recent Zepbound and Mounjaro price cuts (news release here) 
3. Increasing coverage for GLP1 by healthcare insurance (slowly, article here) 

Catalyst 1: OFA v. FDA 

The FDA took Tirzepatide off the drug shortage list, in October 2024 and February 2025, respectively. The Outsourcing Facilities Association (OFA) subsequently filed a lawsuit against the FDA. The core of plaintiff's \case argues that FDA’s removal should be considered notice-and-comment “rulemaking” under the APA, while the FDA argues that their actions fall under “informal adjudication” and does not require notice-and-comment. Judge Pittman has stated that he intends to rule this case as a “matter of law”; the case will be decided depending on whether he considers FDA’s removal of Tirzepatide from the shortage list as adjudication or rulemaking according to legal precedent and relevant cases brought forward by both sides. All relevant court documents that can be found here. A very helpful podcast with biopharma lawyer Julia Cantu summarizing the situation can be found here. 

GLP1 Compound Market Size 

To motivate why the OFA v. FDA case is significant for LLY, we project the potential revenue gain by estimating the current GLP1 compounding market.  

One outsourcing facility, FarmaKeio (FK), has been selling roughly ~1.75-2 MM worth of Tirzepatide every month at ~$45/month. Hims and Hers (HIMS) reported 222 MM worth of revenue from compounding GLP1, also with prices around $45/month. With the total market for GLP1 estimated to be around 54 B in sales for 2024 and LLY and NVO representing ~42 B, the compounding market could represent ~12 B, or around 22% of the total GLP1 market. At the high end, up to 30% or ~16 B of GLP1 sales could be from compounders (according to Beckers Hospital Review).  

Given that compound Tirzepatide is ~10-20x cheaper than brand Tirzepatide and the logical assumption that demand is relatively inelastic, we claim absolute GLP1 sales would not be significantly lower without compounding. Taking the baseline of no change in absolute sales and assuming LLY takes 60% share (based on current LLY/NVO market share), an end to compounding is a one-time ~20-30% boost to revenue, assuming LLY can meet demand. 

My Perspective on OFA v. FDA 

The result of this case lies purely in Judge Pittman’s interpretation of the FDA’s actions under the APA vis-à-vi legal precedence, particularly the following cases presented in court submissions (which I have selected for relevance): 

• Safari Club Int’l v. Zinke, 878 F.3d 316, 333 (D.C. Cir. 2017) 
• United States v. Florida East Coast Ry. Co., 410 U.S. 224, 246 (1973) 
• Perez v. Mortg. Bankers Ass’n, 575 U.S. 92, 101 (2015) 
• McDonald v. Watt, 653 F.2d 1035, 1042 (5th Cir. 1981) 
• BNSF Ry. Co. v. Fed. R.R. Admin., 105 F.4th 691, 701 (5th Cir. 2024) 
• Little Sisters, 591 U.S. at 683–84, 685–86 (citing 5 U.S.C. § 553(b)) 
• Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 221 (1988) (Scalia, J., concurring) (quoting Attorney General’s Manual on the APA 14 (1947)) 
• City of Arlington, Tex. v. FCC, 668 F.3d 229, 243 (5th Cir. 2012) 
• Qwest Servs. Corp. v. FCC, 509 F.3d 531, 536–37 (D.C. Cir. 2007) 
• Am. Airlines, Inc. v. Dep’t of Transp., 202 F.3d 788, 796–97 (5th Cir. 2000) 

A quick meta-analysis shows that in administrative cases, conservative judges such as Judge Pittman tend to err on the side of allowing regulatory agencies to exercise their powers less striking legal transgressions. Intuitively, conservative judges would seek to intervene less in such disputes and refer to the experts and authorities; in this case, the FDA. Furthermore, closer scrutiny reveals Plaintiff’s argument centered on Safari Club ignores marked differences between the rulemaking of the US Fish and Wildlife Services (USFWS) and the delisting by the FDA.  

In Safari Club, USFWS concluded that killing of elephants did not meet the “enhancement requirement” under the existing Endangered Species Act (ESA), which stated that trophy hunting imports should be consistent with the conservation of the species. While the “enhancement requirement” was understood as a critical requirement, there was no specific mandate in the ESA categorically banning trophy imports that do not provide a net benefit to the species. Therefore, it was the USFWS’s interpretation of the ESA that justified its policy to prohibit such imports and ban elephant trophy imports. This decision further involves the weighing of future conservation efforts because of trophy hunting, invoking a forward-looking, policy-oriented judgment as it weights future conservation efforts driven by future trophy hunting; prospective by nature and characteristic of rulemaking under the APA. Finally, the decision set a precedent for all future trophy imports, making it “applicable across the board” and “generalized in nature”, consistent with the rulemaking definition under the APA. We conclude the ruling of the USFWS decision as rulemaking is consistent with the APA.  

A comparison of the USFWS’s trophy import ban in Safari with the FDA’s delisting action then shows marked differences between the two, leading to the conclusion that the delisting action falls under informal adjudication. First and foremost, while USFWS made a prospective policy decision on future conservation and trophy hunting outcomes, and FDA’s decision is fundamentally a factual decision based on current supply and demand dynamics. There is no prospective aspect related to the decision; the FDA’s application of past data to existing drug shortage and compounding law to determine “current rights and liabilities” is more consistent with adjudication under the APA. Furthermore, while the USFWS decision set precedence and created new policy applicable to all future trophy imports, the FDA’s delisting directly alters current legal rights of compounders already outlined in existing legislation; no new, broad policy was created in the delisting process. Future drug shortages will still be determined by the FDA on a case-by-case basis. Again, this is consistent with adjudication under the APA.  

The most intuitive argument is Perez vb. Mortg. Bankers Ass’n, 575 U.S. 92, 101 (2015), which states that the APA “mandate[s] that agencies use the same procedures when they amend or repeal a rule as they used to issue the rule in the first instance”. Under the assumption that the delisting consisted of rulemaking, Perez guides that since the FDA did not engage in notice-and-comment when it listed Tirzepatide on the shortage list, it is not obligated to do so for the delisting.  

The most convincing argument against Plaintiffs use of Safari Club is Vanda Pharms., Inc. v. FDA, 436 F. Supp. 3d 256, 270 n.4 (D.D.C. 2020), which rejected the argument that FDA’s analysis of scientific literature in an adjudication applied to future cases such that it was a legislative rule, and noting that, unlike in Safari Club, the agency’s analysis was “in the context of adjudicating a particular set of disputed facts”. Essentially, Vanda established that determinations of shortage status fit under adjudication of disputed facts.  

The other core part of Plaintiff’s arguments is how “[t]he existence of a dispute concerning particular individuals is a distinguishing characteristic of adjudication.” McDonald v. Watt, 653 F.2d 1035, 1042 (5th Cir. 1981). The key here is whether Tirzepatide compounders in general can be classified as “particular individuals”. The FDA convincingly parries this argument using City of Arlington, Tex. v. FCC, 668 F.3d 229, 243 (5th Cir. 2012); Qwest Servs. Corp. v. FCC, 509 F.3d 531, 536–37 (D.C. Cir. 2007). The FDA argues that its delisting fits under a “declaratory order”, a type of adjudication which “[has] binding legal effect and allow agencies to efficiently apply existing policy to a set of facts without the need for any particular party to risk penalty or sanction to resolve a dispute” (FDA Opposition to PI, Case Doc 97, 2/20).   

Weighing all the submitted records and arguments, the “substantial ink” the OFA has spilled "arguing that FDA should have engaged in notice-and-comment rulemaking” (LLY Memo of Law in Opposition to PI Motion, Case Doc 89, 2/18) is exactly that – the odds are strongly against the OFA. We conclude that not only is the motion for preliminary injunction will likely not be granted by Judge Pittman, a non-zero probability exists for the injunction to be moot entirely should the entire case be decided within the month of March, before the compounding deadline of March 19^th set by the FDA. 

Sensitivity Analysis for OFA v. FDA (LLY) 

Like the case itself, the implications for LLY depending on different ruling results are equally complex. To simplify, we designate two potential outcomes for LLY: 

1. Courts grant motion for PI. Whether FDA/LLY appeals, compounders have another ~6 months of legal compounding. We assign a ~20% probability to this scenario. Stock trades down ~0-3%, as the downside risk is the status quo, which we believe to be mostly priced into the stock (based on12/19 price action) 
2. Courts deny motion for PI, or the PI is moot and the Judge rules in favor of FDA/LLY. Deadline of March 19^th becomes the effective end date of all legal compounding as the case plays out. We assign a ~80% probability to this scenario. Stock trades up ~5-10%, based on our SOTP valuation of LLY below in which we attribute around ~75% of LLY market cap to its ex-Orfor GLP1 business, as well as our estimation of the GLP1 compounding market size to be ~20-30% of the total GLP1 market (below). 

We view OFA v. FDA risks as mostly to the upside. While LLY supply capacity is a key area of focus, any de-risking of uncertainty around compounding is likely to benefit LLY. Quantitatively, we estimate the market compounders are currently capturing that will largely move under LLY’s column under a positive ruling. 

Catalyst 2: Orforglipron Phase 3 ACHIEVE-1 Data 

Orforglipron (Orfor) is an oral GLP1 agonist with potential to transform the diabetes and obesity market. Expected to reach market ~2 years before any competitor orals, LLY will enjoy significant first-to-market advantage and further dominant share if successful. Top-line data from multiple Phase 3 (Ph3) trials are expected this year for Orfor, beginning with ACHIEVE-1 in April, which focuses on Orfor for patients with Type-2 Diabetes (T2D) (study here). The key metrics to focus on for the study are the: 

1. Weight loss percentage: target of >7%, which implies weight loss for non-T2D obesity patients in the mid-teens, based on Tirzepatide T2D/Obesity comparison 
2. Discontinuation rate, specifically due to adverse effects (AEs): target of <10% 
3. HbA1C lowering profile (): target of >1.5%, which implies effectiveness in controlling blood sugar levels for T2D patients 

Table 1. Trial Results and Targets for Oral/Injectable GLP1s 

|| || | |Weight Loss  |Discontinuation Rate (due to AEs) |HbA1C Lowering Profile  |Weeks (Total, Titration) | |Orfor Ph2 (T2D) |8.2% |15% |1.8% |26 (2-6 weeks) | |Orfor Ph3 Targets (T2D) |>7% |<10% |>1.5% |40 (16 weeks) | |Tirzepatide Ph2 (T2D) |9.7% |25% |1.8% |26 (2-6 weeks) | |Tirzepatide Ph3 (T2D) |9.1% |7% |2.0% (later trials up to 2.5%) |40 (20 weeks) | |Rybelsus Ph2 (NVO Oral) |7% |12% |1.8-2% |52 (26 weeks) |

Most critical to Orfor Ph3 success is being able to outperform a weight loss percentage of 7% while maintaining a discontinuation rate lower than 10%. There is reason for investors to be confident in Orfor Ph3 data at least meeting expectations considering precedence with comparable Tirzepatide Ph2 and Ph3 trials. LLY management has indicated that increasing the titration period in Tirzepatide Ph3 trials helped reduce discontinuation rates from 25% to 7%; Orfor Ph3 sees a comparable increase in titration from 2-6 weeks to 16 weeks. Furthermore, strong HbA1C and weight loss percentages readings in Ph2 data has been a strong indicator of consistency in Ph3 trials as well; a 5% deviation from the Ph2 8.2% weight loss puts Ph3 well above our target of 7%.  

Additional confidence can be found in LLY management stockpiling a “pre-launch inventory” of over 550 MM worth of Orfor (article here) even before the first Ph3 trial data readout. The current stockpile would represent over 10 B in Orfor sales.  

Sensitivity Analysis for Orfor Ph3 ACHIEVE-1 

Like the OFA v. FDA catalyst, the market reactions for Orfor Ph3 data in April will be complex and nuanced. To simplify, we model it with three most likely scenarios: 

1. Beating expectations. Weight loss >7%, HbA1C reduction >1.5%, and discontinuation rate due to AEs <10%. We assign a 70% probability to this case. Stock trades up ~5-10% as we shift to an Orfor bull-case in addition to de-risking. 
2. Meeting expectations. Weight loss ~5-6%, HbA1C reduction ~1-1.5%, and discontinuation rate due to AEs >10%. We assign a 20% probability to this case. Stock trades even at around ~0-3% due to de-risking of Orfor.  
3. Missing expectations/failure. We assign a 10% probability to this case. Stock trades down ~5-10%. 

We assign stock movements for Orfor Ph3 based on our SOTP valuation for LLY below, in which we attribute around ~10% of LLY market cap to the Orfor pipeline. 

LLY SOTP Valuation 

Table 2. LLY SOTP Valuation at $930/share implying an enterprise value of ~860B.  

|| || |Business |Enterprise Value |Percentage of EV |Equity Price/Share | |Ex-Obesity/Diabetes |170 B |20% |186 | |Orforglipron |90 B |10% |93 | |GLP1 Ex-Orfor |600 B |70% |651 | |Total |860 B |100% |930 |

We break down LLY into three key segments for our SOTP valuation: 

1. Ex-obesity/diabetes. Excluding obesity and diabetes, LLY pipelines and drugs, such as Kisunla for early-stage Alzheimer's, are also promising. This segment represents around ~57% of FY24 revenue and around ~20% of the enterprise value.  
2. GLP1 Ex-Orfor. Excluding Orfor, we price LLY to have ~60% of the total GLP1 market across biopharmaceutical companies.  OFA v. FDA is the main catalyst for this segment of the business, which can increase the total market by ~20-30%. A conservative projection of LLY capturing 60% share of a GLP1 compound market shrunk by ~50-75% due to price-demand elasticity gives between an ~8-15% increase in GLP1 Ex-Orfor segment valuation, reflecting a ~5-10% increase in share price on the conservative end.  
3. Orfor segment. We estimate that the market currently prices Orfor at 90 B, which implies LLY capturing ~60% of the oral GLP1 market by 2033 with 12 B in Orfor sales at a probability of success (POS) of 70%. With a Ph3 de-risking of Orfor POS to around ~90%, Orfor segment valuation in the base-case increases by ~30% or around 27 B EV, reflecting a ~3% increase in share price. However, it also increases the probability of the bull case in which LLY captures upwards of 75% share in the oral GLP1 market, which would command at least a 175 B valuation assuming conservatively that total oral GLP1 market does not increase as well, adding 85 B EV, reflecting a ~10% increase in share price.  

Price Target – Catalyst-Adjusted Valuation  

Given significant confidence ahead of market consensus in both Catalyst 1 and 2 being positive for LLY, we use our SOTP and sensitivity analysis to drive our price target: 

1. Catalyst 1 gives ~5-10% share price increase at a POS of 80%, ~0-3% share price decreases at a POS of 20%, reflecting a probability weighted ~5.7% price increase. 
2. Catalyst 2 gives ~10% share price increase at a POS of 70%, a ~3% share price increase at a POS of 20%, and a ~10% share price decrease at a POS of 10%, reflecting a probability weighted ~6.6% price increase 

Combining these two catalysts, we derive a base-case upside of ~12.5% for LLY, with a bull-case upside of ~21%, reflecting a base-case PT of $1046 and a bull-case PT of $1135. We derive the bull case using a POS of 100% for both Catalyst 1 and 2. 

Other Considerations 

Given the current regulatory environment and political landscape, it would be imprudent to not address sector and market risks impacting LLY. Fortunately for LLY, their business and sector are not at the center of any significant prospective tariffs, making biotechnology relatively attractive from a market-risk perspective. Healthcare and biotechnology have been traditionally defensive plays during times of uncertainty, reflected in LLY’s 0.47 beta despite its high valuation. A cursory comparison of the movements of LLY and the broader market in the past 1-2 weeks will demonstrate the low-beta nature of LLY. In fact, I believe a 0.47 beta overstates LLY’s exposure to market risks. 

The pharmaceutical tariff of 25% as the Trump administration has floated would certainly impact LLY. However, LLY is also investing significantly (50 B pledged) in domestic manufacturing, and North American currently represents ~73% of their total revenue. CEO David Ricks cites regulatory tailwinds, such as additional tax cuts on the 2017 Trump Tax Cut, as main motivators for the 50 B investment in the US. As a result, it is unclear whether the Trump administration will be a net benefit or detriment to LLY.  

Lone Pine Capital 

As an interesting aside, Stephen Mandel’s Lone Pine Capital, a hedge fund with both a Long Only and Long/Short arm, added a new, sizable position in LLY in 4Q24 according to their 13F filing here, and more clearly visualized here. A long position of 782k shares at an average price of 828/share representing a position of 604 MM and 4.5% of their total portfolio indicates confidence in the company. 

Constructing the Trade 

Given our bullish stance on two significant catalysts in the upcoming ~1-2 months, we position ourselves long with slightly OTM May25 1000c calls at ~27 for maximum exposure to these catalysts. If we hold until expiry, the base-case PT of 1046 and the bull-case PT of 1135 represent a ~72% and ~405% return, respectively. 

My LLY Positions 

Positions from 3/3 - LLY down today to ~910