Eli Lilly'Blockbuster weight-loss drug Zepbound and diabetes drug Mounjaro posted weaker-than-expected sales in the third quarter, although supply of both drugs has largely recovered from widespread shortages in the United States

According to the company, the reason is not a question of demand or supply.

Eli Lilly instead blamed the disappointing sales on drug wholesalers reducing their inventories of Zepbound and Mounjaro. Wholesalers buy drugs from manufacturers and sell them to hospitals, clinics, pharmacies and other health care providers.

Supply increases helped Eli Lilly fill reorders for wholesalers in the second quarter, which led to an increase in Zepbound and Mounjaro inventories during the period, according to the pharmaceutical giant.

But those wholesalers drew on some of existing inventory in the third quarter instead of buying more from the company, dampening sales of both treatments, Eli Lilly said.

According to StreetAccount estimates, Mounjaro's third-quarter revenue of $3.11 billion fell well short of analysts' expectations of $3.7 billion. Zepbound's revenue was $1.26 billion for the quarter, missing analysts' expectations of $1.76 billion.

“The main culprit was an inventory decline at Mounjaro and Zepbound…not weaker demand,” Citi analyst Geoff Meacham wrote in a research note on Wednesday.

Jared Holz, Mizuho's health equity strategist, wrote in an email that the “destocking” – selling existing inventory of the drugs rather than stocking up on more supplies – was a surprise, especially given the high demand after the treatments.

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

Still, some analysts wonder whether the inventory problem can explain everything that happened with Zepbound and Mounjaro's third-quarter sales. That factor likely explains “only a fraction,” or about 20%, of the drug revenue shortfalls, 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 problems began to ease earlier this year when 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 that produce customized and often cheaper alternatives to brand-name drugs that are in short supply sued the FDA. The group said tirzepatide was still in short supply and should therefore remain on the shortage list, prompting the agency to reconsider its decision.

On a conference call Wednesday, Eli Lilly executives emphasized that underlying demand for the drugs remains strong.

“Is there a demand problem? No,” said Dave Ricks, CEO of Eli Lilly, citing instead “a lot of irregularities in channel placement.”

“I think what we really don't control and we're not trying to, but the reality is that Lilly's downstream customers, wholesalers and retailers, make their own decisions about which of the 12 different dosage forms they want to stock at what level,” Ricks said .

He noted that wholesalers face some constraints, including financial pressures. They also have to deal with capacity constraints in the “cold chain,” or maintaining a temperature-controlled supply chain that ensures the quality of medicines from production to delivery.

Ricks said Eli Lilly has not yet begun what the company calls “demand stimulation activities” or advertising and promotions for Zepbound. The drugmaker will begin that effort in November, he said.

This also includes providing drug samples to healthcare providers

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

Ricks dismissed the idea that this quarter's disappointing sales were due to competition from composite versions of Mounjaro and Zepbound.

“We don’t see any real financial impact of compounding on Lilly,” Ricks said.