Lilly’s Head-To-Head Data Lands Blow On Novo In Battle For Weight Loss Supremacy

Summary:

• Eli Lilly and Company shared data today seemingly confirming the superior weight loss qualities of its tirzepatide GLP-1 agonist over semaglutide from rival Novo Nordisk A/S.
• Eli Lilly and Novo Nordisk lead the pharmaceutical market due to their GLP-1 drugs for obesity, with Lilly’s tirzepatide reducing weight by ~20%, compared to Novo’s ~14%.
• Despite Lilly’s higher valuation and promising data, both companies face significant challenges in meeting high market expectations and maintaining their current stock prices.
• Both companies are well-positioned in the burgeoning obesity market, but new entrants and manufacturing hurdles pose risks to their dominance and revenue growth.
• Given the high expectations already priced in, I recommend a “hold” on both stocks, acknowledging their historical performance and potential for continued momentum.

Investment Overview: Lilly And Novo Are The Two Most Valuable Global Pharmas — Thanks to GLP-1 Drugs In Obesity

Eli Lilly and Company (NYSE:LLY) and Novo Nordisk A/S (NVO), the two largest global pharmaceutical companies by market cap, valued at $790bn and $489bn respectively, are the two main beneficiaries of the discovery that the GLP-1 agonist class of drug can have dramatic effects on weight loss.

Originally developed as treatments for diabetes, Novo’s semaglutide and Lilly’s tirzepatide — both members of the GLP-1 class — were first approved in Type 2 Diabetes (“T2D”) in 2016 and 2022, respectively. However, both drugs’ ability to dramatically decrease weight in patients have seen them go on to secure approval to treat obesity, under the brand names Wegovy and Zepbound respectively, in 2022 and 2024, respectively.

Analysts have speculated that the market for GLP-1 drugs could reach >$200bn by 2031, with as many as 16 new drugs approved to treat obesity. However, Lilly and Novo together are still expected to control two thirds of the overall market.

It is not surprising, therefore, that Lilly and Novo’s share prices and valuations have soared recently. Lilly stock is up >600% on a five-year basis, and Novo’s is up >275% across the same period. In 2024, Lilly is forecasting for total revenues of $45.4bn-$46bn, and Novo for total revenues of ~$43bn, so both companies trade at high price to sales (“P/S”) ratios, of ~17.5x and 9x, respectively.

That shows that the market is expecting both companies to grow significantly in the coming years. But why is Lilly so much more valuable than Novo, or to put it another way, why is the market more confident in Lilly’s growth than Novo’s?

Both companies are primarily focused on diabetes, although Novo is also active in rare disease, and Lilly also has interests in oncology, immunology, and neuroscience. The reality is, however, that both companies valuations are swollen by their GLP-1 assets, and seemingly, based on respective valuations, Lilly’s drug is considered more valuable than Novo’s.

Lilly Shares Data Showing Apparent Superiority Of Tirzepatide

Tirzepatide has a slightly different mechanism of action (“MoA”) to semaglutide. According to drugs.com:

Semaglutide is a glucagon-like peptide-1 (GLP-1) receptor agonist and mimics the natural GLP-1 hormone in our bodies. It binds to the GLP-1 receptor to exert its effect.

Tirzepatide is a dual-acting glucose-dependent insulinotropic polypeptide (GIP) and glucagon-like peptide-1 (GLP-1) receptor agonist and binds to both GIP and GLP-1 receptors. Like GLP-1, GIP is also a natural incretin hormone and may increase the action of tirzepatide.

These medicines work by:

• stimulating insulin release from the pancreas when needed to help lower your blood sugar
• decreasing the amount of sugar made by your liver by suppressing glucagon secretion
• slowing the movement of food through your stomach (gastric emptying) which can help you feel fuller for a longer period of time, decrease your appetite and lead to weight loss.

In Q3 2024 to date, Wegovy earned ~$2.5bn of revenues, easily outselling Zepbound, which earned ~$1.3bn of revenues. Today, however, Lilly released head-to-head data from a study comparing Wegovy and Zepbound that it hopes will settle the argument as to which is the more effective drug.

According to a press release issued by Lilly today, topline results from its SURMOUNT-5 Phase 3b open label study showed that:

On average, Zepbound led to a superior weight loss of 20.2% compared to 13.7% with Wegovy. At 72 weeks, Zepbound beat Wegovy on both the primary endpoint and all five key secondary endpoints in this trial of adults living with obesity or overweight with at least one weight-related medical problem and without diabetes.

One secondary endpoint showed that 31.6% of people taking Zepbound achieved at least 25% body weight loss, compared to 16.1% in the Wegovy arm of the study. From a safety perspective, the two drugs were comparable, with most side effects mild-to-moderate in nature, and mainly gastrointestinal related.

The study enrolled >750 patients, randomized to either Zepbound (10 mg or 15 mg) or Wegovy (1.7 mg or 2.4 mg). Other GLP-1 drug developing companies — Viking Therapeutics (VKTX), Altimmune (ALT), Structure Therapeutics (GPCR), Terns Pharmaceuticals (TERN), for example — have driven triple-digit share price gains with less impressive data drawn from far smaller patients subsets. While it’s never easy to compare any drugs head-to-head, we may conclude that the evidence favors tirzepatide as the more effective drug over semaglutide, and the most effective GLP-1 agonist overall.

Analysis: Data Victory Baked Into Lilly’s Share Price As Price, Manufacturing Hurdles Overcome

Personally, I have often wondered why Novo’s Wegovy / Ozempic seemingly enjoys substantially more media coverage than Lilly’s Mounjaro / Zepbound. The main reasons are — I believe — that Novo’s drugs have been on the market longer, and comfortably outsell Lilly’s — $6.6bn of revenues year-to-date, versus $4.4bn, so they are better known around the US, Europe, and other markets.

Given tirzepatide’s apparent superiority, and the market’s valuation of Lilly, which is nearly twice as high as Novo’s, logically, we must expect there to be an inflection point upcoming when Mounjaro and Zepbound become the dominant players over Ozempic and Wegovy. Could today’s data mark the turning point?

There are other factors in play, for example price, and availability. When Zepbound was approved in November last year, Lilly said in a press release that:

Zepbound is expected to be available in the U.S. by the end of the year in six doses (2.5 mg, 5 mg, 7.5 mg, 10 mg, 12.5 mg, 15 mg) at a list price of $1,059.87, which is approximately 20% lower than semaglutide 2.4 mg injection for weight loss

So much for price, then, Lilly’s product is priced as competitively, if not more competitively, than Novo’s. In terms of availability, both companies have suffered from not being able to meet demand with supply. The FDA recently declared global shortages of both semaglutide and tirzepatide, opening up a new threat to both Pharmas in the process — compound drug manufacturers and sellers.

With that said, Novo hopes to complete the $16bn acquisition of Catalent and its 50 global manufacturing sites, to boost its manufacturing ability, while Lilly is investing billions of dollars into new manufacturing facilities also, including a $9bn “complex” in Lebanon, Indiana.

With Novo’s Catalent deal now under scrutiny by the federal trade commission (“FTC”), it seems Lilly could be the ultimate victor in this field as well. If we therefore imagine the establishment of a $200bn weight loss market by 2031 is possible, and speculate Lilly can grab a 45% share of such a market, its revenues from obesity alone could exceed >$90bn per annum.

The Difference Between “Jam Today” and “Jam Tomorrow”: Why Investing In Novo or Lilly Is Now Inherently Risky

Even earning $90bn per annum in obesity / diabetes, plus, let’s assume, an additional ~$35bn per annum from oncology, neuroscience, and immunology by 2031, thanks to drugs such as $3.8bn per annum breast cancer therapy verzenio, >$3bn selling psoriasis therapy Taltz, and newly approved Kisunla for Alzheimer’s, plus a host of late-stage pipeline assets, Lilly would still trade at a forward price to sale ratio of >6x. This is marginally above average for a Big Pharma company.

My point is, the thesis that tirzepatide becomes the dominant player in obesity / diabetes, has already been factored in to Lilly’s current valuation. For years, Lilly’s valuation has only travelled in one direction — upwards — until the company slightly tempered growth expectations in Q3, revising its 2024 guidance down by $600m at the high end, which led to a drop in the share price from >$900, to <$720.

Much of those losses have now been recaptured, but it illustrates the fact that the market has very lofty ambitions for Lilly’s performance going forward, and if the company threatens to fall short, its share price is likely to slide.

If we look ahead, both Novo and Lilly are to some extent threatened by new market entrants, not only from the smaller biotechs I mentioned above, but from other Big Pharmas, notably Amgen (AMGN), Roche (OTCQX:RHHBY), and Pfizer (PFE) at present. If sixteen GLP-1 class drugs do make it to market, some fragmentation of revenue distribution must be expected.

It has to be said, however, that Lilly’s pipeline GLP-1 prospects also look best-in-class — as I wrote in a note covering Lilly’s Q2 earnings:

Retatrutide, nicknamed “triple-G” as it targets three different hormones – GLP-1, GIP, and glucagon – has achieved a weight loss of 24% at 48 weeks. Orforglipron has shown nearly 10% weight loss at 36 weeks, meaning arguably, Lilly has the three most powerful members of the GLP-1 agonist class of drugs in its portfolio.

Novo has also been developing oral semaglutide, and amycretin, another oral GLP-1, has achieved >13% weight loss in just 12 weeks in a Phase 1 clinical study. Arguably, because Novo is valued at just $488bn, it has a greater margin for error and room for upside surprise, but equally, as Lilly’s data drop confirmed today, it may be marketing and selling the marginally less effective obesity-focused GLP-1 drug.

It is difficult to speculate how much that may impact future revenues from semaglutide — but it introduces an unwanted element of risk for investors, as does the Catalent buyout saga.

Concluding Thoughts: Lilly’s Data Confirms What Market Expected — But May Not Derisk The Value Proposition Sufficiently, Or For Novo

Lilly will be justifiably proud and delighted by today’s data readout for tirzepatide, showing apparently clear superiority to semaglutide, but my conclusion would be it does not materially change the investment thesis for either company.

Lilly’s sky-high valuation means a best-in-class GLP-1 agonist drug is the least the market expects. The hardest part — turning promise into cold, hard revenues, to the tune of close to $100bn per annum, is yet to come. Lilly’s valuation has arguably defied gravity — and common sense — ever since it tracked past ~$500bn. Lilly needs to put its foot on the gas and start posting revenue numbers as impressive as its clinical data readouts just to maintain its current valuation, in my view.

From Novo’s perspective, the news of tirzepatide’s superiority will not necessarily deter the company too much. Semaglutide remains enormously effective, and the company has been trialing its drug in fields such as cardiovascular disease — where it has already secured an FDA approval, for cardiovascular risk reduction, and even Alzheimer’s and cancer.

Lilly and Novo have both been in diabetes for more than a century. In my view, they remain the two best-placed company’s to take advantage of what analysts believe will be the biggest ever pharmaceutical market — GLP-1 agonists to treat obesity. That is an excellent position for both to be in, but as I have tried to illustrate, in my view they are both already priced for success, and achieving outperformance, when expectations have been set so high, will be tricky.

As such, I’d give both companies stock prices a “hold” recommendation. The caveat is that the bull run on these two Pharma companies has been historically rewarding for investors. I have almost lost count of the number of times I have thought both companies’ shares could not climb any higher, only to see them spike again.

This is a unique period in both companies’ histories. While there must be doubts that the obesity market can meet the market’s expectations and grow to $100bn-$200bn in size, there is always an argument for backing companies with momentum, as they are most likely to keep outperforming.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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