Better Buy Now: Novo Nordisk vs. Eli Lilly

November isn’t half-finished, and it’s already shaping up to be an exciting month for pharmaceutical companies that market weight-management drugs. On Nov. 8, the active ingredient in Eli Lilly‘s (LLY 1.08%) type 2 diabetes treatment Mounjaro earned approval from the Food and Drug Administration (FDA) for chronic weight management under a new brand name, Zepbound.

Just a few days later, Novo Nordisk (NVO 1.16%) released positive results from a closely watched clinical trial with its weight-management drug Wegovy.

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Great news from both leading sellers of weight management drugs is making it hard for individual investors to choose a stock to add to their portfolio right now. Let’s look past the recent headlines to figure out which of these drugmakers is the better buy.

The case for Novo Nordisk

Novo Nordisk piqued the interest of cardiologists gathered for the American Heart Association’s annual conference on Nov. 11. The company’s Select trial enrolled over 17,600 patients with cardiovascular disease and a high body-mass index but no history of diabetes.

In August, we learned that overall, patients treated with Wegovy were 20% less likely to have a heart attack or stroke compared to patients given a placebo. Details released over the weekend showed a 28% risk reduction among patients already taking statins.

During an observation period that lasted more than three years, treatment with Wegovy reduced patients’ risk of death from cardiovascular causes by 15% compared to a placebo. This is a big deal because health plan sponsors are generally resistant to covering the costs of weight reduction treatments. Evidence of a strong cardiovascular benefit, though, could smooth out Wegovy’s reimbursement path.

During the first nine months of 2023, strong demand for Ozempic and Wegovy drove Novo Nordisk’s total sales 29% higher year over year. Positive clinical trial data for Wegovy could allow for at least several more years of growth at this rapid pace.

Novo Nordisk stock has been trading at around 42 times its trailing-12-month earnings. This is a high multiple, but Wegovy and Ozempic sales will more than likely allow the business to grow into its lofty valuation and outperform over time. That said, competition among weight-loss management drugs is heating up.

The case for Eli Lilly

Eli Lilly launched Mounjaro as a treatment for type 2 diabetes in 2022, but data that shows it’s highly effective at weight reduction keeps driving up demand. Third-quarter Mounjaro sales came in at an annualized $5.6 billion, which is astounding for a drug that earned its first FDA approval less than a year and a half ago.

Sales of Mounjaro and Zepbound could jump forward at an even faster pace than we’ve already seen. Semaglutide, Wegovy’s active ingredient, acts on glucagon-like peptide (GLP-1) receptors. Tirzepatide, the active ingredient in Mounjaro and Zepbound, acts on GLP-1 and glucose-dependent insulinotropic polypeptide (GIP) receptors.

It looks like this dual mechanism that sets Lilly’s weight-management drug apart from Novo Nordisk’s makes it more effective at weight reduction. In a study with patients without diabetes who averaged 231 pounds, treatment with the maximum dosage of Zepbound led to 18% weight reduction.

Mounjaro, and now Zepbound, aren’t the only fast-growing blockbusters in Lilly’s product lineup. Verzenio was recently approved to treat a large cross-section of patients with early-stage breast cancer. The drug label expansion pushed third-quarter Verzenio sales 68% higher year over year to an annualized $4.2 billion.

Eli Lilly reported third-quarter sales that surged 37% year over year, or 24% if we ignore the recent $1.4 billion sale of rights to Zyprexa and COVID-19 antibody sales that disappeared this year. Zepbound will sell for a list price of about $1,060 per month, which is about 21% less than Novo’s Wegovy.

I think that over time, a lower list price and a new dual mechanism of action will allow Zepbound to pull some market share from Wegovy. Demand for weight loss treatments is so high, though, that both can become blockbusters with 11-figure annual sales before a slew of similar treatments from competing drugmakers enter the market.

The better buy now

Investor enthusiasm for Eli Lilly is so high that by market cap, it’s larger than Pfizer and Johnson & Johnson combined. At recent prices, the stock trades for the sky-high multiple of 110 times trailing-12-month earnings. With expectations this high, investors who buy Lilly shares right now could face heavy losses if Zepbound doesn’t become the best-selling drug in history.

I think Zepbound will go on to break a lot of records. Like all pharmaceutical businesses, though, it’s only a matter of time before every blockbuster it has now loses market share to generic or biosimilar competition. Expecting any pharmaceutical company with a lot of moving parts to live up to a three-digit earnings multiple is a bad idea.

While Eli Lilly is the stock I’d rather own right now, a relatively modest valuation makes Novo Nordisk the better buy.

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