NVO

This Is the Biggest Risk for Eli Lilly and Novo Nordisk Investors

Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) are the two most valuable healthcare companies in the world. Combined, they're worth nearly $1.4 trillion. And it's conceivable that their individual valuations could top $1 trillion in the future. How they got here is no mystery; they both possess some exciting glucagon-like peptide 1 (GLP-1) drugs in their portfolios. Novo Nordisk has Ozempic and Wegovy, while Lilly has Zepbound and Mounjaro.

Over the past five years, these stocks have risen by more than 450%. Eli Lilly and Novo Nordisk look unstoppable. But there's one problem on the horizon, which investors should be keeping a close eye on.

The GLP-1 drug market could get crowded

Investors are buying up shares of both companies assuming that they will dominate the GLP-1 weight loss market. Eli Lilly is trading at around 120 times its trailing earnings, while Novo Nordisk is at a price-to-earnings (P/E) ratio of nearly 50. At those kinds of multiples, investors are expecting a lot of future growth.

But one thing that can throw a wrench into those promising hopes is an influx of competition. Healthcare companies are taking note of the potential of GLP-1 medications; Goldman Sachs estimates that the anti-obesity market alone could be worth $100 billion by 2030. And the allure of these GLP-1 drugs, whether they're approved for diabetes (like Ozempic) or weight loss, is that they can help people lose weight.

Roche recently released promising results from an early-stage trial of CT-388, an injectable GLP-1 treatment, in which patients lost 18.8% of their weight after 24 weeks. It was just a phase 1 trial and it could still be years before the drug hits the market (assuming it obtains approval), but it's just one example of a rival treatment which Novo Nordisk and Eli Lilly investors may need to worry about in the future.

The drug I'd keep even closer tabs on is one from Amgen, MariTide, which could be particularly troublesome because it may only need to be taken on a monthly basis (versus weekly, like the drugs from Eli Lilly and Novo Nordisk). And people who have taken the treatment have also been able to keep the weight off after stopping it -- something that usually doesn't happen with other GLP-1 treatments. MariTide is currently in phase 2 trials and results should be available later this year.

It's far too early to know which drug will end up on top

Don't assume that Eli Lilly and Novo Nordisk will own the top weight loss drugs on the market in the future. It's not just the overall weight loss that may ultimately matter to patients; it might be the treatment with the fewest side effects that ends up winning the majority of market share. Novo Nordisk and Eli Lilly are the early leaders in the GLP-1 weight loss market, but that may not be the case years down the road.

Plus, competitors are working on oral weight loss drugs as well. A weight loss pill could potentially trump any injectable treatment available. This is why it's far too early to determine which stock could have the most to gain in the GLP-1 drug market, and which product may ultimately become the best-seller.

Think carefully before buying Eli Lilly and Novo Nordisk shares

I'm bullish on both Novo Nordisk and Eli Lilly. But the reason I haven't bought shares in either one is that their valuations are extremely high. That doesn't mean they can't generate strong returns, but it does mean there's not much margin of safety for shareholders if something goes awry. If a new weight loss drug comes to market, which proves better than the current options, that could trigger a sell-off in the shares of Eli Lilly and Novo Nordisk.

It may not happen but it's a risk to be aware of, especially when these healthcare stocks are trading at such high premiums. Investors are pricing in some rosy expectations for the future, and the reality could turn out to be far different.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends Amgen, Novo Nordisk, and Roche Ag. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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