By David Wainer

Investors in the obesity drug market can breathe a sigh of relief -- but not for long.

On Wednesday, Novo Nordisk calmed fears of slowing demand, projecting a robust 20% increase in companywide sales at the midpoint of its 2025 guidance. While slightly slower than last year's growth, that pace remains impressive in the world of pharmaceutical companies. Eli Lilly, meanwhile, on Thursday confirmed an earlier projection of about 32% revenue growth this year.

After months of choppy stock performance driven by fears of a market cool down, these figures shored up confidence in the obesity and diabetes sector.

Adding to investor optimism is the clear message from the obesity leaders that they are just getting started. During an analyst call on Wednesday, Novo's U.S. head, David Moore, highlighted that only 1.2 million patients are currently being treated with obesity drug Wegovy, out of 55 million people whose insurance would cover the drug. This points to an enormous untapped market.

Meanwhile. Lilly, is quickly closing in on Novo's first-mover advantage. In an earnings presentation Thursday, the company reported it is now the market leader in new GLP-1 prescriptions. Its overall market share increased by 5 percentage points at the end of 2024 versus the same period last year, it said. "We believe both products are still very early in their life-cycle," Lilly Chief Executive David Ricks said during a call with analysts, referring to Zepbound and Mounjaro.

With demand for weight-loss and diabetes drugs still solid, manufacturing capacity remains the biggest constraint. Despite Ozempic and Wegovy still being on the Food and Drug Administration's drug-shortage list, Moore expressed optimism about resolving Novo's supply issues soon. Lilly, whose drugs Mounjaro and Zepbound were recently removed from the shortage list, also struck an upbeat tone, projecting a 60% increase in its GLP-1 supply in the first half of 2025 from a year earlier.

Building out the GLP-1 market is no small feat, involving supply-chain expansion and reimbursement hurdles. Both companies are executing well, but their high valuations -- making them the two most valuable pharma companies globally -- reflect a lot of built-in optimism. That makes their pipelines important.

For Lilly, the focus now shifts to late-stage data for its oral obesity drug, orforglipron, expected by midyear. If the trial delivers strong results, Lilly could dominate the oral market. During the call, the company sounded increasingly optimistic about its prospects, arguing that an oral drug would offer increased convenience and scalability. Additionally, the launch of a new Phase 3 trial testing orforglipron for hypertension further signaled its confidence.

For Novo, whose blockbuster drugs Ozempic and Wegovy could face Medicare pricing caps by 2027, the pipeline outlook is murkier. Its stock has dropped nearly 30% over the past six months amid concerns over its next wave of innovation.

On paper, Novo has an extensive pipeline, with several next-generation drugs in development. The challenge is whether any of them can counter Eli Lilly's increasingly dominant position, given Zepbound's superior weight loss to Wegovy.

Before releasing Phase 3 results for CagriSema, a two-drug combination shot for obesity, Novo signaled the drug could deliver around 25% weight loss. But when the data came out in December showing an average loss of 22.7% -- still a remarkable result for patients -- the stock plummeted, wiping out nearly $100 billion in market value. Separate results for an earlier-stage drug, amycretin, another combination obesity drug, helped the stock recover somewhat, but investors remain skeptical of Novo's strategy against Lilly.

Ultimately, the obsession with weight-loss data may be beside the point. As doctors know, most patients don't fixate on small differences in weight-loss percentages. Many care more about factors such as side effects, tolerability, and convenience, says Evan Seigerman, an analyst at BMO Capital Markets. Longer-acting, once-monthly injections or oral alternatives could be highly attractive to patients.

Novo is now trading at around 22 times forward earnings. That is down from 38 times last summer, but still higher than the NYSE Pharmaceutical Index at around 15 times. Lilly is still valued at a lofty 37 times, down from over 50 around six months ago, signaling Wall Street's higher confidence in its pipeline. For both companies, clarifying what comes next in obesity treatment will be key to sustaining momentum.

Write to David Wainer at david.wainer@wsj.com

(END) Dow Jones Newswires

February 06, 2025 11:16 ET (16:16 GMT)

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