Eli Lilly (LLY) and Novo Nordisk (NVO) have been large players for decades in the market for diabetes medications and are currently dominating the market for related anti-obesity medications including Wegovy (NVO) and Zepbound (LLY). The first article about anti-obesity drugs in E-morningCoffee.com (here) examined the history of medications to treat Type 2 diabetes, which are the pre-cursors to anti-obesity medications. It also looked at the extremely attractive case for the growth of anti-obesity drugs in the coming years. In this instalment, I will look at the qualitative attributes of these two pharmaceutical giants, before turning to equity valuations in the final instalment.
ELI LILLY AND NOVO NORDISK: THE DOMINANT PLAYERS IN ANTI-OBESITY MEDICATIONS
The market today for obesity-reducing drugs is largely a duopoly, dominated by Eli Lilly (LLY) and Novo Nordisk (NVO). The landscape could change going forward as other pharmaceutical companies respond to the opportunity in this market, although the moats are deep for potential competitors. Through their long history and extensive experience in the development and marketing of drugs used to treat Type 2 diabetes (the precursor to anti-obesity drugs), both Eli Lilly and Novo Nordisk have attributes that should enable them to continue to dominate the emerging anti-obesity market. Both are now actively promoting their respective anti-obesity medications:
Eli Lilly: Zepbound, which uses the same underlying GIP receptor and GLP-1 receptor agonist (tirzepatide) as the company’s diabetes medicine branded Mounjaro;
Novo Nordisk: Wegovy, which uses the same underlying GLP-1 receptor agonist (semaglutide) as the company’s diabetes medicine branded Ozempic.
The macro case for owning shares in one or both of these companies is based around a combination of their dominant duopolistic position and the rapid growth globally that is expected for anti-obesity medications, a market which is expected to grow from a few billion dollars in 2023 to as much as $100 billion by 2030. Specifically, both LLY and NVO have:
Research and development facilities, staff, experience and “know how” that will enable them to to continue to focus on and improve the effectiveness of these drugs,
Experience in navigating the regulatory environment in various countries, successfully obtaining regulatory approvals for anti-obesity medications in major countries around the world,
Patent protection for their baseline products which extend to the early / mid 2030s, and
Manufacturing capacity in place (and being built / added) to hopefully satisfy the growing global demand.
The two dominant players and the market
Eli Lilly, based in Indianapolis, is a US-based company with a long history of drug development and sales across a wide array of products. Novo Nordisk, based in Copenhagen, is a Danish company that has about the same amount of revenues as Eli Lilly but is more profitable on the bottom-line, reflecting its different product mix. NVO’s heritage has largely been built around treatment for diabetes Type 2, and these therapies – along with the emerging weight-loss applications – accounted for nearly 93% of the company’s revenues in 2023. LLY is more diversified from a product perspective, with only 58% of the company’s 2023 revenues coming from the sale of medications to treat diabetes and obesity. LLY generates the rest of its revenues from a more diverse stable of products, including medications used for oncology, immunology and neuroscience, among others.
The global market for diabetes medications is estimated by Fortune Business Insights to be $79 billion in 2023, meaning that LLY and NVO collectively have over 50% of this market. This does not include or consider anti-obesity drugs, which – in the case of LLY and NVO – use the same underlying medications that are used in their respective anti-obesity medications. NVO is the clear market leader in diabetes type 2 medications, with LLY being 4th or 5th, behind the likes of Sanofi and Merck. In obesity treatment medications, NVO is again the leader but LLY’s recently-approved Zepbound is gaining ground quickly as its efficacy has shown to be better than NVO’s Wegovy for weight-loss. Keep in mind that Wegovy (NVO) was approved by the FDA in June 2021, and Zepbound (LLY) was just approved by the FDA in November 2023.
The table below contrasts some of the non-financial metrics of the two leaders in the market for diabetes medications and the rapidly evolving and related market for anti-obesity medications.
These are my take-aways from looking at this table.
Shares and ownership
LLY’s shares are listed on the NYSE, and the company has only one class of shares. NVO has two classes of shares, one of which (A shares) is fully-owned owned by a Danish foundation Novo Nordisk Foundation. The A shares represent a minority interest in the listed company (NVO) but importantly have voting control. Historically, the Novo Nordisk Foundation has provided grants from time to time to the company in an effort to support its mission to improve Danish (and I suppose global) society. This support is noteworthy and I would think certainly helpful to NVO as it grows its business. However, as an owner of B shares, the fact that the foundation has voting control means that NVO is effectively protected against any type of actions by public shareholders should they become displeased with the company’s business direction or its share price. As a final thought, keep in mind that US investors are purchasing ADRs (backed by B shares) when they invest in NVO, and ADRs might be considered less liquid than directly-listed shares (like LLY). NVO did a 2:1 stock split in September 2023. LLY has not split its shares since 1997.
Corporate philosophy
NVO discusses its focus on ESG rather extensively in its annual report, also suggesting that it has corporate interests that extend beyond those of its shareholders. This is not atypical for a European company, certainly not one in the pharmaceutical sector. As is typical for a US company, LLY is likely more narrowly focused on shareholder value. This is my interpretation based on my research, and it could – at least theoretically – have ramifications for shareholders.
Dividends and share repurchases
The table below and to the right right illustrates the dividend metrics of both companies. As you can see, NVO has a higher dividend yield than LLY. Both companies are increasing their dividends. LLY will be increasing its quarterly dividend from $1.13/share (4Q23) to $1.30/share (1Q24). NVO will pay a semi-
annual dividend of $0.9299/share in March (1H24), versus its prior dividend of $0.7218 (2H23). Not only do NVO shares offer a higher dividend yield, but the company also is a more active purchaser of its own shares. NVO spent $6.1 billion on share buybacks in 2023, versus LLY which spent $750 million for stock repurchases. Going forward, LLY has $2.5 billion of a share repurchase program remaining in place, and NVO has a program in place to repurchase DKK 20 billion ($2.9 billion equivalent) in shares in 2024. Overall, NVO returns more cash to its shareholders than LLY.
Business diversity (segments)
As mentioned already and as you can see in the table, LLY has a more diverse stream of revenues from different business segments than NVO, which is almost entirely dependent on its diabetes and anti-obesity drugs. This makes LLY less vulnerable to setbacks in anti-obesity drugs, should they occur in the future. (Having said this, keep in mind that LLY’s flagship anti-obesity drug Zepbound was not approved by the FDA – and hence was not for sale in the US – until November 2023, meaning this important growth engine is very likely under-represented as a percent of LLY’s revenues on a pro forma FY basis.)
Manufacturing facilities
Both LLY and NVO have diverse production facilities, but both seem to be suffering from inadequate capacity to meet the demand of the rapidly-growing market for anti-obesity drugs. Both companies are investing substantial amounts in increasing their manufacturing capacity.
Access to capital
Both companies have bonds outstanding, although LLY has substantially more debt outstanding across a wider range of currencies and markets. NVO effectively has no net debt. Both companies are highly rated, with ready access to the debt capital markets and – should it be needed – the equity markets. NVO also receives grants from time to time from the Novo Nordisk Foundation.
CONCLUSION
Ignoring valuation, LLY and NVO are different in that
LLY has a more diverse business mix, lessening its reliance on diabetes and anti-obesity medications.
Diabetes and anti-obesity medications are higher margin, as you can surmise by looking at the difference in the net income margins between the companies. NVO benefits from a product mix much more skewed towards these higher-margin medications.
However, should something not develop as expected for one reason or another in the weight-loss drug area, NVO would be much more affected because their revenue stream is not nearly as diverse as LLY. What could go wrong?
competition heats up reducing top line growth and /or putting operating margins under pressure;
alternatives to GLP-1 receptor agonists are developed by competitors that have better efficacy; or
a narrative around the negative effects of anti-obesity medications develops traction (similar to the blowback against social media).
NVO has broader interests that just its shareholders, a factor that is not relevant today but could be in the future.
NVO returns more cash to shareholders via its higher dividend and more robust share repurchases.
NVO did a 2:1 share split in September. Given the substantial appreciation in LLY shares in the last year and the fact that LLY did its last stock split in 1997, investors might be expecting LLY to soon follow NVO with a stock split.
Both are racing to develop manufacturing capacity to meet growing demand, and both are experiencing manufacturing bottlenecks.
LLY’s Zepbound has higher efficacy (than NVO’s Wegovy), although both companies are battling to position their respective weight-loss medications to not only improve efficacy, but also to extend the drugs’ benefits to areas like also lowering cardiovascular risks. For example, NVO shares got a boost on March 8th when the company announced that the FDA agreed that Wegovy reduced the risk of heart attacks and strokes in prescribers, making the drug available for the first time to be covered by Medicare. The company’s press release regarding this approval is here.
The next leg-up that will turbo-charge top- and bottom-line results from one or both of these companies will be when their anti-obesity medications become available in tablet form (rather than weekly injections).
In the final instalment about anti-obesity medications, I will present the valuation metrics of these companies, both of which are – without question – very richly priced at the moment.