It's Too Soon to Buy the Dip in Weight Loss Drugmakers

Key Points

• Obesity drug sales are growing at a high double-digit pace and accelerating because they work. 
• The outlook is for quadruple-digit market growth by 2030. 
• The stocks are down now and look attractive, but valuation is still a concern. 

Obesity drugmakers like Eli Lilly NYSE: LLY and Novo Nordisk NYSE: NVO were not immune to the broad market sell-off sparked by the June CPI report, but investors looking to get into these names should be cheering. The stocks are down 20% or more from their highs, offering big discounts and the opportunity for fat profits over the long term. The caution is that stock valuations are still high, so it may still be too early to buy the dip; lower prices may still come. The primary takeaway from the latest round of results is that the obesity drug market is young, small, and growing fast. However, most growth is priced into the market after the triple-digit rallies posted since 2022.

Obesity stocks are up 200% or more in the last twenty-four months because of the robust outlook for their growth. Morgan Stanley NYSE: MS estimates that 9% of the population will be on obesity drugs by 2030. Not only are they effective at treating obesity, but they are also gaining approval for new treatments regularly. Obesity drugs like Wegovy and Ozempic, made by Novo Nordisk, are approved to treat cardiovascular conditions and those at risk for weight-related heart attacks and stroke. According to Morgan Stanley, the growth outlook equates to a market value of $105 billion by 2030, about 1650% growth and a low-ball estimate. The bull case has this pharmaceutical market rising to $144 billion, nearly 660 basis points higher. 

High Valuations Are A Concern for Eli Lilly and Novo Nordisk 

Eli Lilly and Novo Nordisk are highly valued for pharmaceutical stocks trading above 50X and 30X their current year’s earnings. While the long-term outlook has them undervalued relative to the 2030 forecasts, below 20X earnings, it’ll be a few years until the valuations normalize, meaning much of the growth story is already priced into the market. With this in play, there is a risk that these stocks will become range-bound or even move lower before they set new highs again. 

Dividends help to offset the valuation concern to a degree. NVO yields about 1.15% today, paying only 50% of its earnings and growing its distribution at a 15% CAGR over the last four years. LLY pays a lower yield, trading at a higher valuation, but it is equally safe at 45% of the earnings and growing at a 15% CAGR. Both are expected to continue rising at a substantial pace because of the earnings growth outlook and help lift the stock prices over time. 

Novo Nordisk Falls On Reduced Guidance; Eli Lilly Reinvigorates the Market 

Novo Nordisk’s guidance-induce price decline is an expected reaction to weaker-than-expected news. However, the real takeaway is that the company’s top-line growth accelerated to 25% on a 55% increase in Wegovy sales and a similarly substantial gain in Ozempic. The miss is a concern, but other factors are in play due to the unknown nature of the market than market weakness. The company’s sales are accelerating at a pace it's struggling to meet. The number of new patients is tracking at 35,000 per week and rising, suggesting that results will remain strong indefinitely, if below the optimistic analyst's consensus forecast. 

Eli Lilly’s results reinvigorated the market, outperforming expectations and increasing guidance. This company makes Mounjaro and Zepbound for diabetes and weight loss; their sales grew 3X and 45%, respectively, helping to widen the margin with leverage. Mounjaro is already tracking at $3.1 billion in sales and will soon hit quadruple-blockbuster status; Zepbound has reached the blockbuster $1 billion threshold and surpassed it. Each of these drugs, including Wegovy and Ozempic, is expected to reach a range of $15 to $30 billion annually.

Analysts Favor Obesity Drug Makers

The trend analysts' sentiment is bullish for these stocks. They are rated with a consensus of Moderate Buy with uptrending consensus price targets, but the upside is limited. Eli Lilly trades near its consensus with only a 3% upside potential, and the high-end of the range aligns with the recent stock price highs, capping the market. Meanwhile, analysts have begun to trim targets for Novo Nordisk.  

Turning to the charts, Eli Lilly looks like the better buy today. Both stocks have retreated to critical levels and show support, but the rebound in LLY is much stronger. LLY shows a trend-following entry signal, while NVO reveals potential for lower prices. It is still below the 30- and 150-day exponential moving averages, showing resistance and set-up to move sideways if not fall.