These two players are set on finding the next big therapeutic modality.
Eli Lilly (LLY -3.47%) and Novo Nordisk (NVO -2.85%) are archrivals thanks to their dueling drugs for weight loss, Zepbound and Wegovy, as well as their competing therapies for type 2 diabetes, Mounjaro and Ozempic.
But dominance in a pharmaceutical segment never lasts forever. Over a long-enough period, new entrants can copy the winners’ products and produce generic versions for a fraction of the cost. Therefore, ongoing innovation is the only sustainable way forward.
Now, as the two companies position themselves to win the future of those markets by developing next-gen therapies, they’re both heading in the same direction in their pipeline strategies and spending huge sums of money along the way. And if their competitive matchup today is any indication, there’s a significant chance they could both be winners in an emerging new battleground, powering tremendous gains for shareholders.
Below, I’ll explore the new arena and see what each business is doing today to create the conditions for big growth.
These new deals point to a long runway ahead
Today, Lilly and Novo’s blockbuster medicines for treating diabetes and obesity are wildly successful because they strike a delicate balance that wasn’t previously possible. In short, the medicines are:
- effective enough to fulfill the medical needs of a large population of patients
- tolerable enough for those patients to be treated for long enough to get a significant and consistent therapeutic effect
- flexible enough to be prescribed to patients without an abundance of diagnostic testing or monitoring
- efficient enough to manufacture and distribute at scale
For a market like obesity therapies — which could be as large as $100 billion by 2030, according to some estimates — the reward for nailing the sweet spot for each of the above factors is tremendous. Furthermore, the rewards for creating a new candidate that performs even better across all of those variables at once are almost incomprehensibly high. That’s why research and development (R&D) efforts to create the next generation of drugs for weight loss are still ongoing, even though the current generation is selling like hotcakes.
But there’s only so much juice that drugmakers can squeeze out of the therapeutic modalities in this generation of medicines. To achieve higher highs across those key factors than what’s presently possible, it’ll probably be necessary to explore a new frontier of drug design. Specifically, both Eli Lilly and Novo Nordisk are investigating genetic medicines.
While it isn’t a tightly defined category, the gist of genetic medicines is that they’re interventions capable of directly altering the body’s implementation or regulation of a patient’s genes. For instance, such a medicine might temporarily turn off a specific gene if that gene’s overactivity was linked to experiencing the symptoms of a disease.
This approach contrasts with traditional drugs, which, very broadly speaking, seek to change the condition, functionality, or other behavior of a patient’s cells without directly interacting with their genetic material. The category also includes hypothetical medicines that could edit a patient’s genome directly to cause a permanent beneficial change, though it’ll probably be a good while before such an approach is used to treat widespread illnesses like obesity or diabetes, if it ever happens.
September has been an intense month so far for R&D dealmaking for genetic drugs. On Sept. 4, Lilly committed $1 billion in payments, royalties, and milestone fees to a private biotech called Haya to develop leads for medicines for obesity and other metabolic conditions using the biotech’s platform. These medications work by affecting certain regions of the regulatory genes (genes that modulate the activity of other genes) in a patient’s cells.
By launching new programs and acquiring in-progress candidates from other companies, Lilly aims to maintain a 25% portion of its total programs as genetic medicines.
In September, Novo has so far signed two different deals with a pair of biotechs totaling $1.1 billion in milestones and other fees. Both deals aim to develop gene editing therapies for cardiometabolic indications. Drugs for obesity or type 2 diabetes are surely the most important of these from a financial angle.
The near term looks great, too
Genetic medicines could be even more profitable than the existing drugs made by Lilly and Novo Nordisk. They theoretically could be better across all of the key factors described above, which would give them a massive advantage. They also would likely have larger addressable markets.
Investors will need to wait for the programs to mature before any firm evidence exists on that front. For the moment, just appreciate that taking a gene editing or gene regulating approach means that it’s possible to make therapies that are simultaneously more effective, easier to tolerate, and cheaper to manufacture than the current products.
These two competitors are, at least for now, pursuing candidates with different mechanisms of action within their genetic-medicine collaborations. That means there’s a high chance of they could split the market if they manage to commercialize new drugs.
However, that will take some time. It could take a few years to reach clinical-stage efforts for most of the collaboration programs, and there’s no guarantee that any of the attempts will succeed.
Nonetheless, there’s no reason why any chance of failure in the future will slow down the upward march of both stocks today. For now, the outlook for both Eli Lilly and Novo Nordisk is unabashedly bullish.