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Shares of Eli Lilly (NYSE:LLY) and Novo Nordisk (NVO) have soared in recent months, fueled by skyrocketing demand for the companies’ respective weight-loss/diabetes drugs tirzepatide, also known as Mounjaro and Zepbound, and semaglutide, better known as Ozempic and Wegovy.
Over the past 12 months, shares of Lilly have shot up 76% while Novo Nordisk shares have jumped 58%. In comparison, the S&P 500 has climbed 28%, as of market close on May 17.
The rest of Big Pharma, meanwhile, has been a mixed bag as far as returns. Over the last 12 months, GlaxoSmithKline (GSK) has fared the best, with shares up 25%, followed AbbVie (ABBV) at 16%, Merck (MRK) at 14%, and Novartis (NVS) and AstraZeneca (AZN) posting single-digit gains.
On the flip side, Bristol Myers Squibb (BMY) shares have plunged 34% during the same period, followed by Pfizer (PFE), down 22%, and Roche (OTCQX:RHHBY), down 18%, with Sanofi (SNY) and Johnson & Johnson (JNJ) seeing single-digit declines.
Thanks to the run-ups in their stock prices, Lilly and Novo Nordisk now boast the largest market caps in Big Pharma at $732B and $588B, respectively, with J&J coming in at a distant third at $372B, according to Yahoo Finance data.
Which brings us to the magic question: are shares of Lilly and Novo Nordisk overvalued? We asked Seeking Alpha analysts Stephen Ayers, Edmund Ingham and Terry Chrisomalis for their thoughts on the subject.
Are Lilly and Novo Nordisk overvalued?
Stephen Ayers: I believe that the stock market is efficient most of the time. I wouldn’t call them “overvalued,” per se. Both companies have unlocked products that, as far as we know, are changing the health of our society for the better, e.g., obesity, heart disease and diabetes. The implications are enormous.
On the other hand, both Eli Lilly and Novo Nordisk are now largely dependent on one or two products. So, despite the high market capitalizations that give the appearance of comfort, there is a higher-than-typical degree of risk that investors should account for.
Edmund Ingham: By most metrics applicable to valuing a “Big Pharma” company – price to sales, price to earnings, dividend yield, revenues, etc. – the conclusion that both companies are somewhat overvalued – with market cap valuations of >$700B and $545B – is inescapable. With that said, Wall Street is in no doubt that the obesity market will be a >$100B per annum industry by the end of the decade, and the facts – for example, that 42% of American adults suffer with obesity – seem to bear this out.
With a unique and historically large opportunity like this in play, logical and objective assessments of value tend to go out of the window, and therefore I would not be surprised to see Lilly becoming the world’s first ever trillion-dollar pharmaceutical company, with Novo not far behind.
Terry Chrisomalis: I believe that Eli Lilly (LLY) and Novo Nordisk (NVO) are not overvalued. I state that because the obesity market is expected to grow rapidly in the next several years. According to Goldman Sachs Research, the anti-obesity medications market could grow by more than 16 times to $100 billion. The market cap for Eli Lily stands at around $700 billion at the time of this writing, but its growth prospects in terms of targeting the obesity market are going strong.
How so? Well, that’s because when it reported its Q1 2024 earnings, it raised its full-year 2024 financial guidance by $2 billion to the range of $42.4 billion to $43.6 billion. The reason why is because of the high demand of Mounjaro and Zepbound. I don’t expect the growth prospects for either of these drugs to stop for years to come.
In terms of Novo Nordisk, it has a huge increase in sales for its obesity drugs program as well. Sales of its obesity drugs grew by 41% Danish Kroner to DKK 11.0 billion. If both of these companies can continue to see such a growth percentage for the obesity market space, then I don’t see how they can be deemed to be overvalued.