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Indianapolis-based Eli Lilly is the largest healthcare company in the world, and Denmark's Novo Nordisk is now the largest company in Europe. Together, the two companies currently hold around 13 per cent of the market value of the entire healthcare sector. The market value of the two companies have skyrocketed over the past couple of years, mainly due to the success of the two companies in the market for anti-obesity drugs. The duo will likely continue to play a leading role in this market for many years to come as both have new products in the pipeline that is expected to offer even higher weight loss than the drugs currently on the market, further cementing its strong positions in this market. For example, Zepbound and Wegovy, the only two obesity drugs currently approved, offer 15 to 20 per cent weight loss on average. Newer versions of the drugs are expected to increase the bar to 25 to 30 per cent.

This year alone, the market value of the two companies have risen by around 20 per cent, equivalent to more than USD 200 billion. And the numbers are even more impressive when looking at bit further back in time, with both stocks having quadrupled over the past three years. This also means the stocks have become ever more expensive to buy. Novo Nordisk has a P/E ratio of over 40 for Eli Lilly it is over 100, calculated on the basis of earnings in 2023. This means that, for example, if Eli Lilly had zero growth, it would have taken more than 100 years to get back your investment. But, with the growth assumed by the market, the P/E ratio will fall to below 20 for both at the current share price and estimated earnings in 2030. The market is currently estimating sales growth of around 180 per cent for Eli Lilly and around 130 per cent for Novo Nordisk by 2030, but we believe the market still might be too cautious with respect to the growth potential for the obesity drugs. The global market for these medicines could reach north of USD 100 billion by the end of the decade, which is not penciled into current estimates. As such, we believe both stocks are attractive, but the companies need to deliver on the high growth expectations.

Production challenges - Novo is buying capacity

One of the major challenges remains production bottlenecks. The companies can’t produce large enough volumes to meet demand, and scaling up production takes time. In an effort to mitigate this, Novo Holdings (the main owner of Novo Nordisk) intends to acquire the US contract manufacturer Catalent for USD 16.5 billion, whereafter Novo Nordisk will buy three strategic manufacturing sites from Novo Holdings. Catalent plays an important role in the production of Novo Nordisk's products, responsible for a large part of the company’s fill-and-finish operations, which involves filling injection pens with the drug. This fill-and-finish part of the value chain has long been a bottleneck for the industry, but the takeover will enable Novo Nordisk to ramp up production of Wegovy and the diabetes drug Ozempic quicker.

Competitors are far behind

There are a number of large and small companies that want to get in on this lucrative business, but only the two big pharma giants currently have obesity drugs on the market. The US company Viking Therapeutics and the Danish company Zealand Pharma, which has a co-operation agreement with Boehringer Ingelheim, both have interesting candidates currently working their ways through clinical trials. Amgen is also one of the main players in the race to join Novo and Lilly, but as things stand, neither company will be able to launch an obesity product until late 2027 at the earliest. There have also been numerous takeovers of companies developing anti-obesity products, with both AstraZeneca and Roche recently having acquired obesity candidates. For these companies though, the road to market is even longer. However, the market is likely to become so large that there will be room for more players.

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