Eli Lilly and Novo Nordisk whipsawed by Wall Street's ever-rising hopes for weight loss drugs

Eli Lilly $LLY and Novo Nordisk, the two dominant players in the raging-hot market for GLP-1 weight loss drugs, have the most fragile of relationships with investors, who seem ready to ghost them at the slightest hint of bad news. This week, the two companies couldn’t win for losing, their stock prices gyrating despite healthy second-quarter results and a promising pipeline of new drugs.

Increased competition from lower priced off-brand firms, high expectations for any future weight loss drugs in development, and the sugar high of constantly increasing patient demand, has made investors easily spooked if their expectations aren’t met.

On Wednesday Novo Nordisk, maker of the pioneering GLP-1 drugs Wegovy and Ozempic, saw its stock price fall 3.9% despite reporting an 18% surge in year-over-year second quarter sales to $24 billion, slightly higher than analysts' projections.

The Danish company’s stock price had already fallen more than 20% the prior week when it significantly lowered its sales forecast for the full year, from a range of 16% to 24% down to 8% to 15%. This week the company also announced that it was pulling the plug on several new weight-loss drugs in development. By the end of Wednesday the stock was down almost 50% for the year.

Novo Nordisk had long been a Wall Street favorite after winning market approval four years ago for Wegovy, sparking a world-wide rush for this new category of weight loss drug. Just 12 months earlier, Novo Nordisk was the largest European company by market capitalization. Now it ranks 11th.

On Thursday it was Lilly’s turn to suffer the fickleness of investors. The company, which took the market lead from Novo Nordisk this year with its GLP-1 drugs Zepbound and Mounjaro, announced a strong second quarter, with sales increasing by a higher-than-expected 38% to $15.6 billion.

But Lilly also reported that its experimental GLP-1 pill Orforglipron resulted in an average weight loss of 11.2% in obese adults in a clinical trial, slightly lower than Novo’s injectable Wegovy. Lilly shares plunged nearly 15% on the news, putting it on pace for its steepest single-day drop in 25 years.

Dr. Daniel Skovronsky, Lilly’s chief scientific officer, insisted that the trial results were a good thing, saying in a morning earnings call that “this is as good as it gets for GLP‑1 monotherapy here in the once‑a‑day small molecule [space].”  But it wasn’t good enough for Wall Street analysts, who had expected a 14% to 15% average weight loss.

Deutsche Bank analysts said in a research note that the data is likely good enough to win FDA approval, “but when it comes to commercial competitiveness, we think price concessions at higher degree than expected may be needed.”

Analysts at William Blair were even more negative, saying that the data provides a “once-in-a-blue-moon occasion” for other biopharma companies to jump into the GLP-1 space. "From a stock perspective, we believe that Eli Lilly’s rare miss from its otherwise impenetrable obesity franchise could create an opening for smaller competitors," they wrote.

Novo Nordisk’s stock, on the other hand, was back in favor, rising about 7% on the Lilly news. The company’s oral version of Wegovy showed an average weight loss of 13% in a clinical trial, and Novo Nordisk filed for FDA approval of the pill in May.

But as the William Blair analysts noted, there are plenty of competitors waiting to take the shine off both Novo Nordisk and Lilly. Some 39 companies across the globe are developing oral GLP-1 drugs in pill form. Structure Therapeutics is expected to report the results of a mid-stage trial of its promising oral GLP-1 drug in the fourth quarter.

And then there are the compounders, pharmacies, and telemedicine firms that prepare customized versions of GLP-1 medications, usually for a much lower price than the brand names. They were allowed into the space in 2022 because of a shortage of FDA-approved versions, but in March the FDA declared the shortage over and ordered the compounders to wind down.

Compounders are getting around that order by offering “personalized” versions of the drugs formulated for each individual patient, which fall into a legal gray area. Novo Nordisk said that more than one million people are still using compounded GLP-1s, eating into its market share, and blamed them for the company’s lowered forecast.

On Wednesday Novo Nordisk filed 14 new lawsuits against compounders, and said it has filed 132 complaints to date in federal courts across 40 states. Lilly has also filed suit against several compounders.

It’s easy to see why there are so many companies eager to challenge the two market leaders. Morgan Stanley $MS Research expects the global market for the drugs to reach $150 billion in sales by 2035, from about $15 billion today. An estimated 12% of American adults have taken a GLP-1 drug and 6% are currently using them.

Plus, there is mounting evidence that the drugs might be effective for far more than weight loss. In 2024, Wegovy was approved for the prevention of heart attacks and other cardiovascular events in people with heart disease and obesity, and Zepbound became the first drug approved for the treatment of sleep apnea.

Recent reports show that the drugs may be effective against kidney disease, uterine fibroids, Alzheimer’s, menopause symptoms, and substance-use disorders. In May, a team of researchers presented a study showing that the drugs may reduce the risk of some 14 obesity-related cancers.