As you've probably noticed, the big pharma juggernauts Novo Nordisk (NVO 1.27%) and Eli Lilly (LLY +0.70%) are both making headlines with their wonder drugs for obesity and diabetes. But as smart investors know, positioning your portfolio ahead of the headlines they'll be making in the near future can be a profitable strategy -- especially if there's a risk waiting in the wings.
For these two players, there's at least one potential obstacle coming up that could put a damper on their ambitions, specifically with their blockbuster drugs that are currently used to treat diabetes and obesity. So let's take a beat to understand what they're trying to do, and why they may fall short.
NYSE: NVO
Key Data Points
Treating liver disease might be a bridge too far
Both Eli Lilly and Novo Nordisk have multiple drug development programs attempting to find a treatment for non-alcoholic steatohepatitis, a chronic liver condition more commonly known by its acronym, NASH. As many as 6.5% of people living in the U.S. today have the condition, so it's a major potential market that isn't yet addressed by any medicine. Per a report by Insight Partners, the market for NASH therapies could reach more than $24 billion annually before the end of the decade.
In biopharma research and development (R&D), it's always much cheaper to repurpose an already-approved drug than it is to start from scratch with a new candidate. Novo Nordisk and Eli Lilly are trying to do exactly that for NASH with their medicines that are currently marketed for diabetes and obesity.
This makes sense because obesity and diabetes are significant risk factors for NASH, and there's plenty of research that suggests the approach could have merit. Those products work by mimicking the action of a molecule in the body called glucagon-like peptide 1 (GLP-1), which is implicated in a wide swath of physiological activities ranging from insulin regulation to impulse control.
Eli Lilly's investigation is in phase 2 trials, while Novo Nordisk's is in phase 3. If its efforts succeed, Novo Nordisk could crack open a major new market for the molecule it currently sells as Ozempic, Wegovy, and Rybelsus, and Eli Lilly could do the same for the molecule it sells as Mounjaro.
NYSE: LLY
Key Data Points
But here's the problem: NASH is a notoriously difficult indication to develop medicines for successfully; many biopharmas have tried and failed. And the data on using their drugs to treat NASH isn't exactly clear about whether the approach actually works. Roughly a year ago, Novo Nordisk's phase 2 investigation failed to show any benefit beyond placebo, but it moved forward anyway, after making a few adjustments. A failure in phase 3, after even more resources were invested, would likely be bad for shareholders.
What's actually at stake?
There's no telling precisely how much late-stage stumbles in NASH trials would hurt these two stocks, but any harm definitely won't be apocalyptic, and it's unlikely it'd even bring them down by 10%. Either way, shareholders can rest assured that if one fails, the other stock will be affected too, as the medicines being tested have overlapping mechanisms of action.
Eli Lilly's trial should conclude in early 2024, but one of Novo Nordisk's late-stage trials could take until mid-2029. There aren't yet any studies that directly compare the efficacy of their candidates in the context of NASH, and it might be years before there are.
So at the moment, it looks like NASH could be only a moderate risk to Novo Nordisk and Lilly's stocks, especially since they have multiple opportunities to whiff in clinical trials. But if either succeeds, the benefits could be enormous. While there will definitely be plenty of competition in the market for NASH therapies soon enough, securing even a piece of it would likely lead to billions in annual revenue.
Therefore, don't let the specter of a failure in repurposing GLP-1 medicines for NASH dissuade you from investing in these companies. For big pharma businesses, clinical-trial problems are par for the course, and their resources are vast enough that bumps in the road rarely lead to persistent declines in their share prices.
