Pharmaceutical company Eli Lilly & Co (LLY 1.19%) is the world's largest drug company. It minted many millionaires on its way to becoming one of the world's largest corporations. The stock has returned an incredible 41,930% over its lifetime, turning a $1,000 investment into $420,000.
The stock is up 250% over the past three years alone and is worth over half a trillion dollars today. Did you miss out? That's OK. There's a stock positioned to outperform Eli Lilly, sitting in the pole position of arguably the hottest growth trend in the healthcare industry.
Here is what you need to know.
The problem with buying Eli Lilly today
Look, I'm not saying Eli Lilly isn't a great company. It's the world's largest pharmaceutical business for a reason. Plus it still has reasons for long-term investors to like the stock, including diabetes drug Mounjaro, weight loss drug Zepbound, and a potential blockbuster to treat Alzheimer's disease called Donanemab. Analysts are bullish too. Consensus estimates currently call for earnings growth averaging over 21% annually.
If you're already a shareholder, you can confidently hold onto the stock. The problem isn't with the fundamentals, but with how much upside is already priced into the stock. After such a big run, Eli Lilly is trading at 90 times its forward earnings.
Eli Lilly could achieve the earnings growth analysts are calling for, or the stock could underperform if the valuation slips. Investors need to be careful about how much they pay for these mega-cap stocks, because huge numbers typically have a harder time growing. That means Eli Lilly could be an excellent company, but only an OK investment for those buying now.
Novo Nordisk is a much better deal
Instead of Eli Lilly, consider Novo Nordisk (NVO 0.84%), a company concentrated in the diabetes and obesity fields. You might wonder why I'm bringing up Novo Nordisk after I just bemoaned Eli Lilly, partly for its large market cap. Admittedly, Novo Nordisk is almost as big at $460 billion. However, there are some critical differences between the two.
First, Novo Nordisk's stock seems like a much better deal for investors. The stock is trading at a forward P/E of 38, which, at a PEG ratio of 2.1, is a better value for the growth you expect -- even with Novo Nordisk expected to grow a little slower than Eli Lilly (its PEG ratio is above 4).
NVO PE Ratio (Forward) data by YCharts
Beyond valuation, Novo Nordisk generates a much higher return on invested capital (ROIC) than Eli Lilly. The company has averaged a 73% ROIC over the past decade, compared to Eli Lilly's 18%. This metric helps gauge how effectively a business makes money. In other words, how much money is a business putting in versus how much profit does it generate?
Novo Nordisk's consistently high ROIC is a green flag for its chances of creating more value for shareholders over the long run, and getting the stock at a better valuation is a win-win.
Its leading GLP-1 product is an industry leader
The weight loss frenzy surrounding GLP-1 products was arguably the biggest story in healthcare last year. These pharmaceutical drugs suppress the appetite by mimicking a hormone in the body that influences hunger. Some of these drugs are approved to treat Type 2 diabetes, while others are explicitly approved for weight management.
Eli Lilly and Novo Nordisk sell products in this field, but Novo Nordisk's Ozempic was the product in most news headlines about the trend throughout 2023. Based on search engine traffic, Ozempic has three times the search activity over the past year as Eli Lilly's Mounjaro. Novo Nordisk's chronic weight management GLP-1 product Wegovy also has a clear lead over Eli Lilly's Zepbound.
Considering the obesity rate in the U.S. alone is over 40%, weight management is a significant pharmaceutical opportunity. A research analyst from BMO Capital Markets estimates the market for GLP-1 drugs could reach $100 billion by 2035. Novo Nordisk could benefit from this tailwind for years as the market leader. The company's GLP-1 leadership, appealing valuation, and higher return on capital make Novo Nordisk the pharmaceutical giant with the most long-term upside today.
