Analysts at HSBC lowered their recommendation on Eli Lilly, the world’s most valuable drugmaker, signaling a potential cooling period in the red-hot obesity drug trade that has come to dominate the sector’s market narrative. Analysts led by Rajesh Kumar lowered their rating on Lilly’s stock from “hold” to “reduce” and lowered their price target from $1,070 to $850, arguing that the stock is currently “perfectly priced” and faces significant headwinds from increased competition. The market for obesity drugs may not be as large as previously thought, they said. Kumar argues that the Total Addressable Market (TAM) consensus forecast for weight loss drugs, at about $150 billion by the turn of the decade, is too high and has “room for revision.” Rather, TAM is likely to be between $80 billion and $120 billion by 2032, and price competition will be intense, Kumar said. Lilly’s stock has risen 20% in the past 12 months, far outpacing the share price of its main rival in the obesity space, Danish drugmaker Novo Nordisk, which has fallen 55% over the same period. Shares fell 0.9% in pre-market trading following the downgrade. LLY NVO 1Y MOUNTAIN Lilly Stock Outperforms Novo In February, Lilly and Novo released different outlooks, with the former forecasting sales to rise about 25% in 2026, driven by blockbuster GLP-1 drugs Zepbound and Maunjaro. Meanwhile, Ozempic and Wegovy maker Novo expects sales to contract between 5% and 13%, citing pricing pressures and the sector’s still largely untested price-volume relationship. “The divergence in guidance from Lilly and Novo is perplexing not only to us but also to most investors,” Kumar said. “The main reason for the divergence appears to be due to Lilly’s success in the cash payroll channel.” “Lilly’s increasing working capital intensity, aggregate price pressure, and rebate trends for both companies indicate that price volatility is likely to worsen.” Kumar also lowered Novo’s price target to DKK 280 (approximately $43) from DKK 350, but kept the rating unchanged. “Prices (for Lilly and Novo) are currently very wide-ranging, so we need to consider how market forecasts assume different price elasticities of demand,” Kumar said. The obvious question is whether Novo’s bearish view of the market is more accurate than Lilly’s bullish view. And HSBC says demand for Lilly’s weight-loss drug Orforglipron, scheduled to launch in the second quarter, could be disappointing. “We believe the risk of paying the price for the bullish worldview embedded in the guidance is not attractive.” Novo, which launched Wegoby tablets in January, will fight back for market share, price competition is likely to intensify, and TAM will be lower than consensus expectations, the analysts added. Healthcare on the defensive Despite its caution over Lilly and the obesity trade in general, HSBC remains bullish on the broader healthcare sector on the defensive. The bank points out that healthcare offers an important margin of safety against two major investor concerns: AI disruption and geopolitical instability. HSBC analysts see an opportunity for AstraZeneca to replace healthcare, unlike technology and manufacturing, where the risk of white-collar AI displacement and potential Middle East supply chain shocks resulting from the protracted war in Iran is relatively low. , AbbVie and Johnson & Johnson offer better risk-reward profiles than their sector peers, while Thermo Fisher and Lonza are undervalued in the tools and medical technology space and could revive in the second half of the year as biotech funding stabilizes, HSBC said, and India’s Sun Pharma and China’s Innovent are HSBC’s top choices for investors seeking exposure to innovation outside the West. Markets — CNBC’s Michael Bloom contributed to this report.
