By Elsa Ohlen

The drugmaker of two weight-loss bestsellers just got its first dose of healthy skeptism during a time when the industry as a whole is fielding a lot of questions.

The maker of tirzepatide, sold under the brand name Mounjaro for Type 2 diabetes and Zepbound for weight loss, Eli Lilly caught a double downgrade from HSCB on Monday -- to Reduce from Buy.

There's simply too much optimism in the price, HSCB analysts led by Rajesh Kumar wrote in a research note. Lilly shares traded at $872.00 in midday trading Monday, up about 13% since the start of the year.

Wall Street is underestimating the risk to Lilly from its main weight-loss industry competitor, Novo Nordisk, which makes Ozempic and Wegovy, according to Kumar.

Novo stock has been falling for much of the past year much due to increased competition and disappointing trial data for the company's next-generation weight-loss drug, CagriSema.

However, compounding pharmacies will soon have to stop producing copycat versions of Novo's drugs now that the Food and Drug Administration has said that the shortage of Semaglutide, the active ingredient in Ozempic and Wegovy, is over.

Kumar wrote that investors could be underestimating the brand recognition of Ozempic and Wegovy -- and what that means for how many prescriptions are given for the drugs.

"Post compounders, Novo might come back stronger," he said.

Kumar also thinks Novo's CagriSema is a greater risk to Lilly than what the market currently prices in. He rates Novo shares Buy.

" When the compounders are stopped in May for Novo's brands, the script momentum gap between the two players [Lilly and Novo] might close," Kumar said.

Last week, a federal court effectively ruled that the FDA can take action against the copycat makers now that the shortage of semaglutide is over.

Novo saw the decision as a victory.

"With the end of the shortage...no patient should have to be exposed to unsafe, inauthentic" drugs, said Steve Benz, Novo's U.S. general counsel.

Besides competition from knockoffs, the prospect of tariffs and lower drug prices are pressuring the pharmaceutical sector.

The Trump administration has said tariffs on pharma products are coming "very shortly," which would likely hit drugmakers' earnings. How big of a hit would depend on how much of a company's manufacturing and intellectual property is based outside the U.S., which isn't something pharmaceutical companies typically disclose.

The president also is promising to bring down prescription drug prices, especially for seniors. Lower drug prices would probably take a toll on earnings as well as research and development through budget cuts.

Even all the hope held for the weight-loss market is waning. The growth outlook is shrinking according to some strategists and both Lilly and Novo have missed earnings expectations in the past year as analysts overestimated sales.

Wall Street, though, is still high on Lilly. Right now, Kumar is the only analyst that has a Sell-equivalent rating on the stock, according to FacSet.

Some of the optimism is because a late-stage trial found that Lilly's experimental once-daily weight-loss pill, orforglipron, was both safe and effective. Most of the adverse reactions were gastrointestinal-related, the company said.

The trial, the first of seven Phase 3 trials, tested orforglipron in adults with Type 2 diabetes over 40 weeks. Lilly expects to submit the pill to regulatory agencies by year's end.

On Monday, J.P. Morgan analyst Chris Schott said the Lilly results pointed at an efficacy close to that of a high-dose injectable semaglutide. He reiterated an Overweight rating on shares ahead of Lilly's next earnings report, scheduled for Thursday.

"We see the drug expanding the overall incretin market in several ways, and our estimates for the drug remain well ahead of consensus over time, " Schott said, reiterating an Overweight rating on shares ahead of Lilly's next earnings report, scheduled for Thursday.

Kumar, however, isn't convinced the new pill will be the blockbuster many others expect it to be -- or that its efficacy is as good as semaglutide's. He urges caution given that 8% of participants didn't go up to the highest dosage because of side effects.

"These trends might require a closer look in the obesity read out to confirm the market's current bullish expectations," Kumar said.

Write to Elsa Ohlen at elsa.ohlen@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 28, 2025 12:54 ET (16:54 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.