Here Is My Top Stock Pick Among the Weight Loss Industry Leaders

Key Points

• Eli Lilly already is bringing in blockbuster revenue from two drugs that have helped people lose weight.

• It's now preparing to submit a third weight loss drug to regulators for review.

• 10 stocks we like better than Eli Lilly ›

The new generation of effective weight loss drugs has generated billions of dollars for industry leaders Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO), and opened the door for companies such as Viking Therapeutics and Amgen that are working on rival new candidates.

The growth of this healthcare niche looks to be far from over: While the weight loss drug segment is expected to be worth $28 billion this year, Goldman Sachs Research predicts that it may be worth $95 billion by the end of the decade.

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That's why, even though the stock prices of prominent companies in the niche have climbed in recent years, some still may have plenty of room to run. Among the weight loss movers and shakers, I expect one in particular to lead the way.

Image source: Getty Images.

Why weight loss drugmakers will keep winning

Investors should be optimistic in general about the potential for weight loss drug companies to keep winning. Demand for these drugs in recent years has been high -- so high, in fact, that Eli Lilly's and Novo Nordisk's products spent most of last year on the Food and Drug Administration's shortage list.

Meanwhile, testimonials about their effectiveness from both everyday people and stars like tennis champion Serena Williams are keeping interest in these products high. Moreover, as these GLP-1 receptor agonist drugs are approved for other indications, such as obesity along with sleep apnea in the case of Lilly's product, the target population for them is expanding. Finally, a general focus on wellness may prompt more and more people to opt to take GLP-1 drugs in an effort to avoid future weight-related health issues.

Against this backdrop, which company is most likely to stand out? My top pick is Eli Lilly, maker of tirzepatide, which is sold under the brands Mounjaro and Zepbound. Technically, the former brand is approved for type 2 diabetes, while the latter is approved for weight loss, but doctors have prescribed both for weight loss.

Blockbuster revenue

These injectable drugs have been generating blockbuster sales for the company, and in the second quarter were almost entirely responsible for Eli Lilly's 38% increase in revenue. I expect this to continue, and on top of this, Lilly soon may add another product to its weight loss portfolio. The company recently reported positive phase 3 clinical trial data for its weight loss pill candidate, orforglipron, and aims to submit it for regulatory review by the end of the year.

Some analysts were disappointed that orforglipron's efficacy wasn't as strong as that of Lilly's injectable drugs, but with patients experiencing an average weight loss of more than 12% after 72 weeks, it met the study's goals and would be a solid addition to Lilly's portfolio. Even if many patients continue to opt for one of the injectable GLP-1 drugs on the market due to their greater efficacy -- Lilly's injectable delivered 15% average weight loss at 72 weeks in its phase 3 study -- a pill offers certain advantages to the patient and the company.

A weight loss pill is an easier option to take on the go, which may better suit the lifestyle of some patients -- and some people may simply prefer to avoid shots where they can. Also, oral drug formulations are cheaper and easier to manufacture, and less complicated to distribute. That could make orforglipron a particularly interesting option for export to low-income countries, for example.

Another candidate on the horizon

Eli Lilly isn't stopping here. Retatrutide, another weight loss candidate that it has in phase 3 studies, may offer even greater efficacy than Zepbound. In short, Eli Lilly may be on its way to constructing a weight loss drug empire.

Of course, Lilly already faces competition from Novo Nordisk, and there's high potential for new rivals to enter the market in the next few years. So far, Lilly's orforglipron stands out versus Novo Nordisk's oral formulation of Wegovy, which regulators currently are reviewing. The pill form of Wegovy involves food and drink restrictions around the time a patient takes the drug. Orforglipron doesn't come with any such inconvenient restrictions.

And oral Wegovy, being a peptide, is more difficult and costly to make compared to a small molecule drug like orforglipron. So orforglipron could help Lilly step ahead in the oral weight loss drug market, and the company's ongoing innovation should make it a long-term winner.

Considering Eli Lilly's potential, its stock looks like a steal trading at 33 times forward earnings estimates -- down from a ratio of more than 60 last year. All of this makes Lilly a buy right now -- and my top stock pick among leaders in the multibillion-dollar weight loss drug industry.

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Adria Cimino has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen and Goldman Sachs Group. The Motley Fool recommends Novo Nordisk and Viking Therapeutics. The Motley Fool has a disclosure policy.