Is It Time to Dump Your Shares of Eli Lilly?

Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) are both highly respected pharmaceutical companies. However, their stock prices have traveled shockingly different paths over the past year or so, with Eli Lilly on the rise and Novo Nordisk falling sharply. Both price moves are the result of GLP-1 drugs. Has the good news played out for Eli Lilly?

What has happened with GLP-1 drugs?

Novo Nordisk was the first company to introduce GLP-1 drugs. This is a new category of drugs that helps people lose material amounts of weight very quickly. As long as patients continue to use the drug, the weight remains off. The drugs, currently delivered by needle, have been hailed as something of a miracle, especially for people who have had a hard time controlling their weight through diet and exercise alone.

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There are negatives to GLP-1 drugs, including the fact that most patients who stop using the drugs gain back a lot of the lost weight. There's also the not-so-subtle fact that the weight loss involves both fat and muscle. Losing muscle is undesirable, particularly for older adults, as it increases the likelihood and negative impact of accidents, such as falls.

Still, customers are lining up to take GLP-1 drugs. Other pharmaceutical companies are also working hard on their own GLP-1 offerings. Eli Lilly came out with its version after Novo Nordisk, but it has quickly taken the lead in the new niche. It is now the 800-pound gorilla when it comes to GLP-1 shots. That's why Eli Lilly's stock has been performing well while Novo Nordisk's shares have been falling.

Eli Lilly is a little expensive

Eli Lilly's price advance over the past couple of years has pushed its valuation higher. While the price-to-earnings ratio is roughly in line with its five-year average, at around 53, it is not low on an absolute basis. For reference, the S&P 500's average P/E ratio is approximately 28, and the average technology stock, a sector known for being expensive, has a P/E of around 30. For an even more direct and stark comparison, the average P/E in the pharmaceutical sector is just under 10.

If you care at all about valuation, you should probably be asking yourself if it is time to sell Eli Lilly and lock in your profits. This is particularly relevant for Eli Lilly, as Novo Nordisk has recently introduced a new delivery method, a pill, for its GLP-1 drugs. Customers vastly prefer taking a pill to an injection, so this is a very big development. Novo Nordisk could regain some ground in the GLP-1 space after its pills start selling, likely in early 2026.

Given that Novo Nordisk's P/E ratio is around 15, about half of its five-year average P/E of 30, it appears more attractive from a valuation perspective. Its P/E is also far lower than Eli Lilly's P/E and much closer to the industry average. You might consider jumping into Novo Nordisk if you exit Eli Lilly. However, there's one small problem to consider here. The healthcare industry is driven by innovation, and new products are particularly important in the pharma segment of the industry.

Due to the significant costs associated with discovering and developing new drugs, pharmaceutical companies are granted the exclusive right to market and sell their new medications. But the patent protections are time-limited, so companies are always facing the day when those patents expire. Normally, this results in a patent cliff, which occurs when revenue from blockbuster drugs declines sharply due to the introduction of generic versions of the drugs. Even in the best-case scenario, a drug company has only a short window in which to generate huge profits.

However, the back and forth between Novo Nordisk and Eli Lilly shows that patents alone aren't enough to protect a new drug. If a competitor introduces a more attractive drug that performs the same function, it will likely take the lead -- which is where another interesting alternative to Eli Lilly comes in, Pfizer (NYSE: PFE).

Pfizer dropped its own GLP-1 drug candidate, a significant setback. Meanwhile, several important drugs are set to lose their patent protections. The stock is deeply depressed, with a P/E ratio of just under 10. Investors appear to be very downbeat on the business right now.

However, Pfizer isn't sitting still. It recently acquired a company with a promising GLP-1 drug pipeline. And it agreed to distribute a Chinese company's GLP-1 drug if it gains regulatory approval. Given Wall Street's low expectations, Pfizer could be an interesting turnaround option in the drug sector and the GLP-1 race.

Eli Lilly isn't done yet

To be fair, Eli Lilly is also working on new delivery methods for its GLP-1 drugs. So, Novo Nordisk's pill could be a short-term benefit to the company, but it still may not change the long-term trends in the new drug niche. And there are clearly other companies working to topple both of the GLP-1 leaders, including Pfizer. The real takeaway here is that Eli Lilly appears expensive today, with investors having priced in a significant amount of good news.

Good news in the pharma sector tends to be short-lived, by design. If you are concerned about the valuation of Eli Lilly, it may be prudent to take some profits. You could buy Novo Nordisk, but an even better value play could be Pfizer, which investors appear to be treating as an industry also-ran. Yet Pfizer is just as capable as Eli Lilly and Novo Nordisk in finding, developing, and marketing new drugs. History suggests that value-priced Pfizer will eventually turn its business around with its own innovation.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.