Success in this new battleground could make Eli Lilly and Novo Nordisk Stock absolutely fly for years

Eli Lilly (LLY -3.47%) and Novo Nordisk (NGO -2.85%) they are rivals thanks to their dueling weight loss drugs, Zepbound and Wegovy, as well as their competing type 2 diabetes therapies, Mounjaro and Ozempic.

But dominance in a pharmaceutical segment never lasts forever. Over a long enough period, new entrants can copy the winners’ products and produce generic versions for a fraction of the cost. Therefore, continuous innovation is the only sustainable way forward.

Now, as the two companies position themselves to win the future of those markets by developing next-generation therapies, both are moving in the same direction in their strategies and spending huge amounts of money along the way. And if their competitive face-off today is any indication, there’s a significant chance they’ll both be winners in a new, emerging battleground that could generate tremendous returns for shareholders.

Below, I’ll explore the new arena and see what each business is doing today to create the conditions for high growth.

These new deals point to a long track ahead

Today, Lilly’s and Novo’s blockbuster drugs to treat diabetes and obesity are tremendously successful because they strike a delicate balance that was not possible before. In short, the drugs are:

• effective enough to meet the medical needs of a large patient population
• tolerable enough for those patients to be treated long enough to achieve a significant and consistent therapeutic effect
• flexible enough to be prescribed to patients without an abundance of diagnostic tests or monitoring
• efficient enough to produce and distribute at scale

For a market like obesity therapies — which could reach $100 billion by 2030, according to some estimates — the reward for finding the sweet spot for each of the above factors is tremendous. Furthermore, the rewards for creating a new candidate that performs even better on all of these variables simultaneously are almost unfathomable. That’s why research and development (R&D) efforts to create the next generation of weight loss drugs are still ongoing, even though the current generation is selling like hotcakes.

But there’s only so much juice drugmakers can squeeze out of therapeutic modalities in this generation of drugs. To achieve higher levels in these key factors than what is currently possible, it will likely be necessary to explore a new frontier of drug design. Specifically, both Eli Lilly and Novo Nordisk are investigating gene drugs.

Although not a well-defined category, the essence of genetic medicines is that they are interventions capable of directly altering the body’s implementation or regulation of a patient’s genes. For example, such a drug could temporarily turn off a particular gene if the overactivity of that gene was linked to experiencing the symptoms of a disease.

This approach contrasts with traditional drugs, which broadly seek to change the state, functionality, or other behavior of a patient’s cells without directly interacting with their genetic material. The category also includes hypothetical drugs that could modify a patient’s genome directly to cause a permanent beneficial change, although it will likely be a long time before such an approach is used to treat widespread diseases such as obesity or diabetes, if ever happens.

September has been a busy month so far for gene drug R&D deals. On Sept. 4, Lilly committed $1 billion in payments, royalties and referral fees to a private biotech called Haya to develop drug leads for obesity and other metabolic conditions using the biotech’s platform. These drugs work by affecting certain regions of regulatory genes (genes that modulate the activity of other genes) in a patient’s cells.

By launching new programs and acquiring ongoing candidates from other companies, Lilly aims to maintain a 25% share of its total programs as gene drugs.

In September, Novo has so far signed two different deals with a pair of biotechs worth a total of $1.1 billion in milestones and other fees. Both deals aim to develop gene editing therapies for cardiometabolic indications. Medicines for obesity or type 2 diabetes are certainly the most financially important of these.

The near term looks great as well

Gene drugs could be even more profitable than existing drugs made by Lilly and Novo Nordisk. In theory, they could be better at all the key factors described above, which would give them a massive advantage. They would also likely have larger addressable markets.

Investors will have to wait for the programs to mature before there is any firm evidence of this. For now, just appreciate that taking a gene editing or gene regulation approach means it’s possible to make therapies that are simultaneously more effective, easier to tolerate, and cheaper to manufacture than current products.

These two competitors, at least for now, are pursuing candidates with different mechanisms of action in their gene-medicine collaborations. That means there’s a good chance they could share the market if they succeed in bringing new drugs to market.

However, that will take some time. It could take several years to reach clinical-stage efforts for most collaborative programs, and there is no guarantee that any of the attempts will succeed.

However, there is no reason why any chance of failure in the future will slow the upward march of both stocks today. For now, the outlook for both Eli Lilly and Novo Nordisk is endlessly optimistic.