3 Reasons I Bought Novo Nordisk Stock Instead of Eli Lilly

Key Points

• Novo Nordisk's beaten-down valuation became too attractive to pass up, so I bought the stock earlier this year.

• Eli Lilly's GLP-1 drugs may have more potential, but Novo Nordisk is still likely to be a dominant player in the weight loss and diabetes markets.

• 10 stocks we like better than Novo Nordisk ›

Eli Lilly (NYSE: LLY) and Novo Nordisk (NYSE: NVO) are two phenomenal growth stocks that investors probably can't go wrong with when investing in for the long term. They are leaders in the GLP-1 weight loss space, and have been generating strong growth in recent years.

But while they are similar, the stock I invested in earlier this year was Novo Nordisk. Here's why I bought it instead of its larger rival, and why I still think Novo is the better buy right now.

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1. It has a simpler business, focused primarily on diabetes and obesity

What stands out to me about Novo Nordisk is how laser-focused it is on two crucial areas of healthcare: Diabetes and obesity. Its diabetes and obesity care segments account for the lion's share of its revenue -- 94%. It does have some revenue coming in from rare diseases, but the company's main focus is on these two areas.

It has two fantastic products that are already delivering strong results in those segments: Ozempic (diabetes) and Wegovy (weight loss). Together, those two products generated sales totaling over 50 billion Danish krone ($7.9 billion) during the first three months of the year, accounting for 64% of the company's total sales.

The company is working on developing more weight loss treatments, including a pill. But by simply ramping up production of its highly popular GLP-1 injections, it can still generate a lot more growth down the road. While Eli Lilly is more diversified, with oncology and immunology also being key areas of its business, I think the biggest payoff can come from focusing on diabetes and weight loss drugs.

2. Its lower valuation gives it more room to go on a run

I am a bargain hunter, and with shares of Novo Nordisk crashing over the past several months, I couldn't resist the opportunity to buy the healthcare stock at what seemed like a valuation that's too good to pass up. Even today, it's trading at just 19 times its trailing earnings -- that's far below the S&P 500 average of 24. If the company's growth rate was lackluster (Novo's sales rose by 19% in the first quarter), then such a low valuation could be warranted. But that isn't the case with Novo.

Even if Eli Lilly does have better-performing weight loss drugs, I don't think they are sufficiently better that they make the stock and its 63 times earnings multiple a better overall investment option. Eli Lilly can still rise in value from where it is, but I think there's far more room for Novo Nordisk to rise higher in both the short term and the long term, given its more modest price tag.

3. Investors appear to be underestimating Novo Nordisk

Eli Lilly has been stealing the spotlight over the past year, with its products showing better results in clinical trials. In particular, Eli Lilly's Zepbound achieved superior results in a recent head-to-head trial against Wegovy (20.2% average weight loss versus 13.7%). It also didn't help that in March, Novo released stage 2 trial data for one of its more promising obesity drugs, CagriSema, which fell short of expectations.

There's been a string of bad news for Novo Nordisk, which has been weighing the stock down, but there are still other drugs in the company's pipeline. With two already highly successful treatments in Wegovy and Ozempic that are approved, the company is by no means in bad shape. Plus, given that the anti-obesity market may be worth around $100 billion by 2030 (based on analyst projections), there will be plenty of room for more than just one dominant player.

I also don't agree with the market that it's all about sheer weight loss. A drug needs to be well tolerated, otherwise patients may stop using it, regardless of how effective it is for losing weight or managing blood sugar levels. Ozempic was first approved in the U.S. in late 2017, so patients are going to be more familiar with its side effects than those of newer drugs. Wegovy was approved over four years ago, in 2021. Having first-mover advantages in this sense can help Novo Nordisk, as that can make its drugs default options for people who may want to try a GLP-1 treatment, but who are also concerned about the side effects.

Investors appear to be underestimating the stock today. But as Novo Nordisk continues to post strong results and keeps on developing more treatments, the excitement around this once-promising business could return. That could set the stage for a big rally.

Both stocks are good buys, but Novo may produce better returns from here on out

Buying a stock that's crashing in value can seem like a bad idea, but it's important to consider why it's happening. If the business is in trouble and its fundamentals are broken, then it can certainly be a bad idea to take a chance on a struggling business.

But that isn't the case with Novo Nordisk. It's still growing, it still has some terrific assets, and it's investing more into GLP-1 drug development. This is a situation where I believe the market has overreacted and has been both too bullish on Eli Lilly and too bearish on Novo Nordisk. When that happens, it can be an opportune time to invest in an underperforming stock like Novo Nordisk.

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David Jagielski has positions in Novo Nordisk. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.