Obesity giants will begin $80 bln M&A face-off

argenx SE

17/12/2024 06:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Aimee Donnellan
       LONDON, Dec 17 (Reuters Breakingviews) - Eli Lilly
 LLY.N  and Novo Nordisk  NOVOb.CO  will kick off a massive
shopping spree in 2025. The two obesity giants will be sitting
on cash piles of around $80 billion by 2028, according to LSEG
data, thanks to the runaway success of their weight-loss drugs.
The challenge will be to put that money to work and avoid
overpaying.
    Novo Nordisk was the first mover in the obesity sector. The
Danish pharma company’s drug Ozempic, which mimics a hormone
called GLP-1, has been on the market since late 2017. Its
obesity sales ballooned fivefold to $5.5 billion in the two
years to 2023, thanks to its successor to Ozempic, called
Wegovy. U.S.-listed Eli Lilly came later to the party, only
getting approval for its GLP-1 medication Mounjaro in 2022.
    With little competition today, the two pharma titans look
set to keep growing quickly. Over the next five years, Eli
Lilly’s revenue is expected to increase by an annual average
clip of 20%, while Novo Nordisk’s will rise by 16%, LSEG
forecasts show.
    The rising cash flow will put huge pressure on both
drugmakers to do deals. They will also need new products for
when the obesity cash gusher starts to run dry. Novo Nordisk’s
U.S. patent on the key ingredient in Ozempic runs out in 2031.
And many companies, including Swiss giant Roche  ROG.S  or
UK-listed AstraZeneca  AZN.L , are gearing up to take a slice of
the obesity business. Those pressures are reflected in stock
prices: Novo Nordisk and Eli Lilly shares were valued at 33 and
52 times forward earnings at the beginning of 2024, but those
multiples had fallen to 26 and 32 times by late November.
    Eli Lilly has got a head start in dealmaking. In July, it
spent $3.2 billion on Morphic, a biotech that specialises in
inflammatory bowel disease. That should put pressure on Novo
Nordisk to splash the cash, particularly as it makes most of its
money from diabetes and obesity, both areas at risk of
competition.
    One option is to double down on the obesity market, by
buying promising new drugs that may complement or even replace
the GLP-1 products. One target could be Zealand Pharma
 ZELA.CO , which is working on a promising weight-loss pill that
appears to have fewer side effects than Ozempic or Wegovy.
    Novo Nordisk’s second option is to move aggressively beyond
its core business of obesity and diabetes. Ideally, it would
want a fast-growing sector that could bolster sales without
diluting growth, like autoimmune diseases, for example. One
potential target is Belgian-listed Argenx  ARGX.BR .
    Even bulking up in the familiar territory of obesity means
taking risks. Just ask Roche: the Swiss group paid $3 billion
for Carmot in December of 2023, which it said could quickly
produce seven new obesity drugs. Yet data from clinical trials
showed one of the more promising medications caused side effects
like nausea and vomiting, potentially making it less attractive
than existing products. And moving into new areas could be
expensive. Argenx, for example, was valued at more than twice
Novo Nordisk’s forward price earnings multiple in late November.
    The fact that both Eli Lilly and Novo Nordisk are in the
same predicament raises risks: both groups may find themselves
bidding against each other in any M&A situation, increasing the
odds of the winner overpaying. M&A bankers, at least, are
unlikely to starve.
    Follow @aimeedonnellan on X
    
    This is a Reuters Breakingviews prediction for 2025. To read
more of our predictions, click here.

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Graphic: Eli Lilly and Novo Nordisk’s obesity revenue is on the
up    https://reut.rs/3ZfbMeG
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 (Editing by Neil Unmack and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  DONNELLAN/ 
Aimee.Donnellan@thomsonreuters.com))