Does Eli Lilly deserve to trade at a premium to Novo Nordisk shares? For Deutsche Bank analyst James Shin, the answer is: “yes, but not to this degree.” Shin initiated coverage of a host of pharmaceutical stocks, including Eli Lilly, on Wednesday. The analyst said he is worried Lilly’s valuation is “grating against fundamentals,” as he set a price target of $535 for the stock and gave it a hold rating. Lilly shares have soared nearly 62% since the start of the year as excitement has built over the potential of its portfolio, which includes an Alzheimer’s drug and tirzepatide, better known as Mounjaro for type 2 diabetes and — as of Wednesday — Zepbound for obesity . “The GLP-1 phenomenon has lifted LLY’s FY24E EPS multiple to 48x – near all-time highs, leaving little room for upside,” Shin wrote in a research note. “LLY is also trading at a 16x premium vs NVO… which looks stretched to us.” Shin’s price target implies shares will fall about 9% from where they closed on Thursday. And it goes against the consensus on Wall Street, where the average price target is about $626.17 per share, with a Street high of $722 per share. LLY YTD mountain Eli Lilly shares since the start of the year. According to Shin, Lilly deserves a premium to Novo Nordisk because its portfolio is more diverse and it has less exposure to insulin. But, he said, these benefits are offset by Lilly’s exposure to the Inflation Reduction Act, which could pressure drug prices in the U.S. “We’re also early in the commercialization of GLP-1 for diabesity, which looming competitors could disrupt,” he said. “Year-end market dynamics must also be considered for LLY’s near-term share outlook as funds may need to realize LLY’s premium to offset Biotech/Pharma sector weakness.” An enormous market The potential market for anti-obesity medications is enormous, with more than 40% of American adults having the condition, according to the Centers for Disease Control and Prevention . Obesity is chronic, which means patients will need to take the drugs long-term or risk regaining weight. Many industry analysts see the market peaking at more than $100 billion in annual sales by 2030 . Some have presented even richer forecasts. Novo Nordisk and Eli Lilly are far ahead of their rivals. Their drugs suppress the appetite and regulate insulin levels in the bloodstream by mimicking gut hormones. For Novo Nordisk ‘s Ozempic (type 2 diabetes) and Wegovy (obesity) the target is the hormone glucagon-like peptide-1. Lilly’s Mounjaro and Zepbound also key in on GLP-1. However, the drug also imitates gastric inhibitory peptide, or GIP, which assists in breaking down sugar and fat as well. In clinical trials, patients on Wegovy lost about 15% of their weight, while those taking Zepbound lost about 21%. NVO YTD mountain Novo Nordisk shares year to date In the coming weeks, Lilly will start rolling out Zepbound to patients. The drug will be costly, at a list price of $1,056 per month, but it’s around 20% below Wegovy’s list price. As was the case with Wegovy, Lilly will have a savings card program that could reduce the cost of the drug for patients with commercial health insurance to as low as $25 per month. Medicare cannot cover weight loss medications. “While the net price for Zepbound could start above that of Mounjaro, we expect net price for both products to decline over time and to ultimately be in similar ranges over time,” wrote JPMorgan analyst Chris Schott in a research note. Supply constraints persist Insurance access to the drug is one hurdle for patients, but manufacturing also has been a key limiting factor. Both drugs have had periodic shortages. Since the spring, Novo Nordisk has been limiting access to low doses of Wegovy in a bid to protect supplies for patients already on the drug. Also, both companies have been ramping up manufacturing capacity, but Novo recently said it will take years before it can produce enough Wegovy. “Given the global magnitude of the opportunity, without knowing competitor supply capacities, then I do believe it will be a number of years, several years, before this market is unconstrained on a global basis,” Karsten Munk Knudsen, Novo’s chief financial officer, said on a recent earnings call. On Friday, Novo said it would invest more than $6 billion to expand a plant in Denmarkt that makes Wegovy and other products. During Lilly’s recent earnings call, the company said it was on track to double their production of its incretins, which also include another diabetes drug, Trulicity. Schott said he expects both Novo and Lilly will sell nearly all the product they are able to generate over the next several years. Competition is coming And that’s even as other companies look to enter the segment. On Thursday, AstraZeneca signed a licensing agreement with Eccogene to develop an oral GLP-1 drug Lilly and Novo are both working oral anti-obesity drugs . Lilly CEO David Ricks told CNBC on Thursday that the company has six other molecules in development . Schott expects Lilly shares to appreciate as more is learned about the benefits of these drugs for other related conditions such as heart and kidney disease. He has an overweight rating on the stock. One such catalyst looms ahead on Saturday. Novo Nordisk is scheduled to release the full results of its Select cardiovascular trial at the American Heart Association conference. The company previously said the trial showed that patients taking Wegovy reported 20% fewer major cardiac events compared with patients not taking the drug. While the initial headline results were positive, analysts have been eager to see greater detail from the study. Other studies also are in the works for sleep apnea and heart failure, with data expected in the first half of 2024, Schott said. These trials have been seen as critical to gaining health insurance coverage and expanding use cases for the drugs. These studies also will help better understand these drugs, which are still unknown over the long haul. There are some concerns about how long patients will decide to stay on these medicines due to side effects such as gastrointestinal symptoms. —CNBC’s Michael Bloom contributed to this report.