HSBC analysts just slashed their recommendation on the world’s most valuable pharmaceutical company, Eli Lilly, signaling a potential cooling period for the red-hot obesity drug trade that has come to dominate market narratives of the sector. Analysts led by Rajesh Kumar downgraded Lilly to Reduce from Hold, cutting their target price to $850 from $1,070, arguing the stock is currently “priced to perfection” and faces significant headwinds as competition intensifies. The market for obesity drugs might not be as large as previously believed, they said. Kumar argues that consensus total addressable market (TAM) expectations for weight loss drugs, at about $150 billion by the turn of the decade, are too high and are “due for correction.” Instead, the TAM is likely to be between $80 billion and $120 billion by 2032, with significant pricing competition as well, Kumar said. Lilly stock has gained 20% over the past 12 months, far outperforming shares of its main rival in the obesity space, Danish drugmaker Novo Nordisk , which has fallen 55% over the same period. Its stock price fell 0.9% in pre-market trading in response to the downgrade. LLY NVO 1Y mountain Lilly shares have outperformed Novo’s In February, Lilly and Novo issued diverging outlooks , with the former forecasting revenues to grow around 25% in 2026, driven by its mega-blockbuster GLP-1 drugs Zepbound and Mounjaro. Meanwhile, Novo, the maker of Ozempic and Wegovy, sees its top line shrinking by 5% to 13%, citing pricing pressure and the sector’s still largely untested price/volume dynamics. “The divergence of Lilly’s guidance with Novo’s has been puzzling, not just to us, but [to] most investors,” Kumar said. “The main reason for the divergence seems to stem from Lilly’s success in the cash pay channel. “Rising working capital intensity at Lilly, headline price pressures, and rebate dynamics at both companies indicates to us that the pricing dynamics are likely to get worse.” Kumar also cut his price target on Novo to 280 Danish kroner ($43) from 350 kroner, but maintained a Hold rating. “The difference in outlook of the two companies (Lilly and Novo) now is so wide that one must consider how different price elasticity of demand their market forecasts is assuming,” Kumar said. The obvious question becomes whether Novo’s bearish read of the market is more accurate than Lilly’s bullish read. And demand for Lilly’s weight loss pill Orforglipron, which is expected to launch in the second quarter, could be set to disappoint, according to HSBC. “Whilst the execution at Lilly has been good so far, we think the risk of paying up for its bullish world view embedded in the guidance is unattractive.” Novo, which launched the Wegovy pill in January, will fight back for market share and price competition is likely to intensify, leading to a smaller TAM compared to consensus expectations, the analysts added. Healthcare as a defensive play Despite the caution on Lilly and the obesity trade in general, HSBC remains bullish on the broader healthcare sector as a defensive play. Describing it as the “least naughty child” in a room of disruptive global assets, the bank notes that healthcare offers a critical margin of safety against two primary investor fears: AI disruption and geopolitical instability. Unlike tech or manufacturing, healthcare has relatively lower exposure to white-collar AI displacement and potential Middle Eastern supply chain shocks stemming from a prolonged war in Iran. With the obesity trade looking increasingly crowded, HSBC sees opportunities to rotate into other names. HSBC analysts see AstraZeneca , AbbVie , and Johnson & Johnson as offering a better risk-reward profile than sector peers, with key clinical trial catalysts coming up. In the tools and medtech space, HSBC says Thermo Fisher and Lonza are undervalued plays that may see a resurgence in the second half of this year as biotech funding stabilizes. In emerging markets, India’s Sun Pharma and China’s Innovent are HSBC’s top picks for investors seeking exposure to innovation outside of Western markets. — CNBC’s Michael Bloom contributed to this report