Eli Lilly (LLY -1.38%) and Novo Nordisk (NVO -0.32%), the kings of the titanic weight-loss drugs market, might have a problem on their hands. After reporting their third-quarter earnings, share of both declined even ad the rest of the market rose.

Short-term price changes shouldn't have anything to do with an investment thesis for either stock. Still, investors sold shares in both for a reason. And there's a chance that the issue driving the decline is going to stick around, so let's see what's going on and determine how it might change your investing strategy.

Is this a bump in the road, or a transition to a bumpier road?

Novo Nordisk and Eli Lilly are both raking in billions from their blockbuster weight loss drugs that are also approved to treat type 2 diabetes. Novo's drugs Ozempic and Wegovy are household names already, and Lilly's Mounjaro and Zepbound are close behind.

For the first nine months of 2024, Novo had sales of $29.4 billion, 23% higher than a year prior; its obesity drugs segment led the charge, growing by 44% to reach $6.3 billion. In the third quarter, Wegovy alone was responsible for $2.5 billion in revenue, up 81% year over year.

But, at the same time, for the third quarter, the company reported sales of $10.2 billion, slightly less than what the market was anticipating. And management also disappointed investors by slightly cutting its annual projection for sales, citing a combination of supply pressure and lower pricing.

Lilly had the same problem. Its third-quarter revenue rose by 20%, reaching $11.4 billion, led by excellent Zepbound sales, at $1.2 billion. But management trimmed its year-end forecast, saying that it was taking actions to ease its supply pressures and to stimulate further demand.

Slowing demand, lower margins

Let's unpack these two sets of earnings data to identify the core of the issue at hand.

Both companies are saying that demand for the cardiometabolic medicines that are their primary growth drivers is softening somewhat. That makes sense, as both sets of drugs were just removed from the official list of medicines that are considered by health officials to be in a state of shortage in the U.S.

The market expected that this softening would occur sometime in the near future, not right now. And, if the two management teams are to be believed, finding more demand will require more investment in activities like marketing and advertising, as well as in research and development (R&D) for the drugs in question, not to mention a bit more investment in manufacturing capacity and perhaps commercial infrastructure.

In other words, future growth from Mounjaro, Ozempic, Wegovy, and Zepbound will likely feature somewhat narrower margins after accounting for all of these expansion costs.

Therein lies the threat to the stocks of Eli Lilly and Novo Nordisk. And while this threat is far from being dangerous at the moment, it does indeed imply that the pace of earnings growth in both companies will be decelerating a bit.

Bullishness with these stocks is still in vogue

Now, time for a reality check. Both of these companies are still worth investing in today.

In a big market that's bound to become highly competitive, like the market for type 2 diabetes therapies or weight loss drugs, it is certain that the players will need to spend more than in the past to gain or retain their market shares.

As long as the market itself is still growing -- and in this case, it almost certainly is -- businesses can continue to report rising sales and earnings, and shareholders can still find attractive returns for their dollars. Remember, demand for these therapies has so far been constrained due to the lack of manufacturing capacity, which is easing.

The takeaway here is that the days of easy growth are entering their twilight -- not that growth is over, or that the final victors of these markets have been crowned (or that they're in danger of being dethroned). From here on, biopharmas aiming to compete in weight loss will need to offer patients, insurers, healthcare systems, and other stakeholders more value than they did before. That could take the form of developing updated drugs with reduced side effects, higher efficacy, lower prices, or more convenient dosing formats or scheduling.

Eli Lilly and Novo Nordisk are both already experimenting with solutions across all of those possibilities, and they will almost certainly find a way forward that rewards shareholders.