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Written by: Derren Nathan | Hargreaves Lansdown
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Shares are off recent highs amidst mega cap sell off.
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US policymakers keen to drive down prices.
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Growth opportunity remains exciting. Valuations still toppy.
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Lilly and Novo own the market, but competitors race to bring new drugs to pharmacy shelves.
You may be forgiven for thinking AI stocks are the only growth story in town, but the pharmaceutical companies leading the charge in the booming obesity care markets have also delivered spectacular returns to investors over recent years.
Alongside their tech counterparts they’ve also retreated from their highs lately. This coincides with calls by Joe Biden and Bernie Sanders to reduce the list price.
Novo Nordisk which manufactures Ozempic and Wegovy reports on 7 August and with the company behind Zepbound and Mounjaro, Eli Lilly, following suit the next day.
Obesity is a major factor in many serious illnesses, which can have grave implications for healthcare systems and the wider economy. Currently, well over a third of the world’s population is overweight or obese. Projections suggest that number could rise to more than 50% by 2035. It’s predicted this will cost the global economy over $4tn every year – the equivalent impact of the pandemic.
But where there’s a problem, there’s an opportunity. But where there’s a problem, there’s an opportunity. The latest generation of pharmaceutical products for weight loss can make a significant difference to both the waistline and associated health risks. Demand for these products is booming, as is investor interest for the two market leaders in the space – Denmark’s Novo Nordisk, and US-based Eli Lilly.
Comparing the weight-loss drugs front runners
The weight loss solutions owe their development to research for diabetes, where synthetic hormones (like the renowned GLP-1) can encourage insulin production and reduce appetite.
Novo Nordisk was the first company to receive approval for a once-weekly weight management injection in this class. Diabetes and Obesity care dominate Novo’s revenue profile and drove underlying revenue growth of 36% last year to around DKK 232bn (about £26bn). Sales of obesity care products grew much faster at 154% and made up around 18% of total revenue.
Eli Lilly’s obesity drug was only approved for weight loss in the United States late last year under the brand name Zepbound. There’s some evidence to suggest it can be more effective at shedding the pounds than Novo’s Wegovy, but there are also additional safety concerns.
Diabetes care made up more than half of Lilly’s full year revenues, but it still has a more diverse business mix than Novo Nordisk. Its drug Donanemab has recently been approved to treat early Alzheimer's disease in the United States too. This therapy has a multi-billion dollar revenue potential but much will depend on patient uptake.
Zepbound hasn’t been approved for long, so its sales are a long way behind Wegovy. But both company’s total revenues are forecasted to grow between 20-30% per year in 2024 and 2025.
In terms of operating profit, consensus forecasts suggest much faster growth for Lilly. Novo has much healthier profit margins and there’s an opportunity for Lilly to close that gap, but there’s a lot of work to be done.
Shares in both companies trade at a significant premium to the pharmaceutical sector. It’s worth noting, out of the two, Novo Nordisk has a more dominant position, and slightly less demanding valuation. The prospects are exciting for both companies, but there are also emerging challenges which means significant downside risk if they’re not addressed.
What’s next for weight loss drugs?
Weight loss drugs have the potential to be the most valuable class of medicine in history. The key to achieving this will be growing the market that clinicians can write prescriptions for. Both companies are driving towards this.
Novo’s seen Wegovy approved as the first weight-loss drug to treat cardiovascular disease. Another area it’s aiming for approval is chronic kidney disease. Lilly’s Zepbound has shown promising results in reducing the symptoms of the sleep disorder obstructive sleep apnoea. Further approvals for this and other illnesses are something to watch.
But for now, supply rather than demand is the issue, with both companies investing heavily to increase capacity. The high price of these products makes them incredibly profitable. This hasn’t gone unnoticed in political circles, so expect some downward pressure in the future.
Given the relatively short history of GLP-1s, another risk to bear in mind is the potential emergence of long-term side effects. High prices will always attract competitors too. Copycats are already waiting in the wings, particularly in China. However, in developed markets the big players still have several years of exclusivity.
Given the pace of development, standing still is never a good idea in the pharmaceutical industry. Both Lilly and Novo have significant pipelines with several trials evaluating new and existing obesity therapies.
Demonstrating further clinical benefits, a viable oral administration route, or improved side effect profiles are all routes to establishing a commercial edge. But they’re not the only players in the race, with over 100 substances in clinical trials. Bringing new medicines to market is a lengthy and expensive progress, with most medicines never reaching the market. For now Novo and Lilly’s first mover advantage is holding them in good stead.
But the market is enormous and there’s ample room for more players. Drugs that demonstrate a range of clinical benefits are likely to stand out from the crowd over those that merely show smaller improvements over the current standard of care.
Investors should consider financially secure companies, as they can normally stomach the risks of drug development and aren’t betting their shirt on a small number of clinical trials.
One example is AstraZeneca. Clinical progress on its obesity pipeline is certainly something to watch out for, but it’s not the be all and end all. It already has a world-class offering in cancer treatments and rare diseases, aiming to more than double revenue to $80bn by 2030, helped by the expected launch of 20 new medicines. Compared to Lilly and Novo, the valuation is less demanding, reflecting lower growth projections.
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