Pharma’s Gold Rush for Obesity Drugs

Published March 2024

• Shares of early entrants into the burgeoning GLP-1 market, NVO and LLY, skyrocketed around 150% over the last 18 months.
  
  
• Over 40% of U.S. adults are obese, up from 31% in 1999, which translates to more than 100 million potential patients.
  
  
• Morningstar’s equity research team projects GLP-1 drug sales for diabetes and obesity could surpass $90 billion by 2030.
  

A new class of weight loss drugs known as GLP-1 has led to Wall Street’s soaring excitement for pharmaceutical companies’ blockbuster opportunity to capitalize on the obesity problem in the U.S. and to a lesser extent in other countries. According to the Centers for Disease Control and Prevention (CDC), over 40% of U.S. adults were clinically obese in a survey period from 2017-2020, up from 31% in 1999. This translates to more than 100 million potential patients for GLP-1 drugs in just the U.S. Morningstar’s health care equity research team projects GLP-1 drug sales for the treatment of diabetes and obesity could surpass $90 billion by 2030, more than double last year’s sales. 

The injectable drugs aim to mimic the hormone glucagon-like peptide 1, or GLP-1, that is secreted primarily in the gastrointestinal tract to signal the brain when food has been eaten. The hormone also stimulates insulin release from the pancreas which lowers blood sugar levels. While GLP-1 drugs were first approved to treat diabetes in 2005, pharmaceutical companies seek to broaden their application to treat obesity given clinical trials showed they can reduce people’s appetite, lower their blood sugar level, and reduce body weight by between 10% and 20%. The studies also showed the drugs can improve blood pressure and cholesterol levels, thus reducing the risk of heart attacks and strokes. 

Some doctors have been using GLP-1 drugs approved for diabetes, such as Danish drugmaker Novo Nordisk’s (NVO) Ozempic and Eli Lilly’s (LLY) Mounjaro, as off-label prescriptions to treat obesity. As of February, the Food and Drug Administration (FDA) has approved three GLP-1 drugs for obesity treatment including Wegovy and Saxenda from NVO and Zepbound from LLY. Pharmaceutical companies Amgen (AMGN) and Pfizer (PFE) have ongoing GLP-1 clinical trials and their drugs are projected to become available within a few years.

Shares of early entrants into the burgeoning GLP-1 market, NVO and LLY, skyrocketed around 150% over the last 18 months compared to the S&P 500 Pharmaceutical industry’s 25% gain. Over the last year, NVO’s market capitalization surpassed food and beverage conglomerate Nestle, consumer electronics and appliance maker Samsung, and auto manufacturer Toyota to become the second largest non-U.S. stock behind Taiwan Semiconductor Manufacturing Company. Meanwhile, LLY has become the second-largest non-technology or technologyadjacent stock in the S&P 500, behind only Berkshire Hathaway (BRK/B).

GLP-1 drugs’ hype led to stocks in other industries declining as investors considered the drugs’ secondary effects. Investors inferred that the potential for reduced appetites and lower body weights could hurt sales for food companies, joint replacement products, and glucose monitors and insulin pumps for diabetics.

However, many of these stocks have rebounded as investors’ concerns appeared to have been overstated and some company executives pushed back on the gloomy narrative while highlighting their healthy earnings growth.

The drugs likely face a variety of hurdles for widespread adoption including high cost, side effects, and patients’ commitment to lifelong use to avoid weight regain. For many people the biggest constraint is the drugs’ considerable cost at over $1,000 per month. This mostly falls on patients since only 20% to 30% of privately insured Americans have coverage for GLP-1 drugs and Medicare does not cover obesity drugs. A growing number of employer insurance plans that offer the drugs are discontinuing reimbursement or adding patient requirements such as a high body-mass index (BMI) because they cannot sustain the cost and are suspicious about inappropriate use for non-obese patients trying to lose only a few pounds. The cost of the drugs is expected to come down over time as competitive pressure increases from new companies entering the market.

The most common side effects are unpleasant gastrointestinal symptoms including nausea, vomiting, diarrhea, and constipation.

Muscle loss typically accompanies patients’ weight loss, which poses a greater risk for older patients. The side effects are important because patients need to remain on the drugs to avoid weight regain. Recent studies found that discontinuation of the drugs resulted in patients regaining around two-thirds of their lost weight. The studies have also shown that patients’ weight loss peaks after six to nine months on the drugs. The high cost, unpleasant side effects, and indefinite use even after their weight loss stopped might be prompting some patients to discontinue their use. A large Wegovy study had a high discontinuation rate among the 17,000 patient population. Despite these hurdles, the long-term growth trajectory of GLP-1 drugs still looks encouraging given the multitude of societal health benefits that accompany a reduction in obesity.

by Dan Kupiec, CFA, Senior Investment Analyst at MainStreet Advisors

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Source: Bloomberg, Morningstar, Wall Street Journal