This article is being published in instalments, of which this is the first, for context.
INTRODUCTION
Two macrotrends have been drivers of a handful of the best performing stocks over the last year or so: artificial intelligence (AI) and anti-obesity – or weight-loss – medications. Some companies are truly on the “front line" of these emerging drivers, including NVIDIA (NVDA, +300% one-year return) for AI and Eli Lilly (LLY, +135% one-year return) for weight-loss drugs. Other companies are experiencing indirect effects of AI and anti-obesity drugs. For example, AI can improve efficiency and productivity of companies that migrate to AI, and in many cases, can reduce labour costs. Similarly, the effect of new anti-obesity drugs – which are believed to reduce not only cravings for food but also certain addictions – are having collateral effects (mostly adverse) on companies involved in snack foods, drinks and fast food.
In an article I wrote several weeks ago, I discussed the semi-conductor (“chips) industry and the various players involved in the value-chain from design to manufacture. You can find that article here. This article will focus on anti-obesity drugs and the expected macro drivers of growth for the companies involved in this area, specifically the two companies that are at the forefront of these medications: Eli Lilly (LLY) and Novo Nordisk (NVO). To make the topic slightly easier to digest, I will publish the article in three instalments, as follows:
Overview of the market, including the drivers, the “technology” and the background associated with evolving obesity medications,
The two major pharmaceutical companies currently leading the pack in anti-obesity medication, Eli Lilly and Novo Nordisk, and
A “quick & dirty” analysis of the share prices and associated valuations of these two pharma giants.
It is important I mention two further things at the onset:
I am not a doctor, scientist or research analyst, so take everything I say with a grain of salt, and
I have in the past owned, or currently own, shares in both LLY and NVO.
THE MARKET FOR ANTI-OBESITY DRUGS
History
The approved anti-obesity medications have their foundation in therapies that were developed to treat Type 2 diabetes, which can be traced back to the discovery of insulin as a treatment for diabetes in the 1920s. Over the ensuing decades, improvements for diabetes medications were made that also reduced risk of cardiovascular diseases and reduced or eliminated side effects related to the medications. Several pharma companies, including Eli Lilly and Novo Nordisk, were pioneers in the development of medications to treat diabetes using glucagon-like peptide-1 (GLP-1) agonists, which mimics a hormone secreted naturally by the intestinal tract when a person eats. According to Biopharma PEG, the rollout of approvals for diabetes medications using GLP-1 agonists receptors progressed as follows:
Exendin-4 (brand name “Byetta”, Eli Lilly and Amylin) was the first GLP-1 approved by the Food & Drug Administration (“FDA”) in 2005. It was an injection taken twice/day.
Liraglutide (brand name “Victoza”, Novo Nordisk) was approved by the European Medicines Agency (“EMA”) in 2009 and the FDA in 2010, which was the first GLP-1 to also offer improvements in cardiovascular conditions. It was an injection taken once/day.
Dulaglutide (brand name “Trulicity”, Eli Lilly) was approved by the FDA in 2014, and was the first once/week GLP-1 medication (injection) to treat diabetes.
Semaglutide (brand name “Ozempic”, Novo Nordisk) was approved by the FDA in 2017 and the EMA in 2018. It was also a GLP-1 medication for diabetes taken via injection once/week. Semaglutide under the brand name “Rybelsus” (Novo Nordisk), approved by the FDA in September 2019, was the first oral medication (taken once/day) using GLP-1 receptors to treat diabetes.
In May 2022 and September 2022, Tirzepatide (brand name “Mounjaro”, Eli Lilly) was approved by the FDA and the EMA, respectively. Mounjaro activates both GLP-1 receptors and GIP receptors (glucose-dependent insulinotropic polypeptide), a hormone that may complement the effects of GLP-1 receptor agonists.
As these medications were being tested and approved, other developments in diabetes technology – like continuous glucose monitoring systems, insulin pumps, telemedicine and precision medicine – have advanced diabetes management.
How do GLP-1 agonists work?
GLP-1 agonists stimulate the production of insulin by the body when sugar levels rise after eating, lowering blood sugar. In addition, GLP-1 medications reduce the amount of sugar (glucose) that your liver makes and slows down the movement of food from the stomach into the small intestine. As a result, a person feels full faster and longer, so he or she eats less. You can see how these drugs became the pre-cursors to anti-obesity drugs, and also why Eli Lilly and Novo Nordisk – pioneers in the evolution of increasingly effective GLP-1 agonists receptor treatments for diabetes – have also led in the development and regulatory approval of weight-loss drugs.
Weight-loss treatments / medications
Weight-loss treatments of various types have been around many years, but the efficacy of these anti-obesity mediations (AOMs) was mediocre at best with an expected loss of 3% to 11% of body fat. However, GLP-1 medications to treat diabetes were found to sharply increase the expected loss of body fat, in some cases to 15% or more. This propelled GLP-1 medications from diabetes treatment to the broader category (and larger market) for obesity-treatment. With their dominance in diabetes treatments, both Novo Nordisk and Eli Lilly were not surprisingly again at the forefront of the development of medications to specifically treat obesity, namely brand names Wegovy (NVO) and Zepbound (LLY). Wegovy (generic name semaglutide) was approved by the FDA in June 2021, and Zepbound (generic name tirzepatide) was approved by the FDA in November 2023, both specifically as weight-loss drugs (although note that both are also used for diabetes medications). The efficacy of Zepbound in clinical trials has been better than Wegovy. If you want to dig deeper into the technicalities and science of anti-obesity drugs and their efficacy, the National Library of Medicine has a good overview here.
Anti-obesity drugs are injectables, requiring one injection/week. Eli Lilly and Novo Nordisk, and perhaps other pharma companies, are working on tablet forms, but they are not yet approved by regulatory bodies. Therefore, as it stands currently, anti-obesity drugs require the production of both the actual medication and the injectable pens. I understand that it is largely the manufacture of the injectable pens (rather than the production of the medication itself) that is causing bottle necks in the supply of anti-obesity drugs.
The cost of anti-obesity medications in the US is currently around $1,000/month, assuming it is self-pay (i.e. not covered by insurance). However, when insurance covers the treatment, the reductions in headline costs to patients can be substantial, as much as 70% or more.
It should also be noted that anti-obesity drugs can cause side effects, mainly affecting the digestive tract. Things like diarrhoea, upset stomach (nausea or vomiting), heartburn, gas or constipation might occur and may cause some people to stop treatment. Often, these effects subside gradually over time. I read that up to 20% of people that try anti-obesity medications ultimately conclude that they cannot continue with them due to side effects.
Qualifying for anti-obesity medications
In order to be prescribed FDA-approved anti-obesity drugs in the US, a person must have
a Body Mass Index (BMI) of 30 or higher, or
a BMI of 27 or higher and at least one weight-related medical condition.
In the UK, the requirements are similar. For doctors to prescribe weight-loss medication, a patient must have a BMI of 30 or more and a referral from a weight-loss specialist.
These medications will probably need to be used for a lifetime, since people coming off of them have been shown to gain most of the weight back over a period of several months.
Also, it is fairly obvious that illegal “knockoffs” to the FDA-approved medications seem to be available on the black market, and in some cases are being used by “Hollywood types” and influencers, many of which would not meet the requirements for treatment for obesity. There is also some concern that doctors might be “coerced” (or duped) into prescribing obesity-reducing drugs for people that otherwise might not be eligible for them based on the BMI and related medical condition requirements.
Both Eli Lilly and Novo Nordisk are emphatic in their disclosure documents and advertisements that anti-obesity drugs, to be most effective, should be accompanied by lifestyle changes, including eating less / better and exercising more. Whether or not this occurs in practice is difficult to say.
Global obesity: the issue (and growth engine for anti-obesity drugs)
According to the World Health Organization (WHO), 2.5 billion adults (43% of adults) in the world were overweight in 2022, and 890 million were considered obese. The level of global obesity doubled between 1990 and 2022, so the world is slowly but surely getting less healthy. Clearly, the market for obesity-drugs is huge, especially in the US where over 40% of people are now obese (BMI of over 30). There is little doubt that things like over-indulging in food and drink, eating more and more sugar- or fat-laden foods, and living increasingly sedentary lifestyles, are causing the percentage of the global population that is overweight to increase.
Richer countries tend to have higher percentages of people that are over-weight or obese, with the exception being Japan. This is not be surprising if you think about it. The obesity data below by country was extracted from the Global Obesity Observatory and will give you a sense of the percentage of people that are overweight (BMI of 25-29.99) and obese (BMI of 30+) by select countries. As you can see, the United States is a leader in something it probably wishes it were not because the costs are considerable in terms of addressing the costs of obesity.
To provide further context for the size of the potential market, circa 10% of the US population has diabetes, of which 90%-95% is Type 2 diabetes. This is a much more modest percentage than the 70%+ of Americans that are overweight or obese (see table above), suggesting just how large the market for anti-obesity drugs might be.
Expected growth of anti-obesity medications
The global market for weight-loss drugs was estimated by several sources to be between $2 billion and $3 billion in 2022. Morgan Stanley projects the market could increase to $77 billion by 2030, as the graph below illustrates (extract from research report here).
In an October report here on anti-obesity medications, Goldman Sachs was even more ambitious, believing the market could increase to $100 billion globally by 2030.
Achieving this remarkable growth for anti-obesity drugs is predicated on several factors that look almost certain to occur, including:
Ongoing growth of obesity globally, which shows no signs of abating,
Improving efficacy of anti-obesity medications, making them more effective as far as weight loss for obese people,
The development of tablets (as opposed to injectables), making anti-obesity medications much easier and less expensive to administer, also eliminating the “bottle neck” associated with the manufacture of injectable pens, and
Lower cost of the weight-loss medications for consumers as manufacturing costs decrease and competition increases.
It is the remarkable expected growth of global obesity that is largely driving the stock prices of LLY and NVO, both dominant in the market for anti-obesity medications, with substantial first-mover advantages and wide moats. I will discuss the two main players in the anti-obesity medication market in the second instalment of this article tomorrow.