Look who’s riding up behind the Magnificent Seven: It’s the Obesity Two.
That is, the
S&P 500 index
is still under heavy sway from a big tech septet that includes
Microsoft
and
Nvidia.
But
Eli Lilly
with its newly approved weight-loss drug is suddenly No. 9 by market value, at nearly $600 billion, up from less than $100 billion in just over five years.
Lilly’s top competitor,
Novo Nordisk,
is Danish, so it’s not in the S&P. If it were, its market value of just over $450 billion would put it at No. 13, replacing
JPMorgan Chase.
Novo stock has multiplied more than fourfold in price in five years.
Is this a bubble in slim-down stocks? Hard to say.
A billion people worldwide are too heavy, and these new meds work. Lilly’s tirzepatide, which is already sold for diabetes as Mounjaro, just received a regulatory nod for obesity, for which it will be marketed as Zepbound. In a 72-week trial, those on the highest dosage lost an average of 22.5% of their body weight, or 52 pounds. Meds like this must be taken indefinitely. Lilly says that Zepbound will list for $1,059.87 for a month’s supply, which it calls 20% cheaper than Novo’s drug.
Users with drug plans could pay significantly less, but even so, obesity is now one of the biggest commercial drug opportunities ever. Consensus estimates for drugs that are already identified add up to $67 billion in annual sales by 2032. Barclays says the overall category could hit $100 billion by 2030. That means obesity meds will outsell immuno-oncology ones, another group with a vast patient population and high list prices.
That creates some tricky stock math. Lilly trades at 90 times this year’s earnings forecast—or 20 times estimated earnings for five years from now. For Novo, the numbers are 39 times and 18 times. Maybe there’s still opportunity there for patient investors, but what if the growth estimates don’t pan out?
Oppenheimer analyst Jay Olson has an idea for investors who are drawn to the size of the obesity market, but put off by the valuations of Lilly and Novo. Two ideas, actually.
Begin with the observation that Lilly and Novo set out to treat diabetes, and ended up with obesity drugs. The two diseases are closely related. In fact, obesity is surrounded by a cluster of comorbidities, or ailments that tend to occur simultaneously. These include heart disease, sleep apnea, asthma, knee and hip deterioration, cancer, and an inflammatory condition called NASH, or non-alcoholic steatohepatitis.
Side note: Years ago, a doctor told me I had a fatty liver, which sounded odd, because I have a lot of fatty things. Why were we picking on my liver? It turns out that high liver fat can lead eventually to NASH, which is bad, and that can lead to a scarring condition called cirrhosis, which is worse. Basically, you can pickle your liver like an ardent alcoholic, only with Haagen-Dazs instead of Jim Beam. My liver has tried to make better decisions since that doctor called it fat. The American Liver Foundation reckons that 25% of U.S. adults have fatty livers, and that 5% have NASH.
Comorbitities are the key to segmenting the obese population, which, with new obesity meds under development from
Pfizer,
Amgen,
and others, could be the key to standing out from the pack, Oppenheimer’s Olson says. “Every one of these patient groups is unique in terms of what sort of disease is going to be the primary manifestation of the obesity,” he says.
Think of Lilly and Novo as leaders in the market for treating obesity plus diabetes. Amgen and a small company called
Viking Therapeutics
are “set up perfectly” for obesity plus heart disease and NASH, respectively, says Olson.
For starters, both companies have their own obesity meds in the works. In small, early trials, both reported rapid weight loss—14.5% over 12 weeks for Amgen’s drug, and 8% over 28 days for Viking’s. Results from larger studies for both are expected late next year. Amgen’s drug has potential as a monthly injection; current drugs on the market are injected weekly. Viking is working on a pill version of its drug, making it “one of the front-runners” in that race, says Olson.
Amgen already has a blockbuster drug called Repatha for treating high levels of the bad kind of cholesterol. The company hasn’t said whether it plans to combine Repatha, also a monthly injection, with its future obesity treatment, or whether such a combination is even feasible. But Olson views such a combination as likely. “Now you’re talking about a really potent cardiovascular risk-factor reduction combination,” he says.
The same goes for Viking and NASH. It has a pill in development that was shown this year to have sharply reduced liver fat in Phase 2 trials. Results compare well to those of a further-along drug from
Madrigal Pharmaceuticals
that is expected to be the first to win approval. Viking hasn’t indicated whether it plans to combine its NASH drug with its future obesity treatment, but Olson believes that the two drugs could eventually be taken as a single daily pill.
Much of this is speculative. But Amgen itself is a cash generative heavyweight trading at 15 times earnings with a 3.2% dividend. Viking is a risky pipsqueak, with no meaningful revenue predicted until three years from now. Shares have tripled in price in a year. The stock market value is $1.2 billion.
Olson says that prices for obesity meds are sure to tumble as competition rises, especially if Amgen gets involved. “They’re all about volume- driven growth,” he says. The company launched Repatha in 2015, pricing it at more than $14,000 a year, which Olson points out is close to the cost of obesity drugs. Five years ago, Amgen slashed the price to less than $6,000.
Write to Write to Jack Hough at [email protected]. Follow him on Twitter and subscribe to his Barron’s Streetwise podcast.
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