This interview was a part of the Investing Insights Podcast. You can listen to the entire episode here.
There’s a lot of conversation on social media and elsewhere about the weight loss drug trend. The chatter has been around semaglutide, sold under brand names like Wegovy or Ozempic. These drugs, while intended for treatement of diabetes, have also seen users lose (sometimes significant) weight. This in turn has lead to these drugs becoming popular on social media. But who is making them? And can you make money by buying the manufacturers of these hot drugs?
To find out, I spoke to Karen Andersen, a biotechnology strategist for Morningstar Research Services. She just published a report about these weight loss drugs, that could be a $60 billion market in 10 years. She thinks Novo Nordisk (NOVO) and Eli Lilly (LLY) will continue to lead the obesity market over the next 10 years, with incremental innovation in this rapidly expanding market that will support their wide economic moats. Here are edited exerpts of our conversation:
Why Is Everyone Talking About Ozempic? Is it Just the Weight Loss?
Saldanha: Let’s start with the basics. Why is everyone talking about these drugs? Are they "miracle weight loss" achievers?
Andersen: We’ve been in a situation for the past couple of decades where there just really haven’t been a lot of good treatments, and there’s a history with obesity drug therapies of side effects that have taken drugs off the market. There have been drugs that have failed while still even in clinical trials, and then the drugs that were on the market were only leading to something like 5% weight loss, which is not really a significant enough level to really make a difference, I don’t think, in patient lives. So, when we started seeing this next generation of drugs getting to market, and so this would be, for example, Novo Nordisk Wegovy approved in 2021, 15% average weight loss is much more significant for patients. And so I think with more than 40% of Americans falling into the category of being obese, I think that’s going to be really just a significant driver of patients starting to take these therapies.
And one other thing is that I think that this could even become, there could be even more buzz around this category, if that’s even possible, if the data that Novo Nordisk is expecting for Wegovy for cardiovascular outcomes is positive. So that data could be coming any day now, and they’re going to be seeing if patients taking Wegovy actually see lower rates of heart attacks and strokes. And so if that’s true, then I think that’ll really solidify the case that some patients need this sort of therapy. It’s not a cosmetic thing; it’s more of a medical issue where these drugs can really help.
Which Biotech Companies Are Front-Runners in the Diabetes Treatment Space?
Saldanha: Now, you cover biotechnology and the companies that innovate in this space. In fact, in the past, you’ve also covered the race for the COVID-19 vaccines. What can you tell us about some of the front-runners in this space? Are there any clear favorites at this point?
Andersen: Yeah, sure. So there really are two front-runners. So I mentioned Novo Nordisk. They did just get Wegovy approved. They’ve actually been an obesity drug market player for years. They have an older drug called Saxenda that’s still on the market, but that doesn’t work quite as well, but it’s been a leading drug and about a $2 billion obesity market. But we think with Wegovy, we think Novo is going to grow to $6 billion in obesity sales just in 2023 and eventually lead to $20 billion in annual peak sales in obesity. Eli Lilly is the other company that is really one of the key players here. They have a drug called Mounjaro that is approved in diabetes and likely to get approval in obesity by the end of the year.
Weight loss with Mounjaro looks even better, potentially 20% weight loss, and so we think sales of that could even be stronger than what Novo Nordisk is going to see with Wegovy. Both of these companies also have very strong pipelines that I think will keep them relevant in the long term, so eventually, hopefully seeing weight loss closer to 25%, which is approaching the levels that we’ve seen historically with more-aggressive therapies, things like bariatric surgery.
Why Is Pfizer Underperforming?
Saldanha: Some of these stocks, like Pfizer, for example, have been underperforming for a while now. Why is that?
Andersen: Yeah. So Pfizer, specifically—they’re a company that they’re a little bit late to the game in obesity relative to Novo Nordisk and Eli Lilly. They have a couple of oral obesity drugs that they’re trying to pick from, and one of these will likely move into the final stages of clinical trials next year. So they’re in a position where they might reach the market by around 2026, a little bit delayed. I think the shares of Pfizer, though, it’s a much more diversified company. The shares are impacted by a lot of different things, and I think specifically this year, one of the reasons why they’re underperforming is because of the huge drop in COVID vaccine sales and demand as well.
These Semaglutide Drugs, While Popular for Weight Loss, Do Come With Risks
Saldanha: What are some of the risks that we are facing with these medications?
Andersen: That’s a great question given all of the enthusiasm over their efficacy, and the obesity space historically has had a bit of a checkered past when it comes to drugs. We had the fen-phen issue with damage to heart valves back in the ‘90s. There have been other drugs since then that have had cardiovascular problems or even cancer risks, and so this is definitely an area that we’re watching. The encouraging news is that Ozempic and Wegovy, which is basically this single active ingredient from Novo Nordisk, has been on the market as a diabetes therapy for the past several years. So patients are taking this chronically, and there haven’t been any red flags coming up in terms of serious safety issues. The main issue has been tolerability, so a lot of patients do have issues with things like nausea or diarrhea, but not to the level typically where it’s considered just a serious side effect.
I think that with Mounjaro, Lilly’s drug, it operates in a little bit of a different way, and it hasn’t been on the market as long. So even though there hasn’t been anything concerning bubbling up yet, that’s definitely something that we would watch as more and more patients are interested in taking it. But one of the bigger risks, actually, that’s still not sure how this is going to play out, is what about the risk of regaining weight? So it seems so far from what we’ve seen that if patients do stop taking therapy once they achieve their goal weight, they’re very likely to regain the weight. And so I think we’re going to see a lot more information about whether patients could continue taking this chronically, whether their insurance companies are willing to pay for it chronically, and potentially, hopefully, some good news on the cardiovascular benefit front that should further support being able to use these drugs chronically if needed.
Biotech Stock Picks
Saldanha: With all that in mind, what is your favorite stock pick in this space and why?
Andersen: One of my favorite names is actually Amgen. So Novo Nordisk and Lilly, yes, they’re the leaders in the space, but even assigning them about 75% of a potential $60 billion obesity market by 2030, we’re still not getting a forecast for free cash flows that’s getting us to a price that’s above where it’s trading, so they actually do look a little bit overvalued at recent prices. Amgen, on the other hand, is a company that, there have been some uncertainties recently regarding a bigger acquisition that they’re doing of Horizon Therapeutics. They’ve also faced some pricing pressure for some of their existing drugs that they’re marketing, so it’s actually an opportunity to get exposure to a company that has an obesity drug in development at a fairly decent price. Their drug, there isn’t much data on it. It’s in a midstage study right now, but it looks like it could be differentiated. So far, the data are showing efficacy that looks similar to Wegovy over only a short three-month period, actually, and the drug is moving into, it’s currently in phase 2 trials and could be administered as infrequently as once every quarter. So there could be some potential for differentiation from the leaders there.
Saldanha: Thank you so much for being here today, Karen.
Andersen: Thank you.
