Given that less than 3% of the 110 million obese Americans are being treated with drugs, new medications from Novo Nordisk AS (NVO, Financial) and Eli Lilly and Co. (LLY, Financial) could fatten the bottom line of both companies along with their share prices.
Novo and Lilly’s drugs are in a new class of medications known as incretins. Patients have achieved unprecedented weight loss—more than 20%-with the duo in scientific studies. We do not want to get ahead of ourselves here, but some analysts are throwing around otherworldly sales figures for the treatments at the start of the next decade, numbers that would dwarf the $20 million generated annually by the best-selling drug in history, Humira.
Novo needs to execute better if its drug Wegovy is to take off. The company stumbled out of the starting gate due to supply problems that cropped up late last year. They have continued in 2022, prompting the company to backtrack on its stated plans to fully launch the drug in the second half of 2022; the unveiling is now expected at the end of the year.
When Novo got U.S. approval in 2021 to market Wegovy, the company’s share price climbed 50% over the following year, topping out at about $122 in early April. The delayed introduction soured some investors, and Novo now trades at about $106. That still gives it a hefty multiple of nearly 36 based on the trailing 12 months, well above most of its peers.
Eli Lilly’s challenger tirzepatide, like Wegovy, is given by weekly injection. It allowed people to lose more than 20% of their weight in a study reported in June. It is not yet approved for weight loss. It received authorization for type 2 diabetes in May, when it was branded Mounjaro. The company had planned to ask the Food and Drug Administration for approval to treat weight loss late next year, but it recently said it would talk to the agency about moving the date up.
Mounjaro is one reason that Eli Lilly is a Wall Street favorite among pharma stocks. At its recent price of around $300, it trades at 34 times the consensus forward 12-month earnings forecast, or twice the average multiple of its sector.
Taking on the weight of the world could make Novo Nordisk and Eli Lilly into two of this decade’s best drug stocks, reported Fidelity. But there are some good reasons for investors to be wary about jumping into the stocks based on the potential of the incretins.
For one, Novo has most of its chips on products like Wegovy, without any other potential blockbusters in the pipeline. Eli Lilly is in much better shape. The Indianapolis-based industry giant’s pipeline is diversified, with treatments aimed at Alzheimer’s disease, autoimmune disorders and cancer.
Wall Street is enthusiastic about the new class of obesity drugs. At the start of June, JPMorgan’s Richard Vosser upgraded his rating on Novo stock from neutral to overweight, doubling his sales forecast for the company’s incretin products. He thinks the twins Wegovy and CagriSema will surpass Eli Lilly’s product sales and add up to $27 billion of the $40 billion total revenue for Novo in 2030. He says that Novo’s stock could reach $127 next year.
Michael Leuchten of UBS has a different opinion. A few weeks after Vosser’s upgrade, Leuchten dropped his rating on Novo from neutral to sell. He thinks that Eli Lilly’s incretins will outperform and outsell Novo’s, leaving less upside in the latter’s sales than its premium-priced stock requires. He is concerned that Novo’s revenues are too concentrated, projecting its semaglutide-based products could account for 60% of company sales in a few years.
Conversely, Eli Lilly could capture the lion’s share of the diabetes and weight-loss markets for these products, and still not have the incretins rise above 40% of its total revenue, according to UBS analyst Colin Bristow. Incretins could bring in about $22 billion of the $52 billion that Bristow projects for the company in 2030. He thinks its offerings will remain best in class, an advantage already built into Eli Lilly’s share price, the primary reason for his neutral rating.
If incretins are to achieve their full potential, one big issue to overcome is insurance reimbursement. Incretins treat, not cure, obesity. This means patients will need the shots for the foreseeable future, a cost health payers may not be ready to absorb.
“Many insurers do not cover anti-obesity medicines,” Maria Cecilia Asnis, an endocrinologist who runs the medical weight-loss program at Stamford Health in Connecticut, said. “List price is also a barrier. People are going out of the country to get these medications.”
Patients without coverage are looking at shelling out $1,000 to $1,500 for Novo’s Wegovy, Asnis said. What Novo and Eli Lilly have to demonstrate is that helping people lose weight will reduce the incidence of other more costly health problems like diabetes and cardiovascular disease. That proof is going to require clinical trials if incretins have any hope of qualifying for reimbursement.
