Pharmaceutical companies Eli Lilly and Novo Nordisk have recently dominated international headlines with their blockbuster weight loss drugs. These new cutting-edge medications, known as GLP-1 antagonists, help manage blood sugar levels and reduce hunger and food intake, and are currently used mainly to treat obesity and type 2 diabetes.
However, strong evidence is emerging that these drugs are also effective at treating a range of health conditions including cardiovascular disease, Parkinson’s and Alzheimer’s.
While Eli Lilly NYSE:LLY and Novo Nordisk [CPH:NOVO] are currently leading the way in the production of these medications with drugs such as Wegovy/Ozempic (Novo Nordisk) and Zepbound/Mounjaro (Eli Lilly), dozens of other companies are working on similar treatments, making the most of recent developments.
As the market leaders, Novo Nordisk and Eli Lilly have seen their share prices soar in recent months, with Novo Nordisk up 352% and Eli Lilly up 381% over one year. This year, sales of GLP-1 antagonists are projected to reach $6 billion, with some speculating that this drug class could be the first to reach $1 trillion in sales.
Obesity is becoming a global epidemic
Obesity is a global epidemic, and one that is getting worse, with some estimates suggesting that there are over a billion people worldwide suffering with severe excess weight and related health issues. The emergence of treatments for diabetes and obesity via weight loss drugs rather than managing symptoms through insulin shots has a wide variety of positive implications.
Given the efficacy of the drugs in managing weight, drugs like Wegovy and Ozempic are in huge demand. Sales estimates for the class of drugs (including diabetes) are $165bn.
The potential for weight loss drugs is massive
“The combination of incredible efficacy, long-term safety, and a massive addressable market in terms of global patient prevalence has created the largest therapeutic market opportunity I have ever seen in my career,” says Trevor Polischuk, who manages the Worldwide Healthcare Trust. “And that is just in obesity. The impact that these drugs are having in other areas, including but not limited to diabetes, cardiovascular disease, kidney disease, liver disease, arterial disease, heart failure, and potentially even Alzheimer’s disease is incredible. As the newest data was emerging last year, we began to forecast a market potential of $100 billion by 2030. Now we are wondering if it could be $200 billion.”
The gravity of the obesity crisis and the escalating demand for solutions has prompted biotech and pharma companies to invest billions into developing and manufacturing next-generation anti-obesity medications. Some analysts forecast that peak sales will be between $50 billion and $150 billion by 2030.
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“Some of these firms offer little more than compelling narratives and insufficient data, seeking to capture investor interest and boost their valuations,” notes Marek Poszepczynski, manager of the International Biotechnology Trust. “Such trends risk creating an ‘obesity bubble’, with the companies involved rising to unsustainable and unjustifiable valuations.”
So far, the biggest problem facing Novo Nordisk and Eli Lilly has been their inability to ramp up supply quick enough to meet the huge demand levels for their obesity drugs. Both companies have invested significantly to overcome this issue and we are unlikely to see significant supply constraints beyond 2024.
Demand is outstripping supply of obesity drugs
Obesity drugs require the manufacturing of peptides, a process that takes both time and effort since they are not small molecule drugs. Both Eli Lilly and Novo Nordisk have recently announced a combined $50-60 billion to be put aside for manufacturing plants, which could address such issues and allow them to keep pace with growing demand. This opens the door to other companies to enter the market with competitor products and many are seeking to take advantage of the situation.
According to Jamie Ross, portfolio manager of the Henderson EuroTrust, there are three major risk factors to focus on here. Most importantly, Novo Nordisk and Eli Lilly have a head start, but they will one day face competition. This competition could result in a still-rational market where pricing is robust and volumes grow strongly, but changing competitive dynamics could also result in aggressive price competition if the products competing are relatively undifferentiated from each other.
Second, political pressure, especially in the US, or changing regulatory treatment, could also put unanticipated pressure on pricing. We have heard Bernie Sanders in the US call for price reductions for Novo Nordisk’s products (whilst seemingly ignoring the US company Eli Lilly) and this noise could increase, leading to faster than anticipated price reductions.
Finally, and this is unlikely given extensive testing and how much we now know about these drugs, there is always the risk with pharmaceutical products that long-term usage results in side-effects that were unanticipated.
So what about the competition?
Cheaper alternatives, whether it be in the form of generic drugs or ‘me too’ products that are discount priced, are a constant and familiar theme within the pharmaceutical industry. The best and most successful companies combat this with innovation – creating a better mouse trap. Despite the recent launches of Wegovy and Zepbound, both Novo Nordisk and Eli Lilly have next generation products already in late-stage development – and these developmental assets appear to be superior to what they are selling today.
“Competitors will also have to start – now – creating capacity to compete to even give them a fighting chance to take any meaningful share from Lilly and Novo in the future,” observes Polischuk at the Worldwide Healthcare Trust. “The moat that Lilly and Novo have created is huge. And if I am wrong, I think the market is massive enough, especially beyond 2030, to have more than two entrants in this space and multiple competitors could enter and be successful with blockbuster products.”
Fist mover advantage matters in this market
This will be a market where first mover advantage and manufacturing scale and capabilities will matter. Fund managers see Novo Nordisk and Eli Lilly as likely to lead the market throughout the 2020s. However, as we approach the end of the decade, we are very likely to see new drugs on the market from Roche [SWX:ROG], Zealand Pharma [CPH:ZEAL], Amgen [NasdaqGS:AMGN] and Viking [NasdaqCM:VKTX] amongst others.
In addition to this dynamic, there will also be companies involved in the value chain who will benefit. For example, Gerresheimer [ETR:GXI] make speciality syringes used in GLP-1 production and Lonza [SWX:LONN] provide outsourced manufacturing capabilities that will be in increasing demand.
Current GLP-1s require weekly injections, a somewhat cumbersome method compared to oral tablets, so many companies including Novo Nordisk and Eli Lilly themselves, are attempting to develop more convenient and longer lasting treatments. Amgen and Zealand are the only sizeable biotech companies (as opposed to pharmaceutical companies) that are currently actively trying to get involved in the obesity space.
