For years, we have dreamed of a true weight loss "pill" -- and now we need it more than ever.
Obesity affects more than 40% of adults in the United States and costs the health care system $173 billion annually. While we have drugs that treat the many consequences of obesity -- including diabetes, hypertension, high cholesterol, and various cardiovascular ailments -- a drug that targets obesity itself could be big winner.
Morgan Stanley makes a compelling argument that treatments that target obesity directly is the next blockbuster pharma category, with potential sales greater than $50 billion by 2030. This is why I believe Novo Nordisk (NVO) , the Danish pharmaceutical giant, is the stock to own to capitalize.
Historically, drugs that fight obesity have had significant side effects and limited efficacy, leading to restricted use and poor insurance reimbursement coverage. Novo and Ely Lilly (LLY) have developed a new class of drugs to fight obesity, GLP-1 drugs, with a sound safety profile and demonstrably efficacious results. Patients taking Novo's drug Wegovy lost an average of 35 pounds, or about 15%, of their body weight, compared to six pounds, or roughly 2.5% of body weight, in the placebo group.
While weight loss results are noticeable, Novo and Lilly are studying the promise of the secondary benefits, such as reduced risk for heart attack, cardiovascular disease, strokes, and diabetes. Novo's "Select" trial has been running for over four years, with more than 15,000 participants, striving to determine the derivative effects of Novo's weight loss drug on reducing heart disease and stroke cases in obese patients. The study's conclusion and results are due in mid-2023 and could prove to be a major catalyst for the shares, if the results are statistically significant.
Morgan Stanley has an optimistic take on the trial's outcome, citing three reasons. First, there's an existing body of data demonstrating that bariatric surgery leads to lower risk of major adverse cardiovascular events. That procedure, however, is an extreme medical intervention, thus the data suggests that another effective weight loss treatment could also show similar benefits. Two, meta-analysis of GLP-1 drugs in non-diabetic obese and overweight people reads positive for supporting medical benefits. And, three, the GLP-1 drugs have demonstrated positive cardiovascular outcomes across a series of phase-3 trials in type-2 diabetes patients.
Novo also has a trial of oral semaglutide, a diabetes and obesity drug, with results expected in the first half of 2023.
Undoubtedly, waiting for trial results and for the health care system to recognize the benefits of obesity drugs is a big-picture idea with an uncertain outcome. Yet, it's too big to ignore. If Morgan's thesis is correct, treating obesity directly will medically be a far more appealing choice than treating the effects of obesity. Eli Lilly and Novo garner a premium valuation as they are potentially on the cusp of enormous growth in this category.
Novo Nordisk stock is only followed by a couple of domestic analysts. Cowen named Novo as one of its best ideas for 2023. The firm estimates top- and bottom-line compound growth from 2021-2027 to be 10%, justifying the premium multiple.
This past Sunday, "60 Minutes" profiled Novo's obesity weight-loss drug, Wegovy, noting its effectiveness for weight loss and the lack of health insurance coverage for desperate patients. Insurance companies have rejected coverage of Wegovy, at the cost of $1,300 per month, classifying it as a vanity drug akin to Viagra or Botox. Such high-profile media scrutiny of insurance companies will likely ease the way for medically beneficial reimbursement for this class of drugs.
Indeed, the promise of Novo's obesity drug is known, reflected in the stock's current high price-to-earnings of around 40, while Eli Lilly trades with a lofty 46 price-to-earnings. Even so, there's enough growth opportunity and upcoming catalysts to make for a worthwhile long-term investment, especially on pullbacks.
