The healthcare sector has lagged the broader market this year. While the stock market as a whole has produced double-digit gains, a lot of healthcare stocks have gone nowhere.
However, there is one sub-sector of healthcare that has generated huge returns for investors in 2023 and that’s obesity drug stocks. Just look at the share prices of the two biggest players in this space, Eli Lilly and Denmark’s Novo Nordisk. As of 31 August 2023, the former is up about 50% year-to-date — outperforming the likes of Apple, Microsoft, and Alphabet — while the latter has risen over 37%.
So, what has been driving these big gains? And how can investors gain portfolio exposure to this area of healthcare?
Excitement around weight-loss drugs
The recent outperformance in this area of the market can be attributed to excitement around the long-term potential of a class of drugs known as glucagon-like peptide 1 (GLP-1) agonists.
GLP-1 agonists are nothing new. For nearly 20 years now, they’ve been used to treat diabetes (Eli Lilly and Amylin Pharmaceuticals scored the first US Food and Drug Administration (FDA) clearance in 2005 with a product called Byetta).
However, in recent years, it has come to light that these drugs can be very effective as weight-loss treatments. As well as stimulating the production of insulin, they also have an impact on the digestive system, suppressing hunger signals sent to the brain and curbing appetite. As a result, diabetes drugs companies have been developing injectable GLP-1 drugs specifically aimed at treating obesity.
One product that’s already on the market is Novo Nordisk’s Wegovy. This drug — which has been shown to help patients lose about 15% of their body weight — received US FDA approval in June 2021. Novo Nordisk has also developed Ozempic, however, this has only been approved by the FDA for the treatment of diabetes, despite the fact that it has the same active ingredient as Wegovy (Wegovy is considerably stronger than Ozempic).
Meanwhile, Eli Lilly’s Mounjaro (which is already approved for diabetes treatment) could be approved for obesity treatment by the FDA later this year. It has helped patients lose up to 16% of their body weight in trials. Eli Lilly is also working on a new product called “triple G,” which is designed to mimic the action of the GLP-1 hormone and has demonstrated even more powerful effects when it comes to weight loss.
Now, despite the high cost of these drugs (Wegovy costs over $1,300 per month in the US), they’ve received a lot of interest from consumers. Social media hype and celebrity endorsements have played a role here. With celebrities such as Elon Musk, Charles Barkley, and Amy Schumer admitting that they have used Ozempic for weight loss, the product has been flying off the shelves and many countries have faced shortages. As for Wegovy, there has been so much interest from consumers since its launch that Novo Nordisk has been unable to meet customer demand. Novo — which has raised its guidance twice this year already on the back of this strong demand — has been forced to reduce the supply of starter doses to the US market to ensure that there are enough supplies for existing patients.
However, looking ahead, demand could be set to increase significantly. That’s because, earlier this month, a study found that Wegovy can actually cut the risk of heart attacks and strokes in non-diabetic people with obesity by 20%. In other words, the drug has a range of other health benefits. These additional benefits could help to convince insurance companies to pay for the drugs, which are currently seen as “lifestyle” drugs.
Clearly, investors see demand skyrocketing from here, as the study results pushed Novo Nordisk’s market cap up over the $400 billion mark, making it the largest company in Europe followed by LVMH. The news also put a rocket under Eli Lilly’s share price due to the fact that its obesity product is not far away now.
Given that these obesity drugs need to be taken continuously to see the desired results (like blood pressure medication), the companies producing them could be set to enjoy a steady stream of income for many years to come.
An “iPhone moment”?
The approval and launch of obesity drugs is certainly a big deal. Some believe these developments are on par with game-changing moments in society such as the launch of the iPhone back in 2007 or the launch of Uber in 2011.
One thing we know for sure is that the market for obesity drugs is enormous. According to Barclays — who have dubbed obesity the “story of this decade” — the industry could be worth $200 billion by 2030. Given the market size, some analysts believe this class of drugs could become one of the pharma industry’s biggest success stories.
On the back of Wegovy’s recent success, other pharma companies are scrambling to develop their own obesity products. For example, Pfizer is currently developing a twice-daily GLP-1 pill called danuglipron. It believes this could potentially bring in $10 billion in revenues per year in the future. Similarly, Amgen is working on an experimental prodigy called AMG 133, which will mimic GLP-1 while inhibiting the GIP hormone, which is thought to play a key role in obesity. With the number of people around the world with obesity currently standing at over 1 billion according to the World Health Organisation, there should be enough room for multiple players.
Investing in diabetes/obesity stocks
Those interested in gaining portfolio exposure to this exciting growth industry may want to check out eToro’s Diabetes-Med Smart Portfolio. While this portfolio is predominantly focused on companies fighting the global diabetes battle, it also provides exposure to the major players in the obesity drug market, Eli Lilly and Novo Nordisk.
You can find more information on the Diabetes-Med Smart Portfolio here.
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