Could These Obesity-Drug Stocks Make Your Portfolio Look Big?

We’ve all been there: struggling to zip a favorite pair of jeans after packing on a few extra pounds. The fact that it affects so many of us is what makes the prospect of breakthrough weight-loss drug treatments so exciting – and potentially so lucrative. So let’s take a look at the pharmaceutical companies that might help slim your waistline while fattening your portfolio.

Why is obesity such a big deal?

It's estimated that around 650 million people are currently living with obesity. This has some pretty serious implications for the economy and for people’s lives. The World Health Organization says obesity is responsible for 5% of all deaths around the world, which leads to a drag on global economic growth of about 3%.

The bad news doesn’t stop there: obesity is linked to over 200 other health problems, including cardiovascular conditions, osteoarthritis, kidney disease, and early eyesight loss. Together, they’re estimated to eat up around 8% of healthcare budgets.

Viewed a different way, as the body mass index (BMI) increases, so does the healthcare cost per capita. In the UK, for example, a patient with a BMI under 25 racked up an average healthcare tab of £805 ($996) in 2012, while those with a BMI over 40 racked up an average £1493 ($1848). That’s 86% more.

Costs per capita in pounds for each BMI band. Sources: Morgan Stanley and McKinsey Global Institute 2014.

So what are these breakthrough treatments?

Right now there are two major pharmaceutical companies making headlines for drug treatments.

The first is Novo Nordisk (NVO). Its weekly injectable drug Wegovy netted an average weight loss of 35 pounds – roughly 15% of body weight – during a 68-week study. The medication works by stimulating the secretion of insulin, the hormone that regulates blood sugar. This essentially shrinks your appetite and makes you feel fuller, reducing your cravings for fatty, sugary things. Investment bank Morgan Stanley is predicting that another study will show that Wegovy can deliver a 27% reduction in the risk of heart attacks, strokes, and cardiovascular deaths.

The second drug shaking things up is Eli Lilly’s (LLY) Mounjaro. Its patients lost about 52 pounds – on average 22.5% of their body weight – during the 72-week trial. I’m not making any puns here when I say that’s huge – better than any drug on the market. Mounjaro’s method is similar to Wegovy’s, but it seems to be more effective and that might be because it contains an additional hormone compound.

Now, Wegovy already has the very important FDA approval, but Mounjaro doesn’t. It’s been fast-tracked, but approval is still pending.

How big could the obesity market become?

Pretty big. Analysts at Morgan Stanley are projecting that the global obesity market could see global revenues of $54 billion in 2030 (up from $2.4 billion now), with the majority of that, $31.5 billion coming from the US.

And it could grow even beyond that: their forecast assumes only modest uptake rates for the drugs and conservative pricing assumptions. The analysts estimate that 25% of obese people will engage with their doctors by 2035 about their weight concerns (up from the current 10%), and that 55% of those people will be prescribed anti-obesity medication. The rate of prescription growth has more than doubled over the past year so the trend looks good. They estimate a monthly prescription cost of $350 by 2030. And they see Novo Nordisk and Eli Lilly dominating the industry, each carving out around 40% of the market share by 2030.

Obesity market revenue projections split into the US and ex-US, i.e. the rest of the world. Source: Morgan Stanley.

Obesity treatments are not in the top 20 categories by global spending, but they could easily climb the ranks into a top-12 position. With all the known obesity-linked health issues, Morgan Stanley believes there could be a serious shift in treatment guidelines. This could result in Congress passing potential legislation such as the Treat and Reduce Obesity Act (TROA), for example, allowing Medicare coverage for the treatments from 2025 onward.

We live in a time of social media, which can amplify knowledge about a product and send demand through the roof. Morgan Stanley’s analysis shows that social media already is creating a rinse-and-repeat cycle of education, word-of-mouth, and demand for new weight-loss drugs. Influencer and celebrity use would only catapult demand even higher.

Worldwide Google search volume for diabetes drug for weight loss (blue line) and semaglutide, the active ingredient in Wegovy, (yellow line). Sources: Google trends and Morgan Stanley.

So what’s the opportunity then?

If you ask Morgan Stanley’s analysts, they’ll tell you the top pick here is Eli Lilly: they see it as the best large-cap biopharma stock for the obesity-reduction theme. In fact, they say most of the market is underappreciating Eli Lilly’s future obesity-related sales, compared to Novo Nordisk’s. Every $1 billion in Eli Lilly’s Mounjaro sales leads to an incremental 4% to 5% long-term earnings impact.

However, Eli Lilly still needs to show solid performance and achieve good results in terms of cardiovascular risk reduction in order to compete with Wegovy across more than just weight loss. Morgan Stanley also sees the development of a broad obesity program for a range of related conditions by Eli Lilly as a sensible strategy to help build the long-term commercial opportunity.

This is definitely an industry to watch: over the years, we could see new players and drugs come to market, unseating the likes of Eli Lilly and Novo Nordisk. And, keep an eye out for an ETF that’s designed around this theme: something tells me there will be plenty of appetite for that.