Binge on diet drug stocks this Thanksgiving?
Ozempic and Mounjaro are all the rage...and that's led to a big pop in the shares of Novo Nordisk and Eli Lilly. Will the rally continue?
Thanksgiving. Time for friends and family to get together, watch some football and stuff our faces with lots of turkey, gravy, stuffing, cranberry sauce and potatoes (or popcorn and toast if you’re a fan of the Peanuts/Charlie Brown Thanksgiving special). But wait a minute. Maybe people won’t be so gluttonous this holiday season if they’re taking Ozempic, Wegovy, Mounjaro or Zepbound? (That last drug name makes me think of “Stairway to Heaven.”)
The rising popularity of injectable weight loss drugs to treat diabetes or obesity has given the Big Pharma giants behind these drugs a huge stock boost this year. Shares of Ozempic/Wegovy seller Novo Nordisk have surged more than 50% in 2023 while Mounjaro/Zepound maker Eli Lilly has gobble gobble gobbled itself to a more than 60% gain.
So what’s next? Zak Smerczak, a portfolio manager with asset management firm Comgest, is bullish on both stocks. (Comgest owns shares of Novo Nordisk and Eli Lilly in various funds.)
“It’s fair to say that the theoretical addressable market for the new and improved versions of drugs have exceeded expectations with regards to their efficacy,” he told me. Ozempic and Mounjaro were originally approved to treat diabetes. But versions of those drugs (Wegovy and Zepbound) have also been green lit by health regulators to manage weight loss/obesity. Smerczak said the next step could be approval of Novo Nordisk’s and Eli Lilly’s medications to treat cardiovascular diseases.
But even as investors wait to see if Ozempic/Wegovy and Mounjaro/Zepbound get approved for other indications, Smerczak thinks that there is still a lot of room left for both Novo Nordisk and Eli Lilly to generate big revenue from just obesity and diabetes for “multiple years.”
“The duration and visibility of earnings are well entrenched and expanding,” he said. “They can’t produce enough of drug to meet demand. There is very strong growth.”
Now of course there are risks with both stocks, not the least of which is valuation. Eli Lilly, for example, now trades at 48 times 2024 earnings estimates. That’s the type of price you usually see for a hot tech stock. Earnings are expected to increase by a whopping 85% though. So the price may be justified. For now.
Smerczak conceded that there are other concerns. For one, questions about drug pricing could weigh (sorry) on the stocks. If global governments look to put caps on how much the drug companies should charge and the cost for average consumers paying out of pocket versus what insurers will cover, that could hurt margins (and demand) for these medications down the road.
Competition is a concern too. The success of these drugs has already created a stir in the industry. Other big drug firms are now trying to develop versions of these medications that can be taken as pills as opposed to injections. Smerczak pointed out that Astra Zeneca has a partnership with a Chinese biotech while Pfizer is working on an oral medication as well. (One Pfizer attempt has already been scrapped though due to safety concerns.)
“Other drug companies are not asleep at the wheel,” Smerczak said. “New entrants will come in this market.”
Ozempic/Wegovy and Mounjaro/Zepbound will also eventually face competition from generic rivals. But that threat is still many years away as Novo Nordisk and Eli Lilly will both enjoy patent protection for awhile. Still, Novo Nordisk and Eli Lilly need to keep innovating. Smerczak conceded that at some point in the next few years, maybe by 2027 or 2028, the companies could be generating an overwhelming majority of revenue from just these types of weight loss drugs. “They will need a richer pipeline to move the needle in the next three to five years.”
But even though Smerczak said that Novo Nordisk and Eli Lilly are revolutionizing the weight loss industry with their new medications, he doesn’t think investors should avoid food and beverage stocks entirely. His firm owns shares of Nestle and luxury candy maker Lindt. Comgest also has a position in Alcon, a company that makes treatments for glaucoma, which is a common comorbidity risk of diabetes.
Sure, these companies may be affected somewhat. But Smerczak doesn’t see a fundamental risk of a “material shift” in earnings. So far, food and beverage companies agree. Pepsi and Hershey have each downplayed worries of an Ozempic impact on demand in recent earnings calls.
So go ahead and have that extra leg of turkey and more candied yams on Thursday. You can worry about your weight….and your portfolio…later. Just don’t eat so much that you can’t get out of bed early enough for those Black Friday sales. (Of course, there’s always Cyber Monday too.)
Happy holidays!