Obesity Drug Makers: After the Hype, Can They Deliver on the Promise?

Current State of GLP-1 Obesity Drug Makers

GLP-1 obesity drug makers were a remarkable story in 2023, and the potential of their medicines to transform health care by addressing the global obesity crisis is enormous.

Novo Nordisk and Eli Lilly are the dominant players and their stock price performance in 2023 and so far in 2024 reflects the promise of their obesity treatments. However, we believe their future gains will likely depend on successfully navigating key challenges, such as competition, limited access to GLP-1s and manufacturing bottlenecks.

Potential Societal Impact of Obesity Drug Treatments

GLP-1s promote weight loss by suppressing appetite, delaying gastric emptying and reducing caloric intake. They were initially deployed to fight diabetes. The first GLP-1 for diabetes was approved in 2005, followed less than a decade later by Novo Nordisk’s Saxenda^®, the first GLP-1 approved for obesity.

In 2021, Novo’s Wegovy^® won approval to treat obesity based on clinical trial data showing an average of 17%-18% weight loss. Wegovy quickly took over the prescription market for obesity.¹

The notoriety of GLP-1s jumped in 2022 when Eli Lilly reported that patients in an obesity-focused clinical trial lost 23% of their body weight after 72 weeks of treatment. In 2023, a flood of potentially transformative data showed the drugs could improve conditions such as heart disease, kidney disease, high blood pressure and possibly even addiction.² This clinical data demonstrates that managing weight isn’t just about aesthetics but also about preventing the long-term health problems associated with obesity.

GLP-1s hold promise for making a big difference in society because obesity affects about 1 billion people globally, and it’s a long-lasting health issue.³ By 2035, the World Obesity Federation estimates that over half of the global population will be overweight or obese, with BMIs of 25 or higher, resulting in annual health care-related costs exceeding $4 trillion.⁴

Assessing the Size of the Obesity Drug Market

The potential size of the obesity drug market is uncertain, and estimates from even the most well-informed observers can differ greatly. Wall Street analysts and drug company executives suggest that the annual market for GLP-1s used in treatments for obesity and diabetes could surpass $100 billion by 2030.⁵ Given that the annual costs of obesity-related care in the U.S. are about $150-$200 billion and globally exceed $2 trillion, we don’t think these numbers seem unrealistic.⁶

It's crucial to understand that the estimates for potential yearly sales rely on the assumption that both private and later public insurers will agree to pay for these medications. That’s not a sure thing.

There’s a long history of the U.S. insurance industry delaying and challenging the adoption of new drugs expected to have significant markets. Novo recently said there are roughly 40 million obese patients covered by commercial insurance who have access to Wegovy, along with another 10 million covered by Medicaid. That’s out of approximately 110 million obese U.S. adults. Consequently, we expect coverage to grow incrementally, not dramatically.

As of this writing, Medicare covers obesity drugs so long as the drug is approved for some other applicable treatment. For example, Wegovy recently received Food and Drug Administration approval to treat heart disease in obese patients. This opens the door to Medicare coverage.

Market Positioning of Novo Nordisk and Eli Lilly

In 2023, Novo reported that Ozempic and Wegovy, in addition to Novo’s older generation GLP-1s, brought in approximately $24 billion in revenues. According to Lilly, Trulicity^®, Mounjaro^® and Zepbound™ sales totaled around $12.5 billion. This amounts to roughly $36.5 billion in sales across the entire category, though those totals are split between diabetes and obesity prescriptions.

Novo’s revenues rely heavily on its GLP-1 franchise, with these drugs making up 70% of its total revenues in 2023. In contrast, Lilly has more diversified sources of revenue, with GLP-1s contributing to just over a third of its total revenues last year.⁷

It’s important to point out that there’s more demand for obesity drugs than what manufacturers can currently produce. The bad news is that they’re not making as much money as they could because they’re investing heavily to ramp up production. However, the good news is that this shortage of production capacity acts as a barrier to entry, giving companies like Lilly and Novo a competitive advantage. To overcome these capacity limitations, both companies are rapidly expanding their manufacturing capabilities by building new production facilities and partnering with contract manufacturers.

Anticipated Competition in the Obesity Drug Market

Although it might not be evident now that Lilly and Novo are dominating the market without any other major players, competition is on the horizon. Given the immense size and profitability of the potential market, numerous large and small companies are directing their research toward obesity.

We anticipate three possible ways for companies to differentiate themselves competitively. First, there’s the form of the drug itself — some patients might prefer a daily pill over the current weekly injections. Novo has already received approval for the pill form of Ozempic for diabetes, and the company is now in phase three clinical trials for using the oral formulation in treating obesity.

Lilly’s oral GLP-1 treatment has demonstrated weight loss of up to 15% within 36 weeks, and the company is now studying the drug’s effectiveness over a longer period. Pfizer also has a pill in clinical trials, with data expected in 2024. Highlighting the challenges of finding success in this space, the pharma giant has already withdrawn one promising oral treatment due to disappointing clinical trial results.

Second, developing a combined treatment for weight loss and muscle preservation is another area of competition and innovation that could potentially capture a sizable portion of the market. Much of the weight loss resulting from GLP-1s comes from losing lean muscle mass. The next frontier for these medications is a treatment that promotes weight loss without sacrificing muscle.

And third, there’s the aspect of eventual competition from biosimilars. Given that Novo’s Ozempic has been available as a diabetes treatment since 2017, we could see potential biosimilars targeting diabetes entering the market as early as 2029.

Evaluating Obesity Drug Makers’ Performance

Armed with this knowledge, we can better evaluate these companies' potential business prospects and valuations more accurately.

Many other large-cap pharmaceutical companies face challenges from expiring patents and new drug price negotiations. As a result, the stronger growth seen by Novo and Lilly in their GLP-1s might be what sets them apart.

We believe that manufacturing and insurance limitations mean the initial adoption of these drugs may be slower than anticipated.

We think 2024 is a pivotal year for these companies because it will likely provide a clearer picture of the long-term sales potential of these drugs. Investors were excited about their potential in 2023, and this year is about delivering on that promise.