Is there an obesity drug bubble?

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Good day. Hurricane Milton is hitting Florida. The conflict in the Middle East remains hot. It’s fair to say that we’ve already had several surprises in October. Let’s hope that the CPI, published this morning, is nothing else. Send us an email with your fears: robert.armstrong@ft.com and Aiden.reiter@ft.com.

Is there a LPG-1 bubble?

AI gets a lot attention. There have been thousands of opinion pieces about how it will transform society, and almost as many argue that the AI ​​hype has pushed tech stocks into bubble territory. Glucagon-like peptide (GLP-1) obesity drugs also receive a lot of attention for their impact on fashion, exercise and health. But hardly anyone seems to wonder if there is an LPG bubble.

Eli Lilly and Novo Nordisk, which make market-leading LPG, have vastly outperformed the S&P 500 over the past five years:

Eli Lilly has a price/earnings ratio almost as high as Nvidia:

Expectations for both companies are really high. Morningstar estimates the GLP-1 drug market will be worth $200 billion by 2031, with analysts expecting Eli Lilly and Novo Nordisk to take the lion’s share. Eli Lilly’s revenue is expected to nearly triple between now and 2031, driven largely by its GLP-1 blockbusters Zepbound and Mounjaro:

Novo Nordisk is on a similar trajectory, although Wall Street expects its LPG-1 revenue from Wegovy and Ozempic to start falling after 2029:

The free cash flow estimates for the two companies are even more surprising, with both expected to rake in over $35 billion by 2031:

Are expectations too high? There are several factors to consider.

The competition is fierce. Profitable drugs invite competitors with slightly different formulations or delivery methods. Here’s a Morningstar chart of hopefuls entering the LPG-1 market. Novo Nordisk and Eli Lilly are likely to maintain their lead for a while because of their own new products: Novo Nordisk already has an oral medication on the market, although it’s not as popular as injectables, and both companies will be first out of the gate. of oral GLP-1 at lower doses. But Pfizer and Roche will follow shortly after:

Then there are the patents. Novo will lose its US patent in 2032, while Eli Lilly will lose its patent in 2036 (this partly explains its valuation premium over Novo Nordisk). But most important for both is that Novo Nordisk’s GLP-1 products will lose their Chinese patents in 2026, which could open the US and European markets to generic trafficking.

The market will begin to discount patent expirations years before they actually arrive. AstraZeneca shares traded sideways for years (at a single-digit price-to-earnings valuation) before major patents on its blockbusters Nexium and Seroquel expired in the early 1910s. Pfizer launched its megahit Lipitor in 1996. Its revenue peaked at nearly $13 billion in 2006 and was still around $10 billion in 2010, the year before its U.S. patent expired. But the stock had peaked in 2000 and traded at less than 10 times earnings between 2008 and 2011.

It’s also worth noting, in the context of the competition, that while Lipitor was by far the best-selling statin among cholesterol-fighting statins, it was the fifth to launch. Just because Lilly and Novo were first in LPG doesn’t mean they will maintain their lead.

Price will also be an issue in the future. GLP-1s face Medicare price negotiations in 2027, and CBOs report This week’s report suggests that Medicare and other insurers may demand significant price reductions.

There is also uncertainty about future volumes. Here’s Morningstar’s Karen Andersen, one of the few analysts expressing skepticism about the possibility of buying Lilly and Novo:

one of [the big questions] is how long patients will need to stay in therapy. So far, from what we have seen, it is difficult to maintain weight loss when patients stop therapy. Eli Lilly, Novo Nordisk and their competitors are thinking about how best to help patients adhere to a maintenance regimen. The answer may be to take the medication less frequently or at a lower dose. . . This will have huge implications for the long-term revenue forecasts of these companies and for the potential health benefits of taking the drugs.

Finally, weight loss medications have a difficult history. Some readers will remember the rise and fall of Fen-Phenor how Sanofi’s much-publicized Acomplia was retired in Europe and never gained approval in the United States. there has been rumors about muscle loss and other problems with GLP-1 medications. As the population of people receiving treatment increases, new problems may arise.

We don’t know if Lilly and Novo are overrated. If other pharmaceutical companies do not develop good alternatives in the next few years, no worrying side effects arise, most patients are happy to continue taking the drugs long term, and price negotiations go well, the two companies should print money for years. . to come. What worries us is that no one in the market seems to be taking the bearish side of the GLP-1 trade. In the markets, unanimity is dangerous.

(Reiter and Armstrong)

a good read

Mystery (maybe) solved.