Macro Intelligence: weight-loss drugs drive big pharma

Article written by Nadine Blayney (ausbiz)

The quarterly reports of US and European drugmakers confirmed GLP-1 – or weight-loss drugs – remain fundamental drivers of profits in big pharma.

Drugmakers gorge on weight-loss

Amgen shares soared in the wake of its quarterly result after the US drugmaker hinted at encouraging interim trial data on its experimental obesity drug. Despite providing scant detail on the injectable drug MariTide, its plans to commence a late-stage study later this year were enough to impact the share prices of other weight-loss drugmakers, including Eli Lilly and Novo Nordisk, on the day its report was released.

Amgen Inc daily chart

Eli Lilly's market dominance

GLP-1 powerhouse Eli Lilly lifted its annual sales forecast by USD 2 billion at its quarterly result, driven by strong demand and increased manufacturing capacity for its weight-loss drugs Mounjaro and Zepbound. Quarterly revenue rose 26% to USD 8.77 billion from a year earlier. Morningstar expects the drugs to “grow very rapidly and reach peak annual sales of over USD 60 billion.” This new class of drugs has pushed Eli Lilly’s market cap to about USD 700 billion, making it the world's largest pharmaceutical group.

Eli Lilly & Co daily chart

Novo Nordisk's competitive challenges

GLP-1 market leader Novo Nordisk enhanced its 2024 outlook after reporting better-than-expected first-quarter profits. However, underlying growth was somewhat weaker than expected, and sales of its weight-loss treatment Wegovy were lower than market expectations.

Novo Nordisk is racing to increase production of Wegovy to meet soaring demand; competition from rival Eli Lilly forced it to slash prices. Still, Novo shares have risen around 260% since Wegovy's launch in the United States in June 2021. It is now Europe's most valuable company.

Novo Nordisk daily chart

The holy grail in pharma

Big pharmaceutical companies confirmed in their quarterly reports that the new class of GLP-1 weight-loss drugs will drive R&D spending and M&A activity into the foreseeable future, as the weight-loss market is estimated by Barclays Bank analysts to be worth as much as USD 200 billion within the next decade.

AstraZeneca’s first-quarter revenue jumped 19% to USD 12.68 billion, with the company reiterating its full-year guidance. While oncology revenue drove the result, in late 2023 AstraZeneca agreed to pay up to USD 2 billion for the rights to an experimental pill from China's Ecogene. Sharon Barr, AstraZeneca’s Executive Vice President of BioPharmaceuticals R&D, stated, “We are positioned to go beyond short-term weight loss and to deliver long-term weight management.”

Roche does not report quarterly financials, but it's re-entering the weight-loss field to offset falling oncology sales. After abandoning GLP-1 drugs in 2018, in December, it agreed to acquire obesity drug developer Carmot for USD 2.7 billion upfront. Carmot’s most promising drug candidate is ready for human trials in the second of three stages, highlighting how pharmaceutical companies view weight-loss as a long-term profit driver.

Proof is in the pudding

Investor enthusiasm for the weight-loss drug class has notably boosted the share prices of Novo Nordisk and Eli Lilly. However, a recent PwC report highlighted what it describes as “a fundamental truth about strategy in today’s pharmaceutical industry—there’s more competition fighting over the same space.”

Pharmaceutical industry sales from 2021 to 2024

Despite the rise of weight-loss drugs in driving profitability, the pharmaceutical sector is varied and has underperformed the S&P 500 over the past year.

That said, the market is rewarding those with GLP-1 drugs in development. Following Amgen’s initial share price surge on its obesity drug update, Barclays upgraded the company to 'equal-weight' from 'underweight' and lifted its price target on the stock to USD 300. UBS, Deutsche Bank, and BMO also raised their price targets, while RBC lowered its target to USD 328.

Price surges from August '22 and February '23

ASX stocks impacted by the weight loss megatrend

ResMed’s (ASX: RMD) stock was heavily impacted in late 2023, due to the perceived threat from GLP-1 obesity drugs. However, the stock has largely recovered from that initial reaction.

ResMed CEO Mick Farrell recently informed ausbiz that, contrary to having a negative impact, the weight-loss drug megatrend is beneficial.

“What we’ve actually seen is that these drugs are bringing more patients into their GPs," he explained. ResMed has data on 660,000 patients also being prescribed GLP-1 drugs, showing a “10.5% higher propensity to start positive airway pressure treatment.”

“We believe very strongly, based on this data, that these drugs will be a tailwind for the ResMed business,” he continued.

His comments align with Morgan Stanley research which also found that GLP-1 treatment will lead to higher rates of diagnosis for sleep apnoea and “ultimately, some increased penetration to partially offset the patient losses.”

Morgan Stanley rates ResMed as ‘overweight’ with a price target of USD 31.80, noting its third-quarter result was a strong margin-driven performance.

ResMed Inc daily chart

Analyst sentiment: Advanced Medical Equipment & Technology favoured as a "Buy"

Companies related to alcohol could face risks associated with GLP-1 drugs, with Morgan Stanley analysts noting, “Alcohol faces the most pronounced risk in the beverages category, with some GLP-1 patients foregoing alcohol consumption entirely.”

Should this trend materialise, both Endeavour Group (ASX: EDV) and Treasury Wine Estates (ASX: TWE) might find themselves vulnerable as the weight-loss drug megatrend expands.

Endeavour Group daily chart

Treasury Wine Estates daily chart