The diabetes drug Ozempic became a viral sensation this year, touted by celebrities, CEOs and Real Housewives for its off-label use to quickly shed excess weight. Top health-care stock analyst Damien Conover, CFA, thinks the drugs may have an even more compelling side effect—fattening investors’ portfolios.

The sudden popularity of Ozempic, Mounjaro and similar drugs (known as GLP-1 receptor agonists) as weight-loss treatments has created a ­multibillion-dollar market overnight…and a potential bonanza for pharmaceutical companies. More than 40% of American adults are obese—650 million adults worldwide. That’s three times as many as in 1975.

These drugs, approved by the FDA to treat type-2 diabetes, effectively mimic the body’s natural hormones to slow digestion and make you feel full. People who received once-weekly injections of the drugs experienced an average weight loss of 15% to 23% of their body weight over about 18 months. 

Conover estimates that by 2032, the fledgling GLP-1-obesity-drug market could increase more than tenfold compared with 2022. Novo Nordisk, the European pharmaceutical firm behind Ozempic, has already launched a more potent version under the brand name Wegovy, which has been approved by the FDA specifically for weight loss. Mounjaro’s maker, Eli Lilly and Co., expects to get a green light from regulators to bring its own branded formulation for weight loss to market next year.

Challenge for investors amidst this gold rush: Separating the opportunity from the hype. For these drugs to maximize their revenue potential, pharmaceutical firms will need to come out with easier-to-use pill formulations…consumers will have to deal with the high costs (Ozempic injections run $13,000 a year, and the injections must be taken indefinitely to keep off the weight)…and insurers need to be convinced that Ozempic and other weight-loss drugs are more than just vanity drugs for people who don’t want to diet.

Bottom Line Personal asked Conover to explain what investors need to watch for when tapping into this rocketing Wall Street trend and which companies have the most potential…

Investing in the New Obesity Drugs

For decades, the weight-loss market offered only ineffective products that carried severe side effects. All that changed with GLP-1 drugs, synthetic versions of the hormone Glucagon-like peptide-1 (GLP-1). When you eat, your intestines release GLP-1, prompting the pancreas to create more insulin and signal the brain to suppress your appetite.

What investors can expect in the next decade: The obesity-drug market will expand to accommodate a variety of competitors with treatments at different price points and with different efficacies using cutting-edge science. Some patients may suffer from morbid obesity and need to lose 20% of their weight to avoid bariatric surgery. Others may want to prevent cardiovascular problems by knocking off 20 pounds. Investors will need to keep an eye on several factors that could cause great volatility among pharmaceutical companies’ obesity-related stocks as well as create new winners and losers. Those factors include…

Who wins the race for an obesity pill. Pills are more convenient and could have a cheaper price point, encouraging more patients to stay on them for far longer. But the science has been complex and daunting because GLP-1 drugs degrade quickly in the digestive tract, minimizing their benefits.

Whether insurers and health-care plans will cover obesity drugs. While many employee health plans cover Ozempic as a diabetes treatment, fewer than 25% cover any drug for weight loss. Obesity is still considered a behavioral problem, not a chronic disease. Possible breakthrough: A recent five-year study of overweight or obese people with a history of heart disease found that those who took Wegovy had 20% fewer incidents of heart attacks. Those findings could convince insurers to pay for obesity drugs to prevent more serious and expensive health-care problems in the future.

Whether Medicare will cover ­obesity drugs. The 66 million Americans age 65 and over are a huge target group for obesity drugs. But Medicare is prohibited from covering weight-loss–related drugs as part of the Part D program. It would require an act of Congress to change the law.

Two leaders…and two challengers

The following pharmaceutical companies are likely to dominate the obesity-drug market in the next decade. By 2030, I expect two firms with first-mover ­status—Novo Nordisk and Eli Lilly—to control 75% of the market. The catch: Their stocks have had huge run-ups in 2023 and are richly valued, so you’ll have to wait for pullbacks and invest cautiously. The two challengers—Amgen and Pfizer—have promising drugs in late-stage clinical testing that could capture 25% of the market. While their valuations are more attractive, the risks for investors are greater because it could take two or more years to get FDA approval.

The leaders…

Novo Nordisk (NVO). Until this year, few US investors were even aware of this 100-year-old Danish pharmaceutical company, which is best known for ­insulin medications. Now, the company’s market capitalization (about $435 billion) has eclipsed the entire annual gross domestic product of Denmark (estimated at about $400 billion). Ozempic is expected to produce revenue of $12.5 billion in 2023. Wegovy grew a whopping 500% year over year in the second quarter, when it earned more than $1 billion. Things to consider before investing: Novo Nordisk’s stock price is about 25% over fair value…a high-dose pill version of Wegovy could get FDA approval within the next year. Recent share price: $195.40.*

Eli Lilly and Co. (LLY). Revenues for Mounjaro, approved for diabetes, jumped to nearly $1 billion in the second quarter of 2023 versus $16 million around the same time a year ago. The Indianapolis-based drug firm expects Mounjaro to receive FDA approval for weight loss in late 2023 or early 2024, and data suggest that it is more effective than Wegovy. That’s because Mounjaro combines a GLP-1 hormone with a second hormone, known as GIP, which enhances insulin creation. Things to consider: The stock has soared this year, leaving its share price about 50% over fair value…Eli Lilly recently spent $2 billion to acquire ­Versanis Bio, which is testing an obesity pill that works by blocking fat accumulation. Eli Lilly is also developing a once-daily obesity pill. Recent share price: $586.46.

The challengers…

Amgen (AMGN). The biotech firm is years behind other obesity-drug ­makers, but it may have a superior injectable treatment. AMG133 works like conventional GLP-1 drugs but also blocks the activity of a second hormone in the intestine to promote weight loss. It requires once-a-month injections as opposed to weekly for other drugs. Things to consider: The stock trades at a slight discount to fair value…AMG133 isn’t expected to come to market until 2026 or later. Recent share price: $259.43.

Pfizer (PFE) is making a push into the obesity-drug market with late-stage clinical trials for the drug danuglipron, a twice-daily pill that has performed as well as injectables and could be available by 2027. Things to consider: Pfizer is the cheapest way to play the race for obesity drugs. Its stock is down nearly 30% in 2023, and it is selling at a 25% discount to fair value because investors expect a steep decline in Pfizer’s COVID-19 vaccine revenues. Recent share price: $34.25.

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