Investors lose their appetite for the obesity trade
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In a few short years, excitement about groundbreaking anti-obesity drugs made Novo Nordisk Europe’s most highly valued company and Eli Lilly the biggest pharma group in the world. Just as quickly, investors are losing their appetite for the trade.
After a disappointing trial of a new Novo Nordisk drug last month and lower-than-expected sales figures from Eli Lilly for two consecutive quarters, shares in both have come down from all-time highs.
Some investors are also unconvinced that the market will be worth the $100bn plus by the end of the decade that analysts predict. The result for now is that Novo Nordisk is no longer the most valuable company in Europe, and anti-obesity specialists have entered bear market territory.
Sachin Jain from Bank of America points to the growth potential of the market as one of the main unknowns that worries investors. There’s a “big debate”, he said. “Is [the market] $80bn across Novo and Lilly, or are we just having the wrong debate and the pie is a lot bigger? There’s a huge range, no one knows what it could be.”
The first of a new generation of GLP-1 drugs was approved for weight loss in the US in 2021, but lack of manufacturing capacity means demand outstripped supply from the start. This has made the size of the market and its growth potential much harder to judge.
Even so, a plethora of biotechs have sprung up around the world to try to compete with the two big players. They hope to be able to design treatments that are easier to manufacture, more convenient to administer — the current options must be injected — and have fewer side effects, the most common ones being sickness and diarrhoea.
Private investors have recently backed biotechs with exceptionally large funding rounds: Verdiva Bio and Kailera Therapeutics have raised more than $400mn each, while Metsera, which has filed for an IPO, secured $215mn in November. Big pharma companies are also rushing to buy anti-obesity drug candidates.
But the vast majority of these drugs are still many years from the market and although sales of existing drugs continue to grow, investors have become unnerved by the high valuations of Novo Nordisk and Eli Lilly.
Even after its shares fell 7 per cent in one day earlier this month, Eli Lilly is trading on a price/earnings ratio of 55. Novo Nordisk trades at a p/e of 27, despite a more than 21 per cent drop in its shares in one day late last year.
One healthcare investor who owns shares in Novo Nordisk and Eli Lilly said both have been spending on big advertising campaigns in the US but have not had a corresponding sales growth spurt, making him worry about the potential of the market.
He added that external factors will also push down prices. Novo Nordisk’s Wegovy and Ozempic, which respectively target weight loss and diabetes, were added to the Medicare negotiation list this month, making it likely the company will have to cut prices significantly in the US from 2027.
The weight-loss trade aside, healthcare shares have not kept up with a US market that is otherwise optimistic about the US economy.
Linden Thomson, senior fund manager at Candriam, notes that weight-loss drugs have become the driver of healthcare investing. “The obesity opportunity is one that people can really understand and has been the main trade in the sector for quite a while. It is the AI equivalent of healthcare.”
Ashley Oerth, associate global market strategist at Invesco, said the broader industry had been underperforming since the odds of Trump winning the US election swung in his favour in October.
“I think a really important component is the Trump trade. We’ve seen this expressed as a tilt towards more cyclical than defensive [shares], and healthcare is in the defensive bucket,” she said.
Gareth Powell from fund manager Polar Capital, which owns shares in Eli Lilly and Novo Nordisk, said the sector had also been affected by worries about the nomination of Robert F Kennedy Jr as US health secretary. “I think good news is not cheered significantly, and bad news is met with this huge sensitivity, and you’re getting massive overreactions,” he said.
In late December, Novo Nordisk announced that its much anticipated next-generation obesity drug CagriSema had missed its target for patients to lose 25 per cent of their body weight in a late-stage trial. The news wiped €90bn off the company’s market capitalisation.
The results showed that patients on CagriSema could lose 23 per cent of their body weight on average. Unusually, participants had chosen their own dose. If more had taken the highest dose, the drug could well have hit the 25 per cent bar, according to several analysts and investors.
Crucially, CagriSema had been seen as Novo Nordisk’s opportunity to beat Eli Lilly’s Zepbound, which was approved in November 2023 and quickly won market share. Results published in December from a head-to-head trial run by Eli Lilly confirmed that Zepbound offered greater weight loss than Wegovy.
Powell said if Novo Nordisk had run a more conventional trial, he believes it would have “smashed 25 per cent”. “I think CagriSema is stronger and much more potent than Mounjaro,” he said.
Investors will have to wait until later in the year for more data from the trial. This might explain why many patients did not increase their dose, with speculation in the market that this was because they were happy with the weight loss they had achieved or wary of experiencing more side effects. Novo Nordisk has also said it is planning a more conventionally designed trial.
But shareholders are not in a patient mood. Emily Field, an analyst at Barclays, said Novo Nordisk has a “credibility problem” in relation to the CagriSema trial. “They made a gamble on this trial design — and lost,” she said. “They’ve made some unfortunate errors . . . and the market is being much more critical.
“I think people just come to the conclusion that [its] . . . advantage Lilly, and that’s it.”
Novo Nordisk declined to comment.
Shares in Eli Lilly rose on the CagriSema result but quickly gave up those gains. When it then missed its sales guidance last week, its shares fell 7 per cent in one day.
Sales of Mounjaro, the anti-diabetes version of Zepbound, were $3.5bn in the fourth quarter of 2024, missing a forecast for $4.4bn, while the figure for Zepbound was $1.9bn, below the average analyst estimate of $2.2bn.
At the JPMorgan healthcare conference in San Francisco this month, Eli Lilly chief executive David Ricks offered some explanations for the sales miss, including wholesalers trying to cut inventory.
Eli Lilly still expects robust sales growth of 28 per cent to 35 per cent in 2025 but has conceded that the market is hard to predict.
The healthcare investor concluded: “The easy money to be made has been made and now we’re in this choppy dynamic. And then it doesn’t help that suddenly Lilly can’t guide properly. Nobody wants to own it right now.”
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