You probably heard about Ozempic. It is a drug approved by the FDA in 2017 to treat type 2 diabetes. But, many people use it for other purposes, mainly to lose weight. Ozempic gained national attention for its weight loss potential in 2021. That was when The Dr. Oz Show featured it.

The rest is history. Celebrities and TikTok influencers took Ozempic and other obesity drugs to new heights. In this article, let’s take a deep dive into the world of weight loss drugs and why they are causing a “gold rush” among big pharma companies.

How Obesity Drugs Work

First, let’s quickly understand how obesity drugs work. There are currently two major companies that produce weight loss pharmaceuticals. They are Ely Lilly (LLY) and Novo Nordisk (NVO). Ely Lilly’s came up with a drug called Tirzepatide. It is marketed as Trulicity/Mounjaro for diabetes treatment, while Zepbound is used for weight loss.

Likewise, Novo Nordisk has semaglutide drugs. They are sold under the brand names of Ozempic/Rybelsus and Wegovy. Most of these drugs must be injected subcutaneously under the skin with a special pen. Novo and Eli are working on weight loss pills that can be taken orally too. This will likely make them even more popular.

What is GLP-1?

Both tirzepatide and semaglutide are glucagon-like peptide-1 receptor agonists, or GLP-1 for short. Without getting too technical, here is how GLP-1 works. Whenever we eat, a special hormone is released in our gut called incretin. Incretin decreases blood sugar levels by stimulating insulin production. GLP-1 class drugs mimic actions of incretin. So, those who take GLP drugs also experience lower appetite and want to eat less often. All of this  eventually leads to weight loss.

Of course, these drugs come at a price of side effects. GLP significantly slows down the movement of food through the gut. This can cause nausea, vomiting, abdominal pain and constipation. Also, there were reports of people binge eating after they stopped taking the weight loss medications. Some gained their weight back as a result.

Why Big Pharma is Obsessed with Obesity Drugs

Currently, there are many big pharma firms rushing to come up with their own obesity drugs. The reasons are numerous.

Recurring Revenues

First, people are supposed to take obesity drugs long-term for weight management. Coming off them creates risks of gaining everything back. So, these drugs are unlike some other one-time treatments.

Patients are likely to use them long-term or even indefinitely. That’s the best outcome for pharma firms, financially speaking. Yes, these drugs can come at a cost of unpleasant side effects. But, having excess weight also puts people at risk of other major health problems. For some, the benefit may outweigh the cost.

Huge Potential Market

The second reason has to do with the growing obesity rates around the world. Here are the eye-opening stats. According to the World Health Organization, worldwide obesity has more than doubled since 1990. In 2022, 2.5 billion adults were overweight, which is 43% of all adults. Of this number, almost 900 million adults were obese. That is 1 in 8 people globally that are dealing with obesity every day.

Obesity among children is also growing. Both Novo and Eli are working to get their weight loss drugs approved for adolescent use too. With sky-high obesity rates, the total addressable market is big.

Novo and Eli sell their drugs in the US and Europe. But, other countries are taking notice. For instance, India approved Novo’s Rybelsus in 2022. In June 2023, China approved Wegovy for weight loss. Ely Lilli’s weight loss drugs have also seen approval in other major markets recently.

Closer Look at Novo Nordisk

Next, let’s take a quick look at numbers for Novo Nordisk and Eli Lilly to see how obesity drugs benefited them. Let’s start with Novo Nordisk.

Novo Nordisk is one of the first if not the first company to pioneer diabetes treatments 85 years ago. The company is based in Sweden and is one of the largest companies in Europe by market capitalization. Diabetes and obesity treatments account for around 90% of Novo’s sales. Rare disease therapeutics take the rest. Novo is probably one of the few concentrated bets on diabetes and obesity drugs out there. Other pharmaceutical companies typically have a much wider portfolio of drugs.

Novo’s GLP-1 obesity treatments had a 55% market share in 2023, while its insulin products for diabetes had 44% market share. Wegovy and similar obesity drugs took off from virtually nothing in 2020 to over 40 billion DKK in 2023. This is around $6 billion, accounting for roughly 18% of Novo’s total sales. That’s a huge growth, which is still in its infancy.

Novo’s operating margins and returns on invested capital jumped after the introduction of diabetes/obesity drugs. Sales also took off to unprecedented levels for a company of this size. Recently, Novo clocked in a 36% growth rate in sales on a constant currency exchange rate.

Higher Investment Needs and Sky-High Valuation

But, growth in returns will likely subside going forward. Novo remained constrained in its production to supply obesity drugs to the market. The company went on a spending spree by building new facilities around the world. In 2023, its capital expenditures to sales ratio spiked to 11% (it was around 5% before 2020). This means that Novo spent 11% of its sales on various capital projects. Many of these projects are due to be completed in the next 2-3 years.

Such financial performance did not go unnoticed. The stock price soared producing massive trailing returns, especially over the last year.

Based on various relative valuation metrics, Novo is priced at its peak.

For instance, its enterprise value to operating profits multiple (EB/EBIT) stands at over 36x. This is almost double of its historic numbers. But, sales growth rates are very different today too, as we see. They used to be sub-10%, but now it is over 20% or even 30%. So, one can argue that such a high multiple is justified. The question is whether Novo will be able to sustain this break-neck growth.

Expiring Patents and Pricey Drugs

Many of Novo’s patents for GLP-1 treatments are set to expire shortly after 2030. In China, they will expire even earlier in 2026. This means that generic versions of GLP drugs will appear around that time. Typically, generic competition will result in lower prices, forcing Novo and others to reduce their prices too. Although, one can argue that it may or may not be that easy to copy these obesity drugs for generic producers.

But, regardless of this, obesity drugs remain pricey for an average person. For instance, here is some data from August 2023 on how much one-month supply of semaglutide or tirzapetide treatment costs. The US leads all other countries in comparison.

Roundabout Way to Get Obesity Drugs Coverage

What’s interesting is that many US health insurers did not want to cover obesity drugs. Medicare and Medicaid in many states do not cover Wegovy for cosmetic weight loss. But, pharmaceutical companies know this and figured out a backend way to get coverage.

The thing is that obesity comes with many other health complications. Type 2 diabetes is an obvious one. But, there are many others, such as cardiovascular problems. Novo Nordisk and Eli Lilly started studies to see how semaglutide drugs can improve other health outcomes. After all, if a person loses excess weight, many other health problems can vanish or at least subside.

For instance, in 2023 Novo Nordisk established that Wegovy can reduce the risk of heart attack or stroke. Likewise, Eli Lilly just announced results from its clinical studies of Zepbound. They found Zepbound reduces the severity of sleep apnea. Over 50% of study participants resolved their apnea.

Now, that’s a very different matter. With such outcomes, Medicare, Medicaid and other health plans are more likely to cover obesity drugs. A person who was refused coverage for Wegovy for weight loss can take a roundabout route. If he has cardiovascular issues, he is more likely to get coverage for obesity drugs.

In fact, this is exactly how these companies are creating competitive advantage for their drugs. They sponsor multi-year clinical trials proving health benefits for things other than weight loss. This research is what will make it hard for new entrants to catch up to Novo Nordisk and Eli Lilly.

Closer Look At Eli Lilly (LLY)

The other company currently competing with Novo Nordisk is Eli Lilly. You may know it by its anti-depression and anti-psychotic drugs such as Prozac or Zyprexa. Like Novo, Eli is reliant on diabetes and obesity drug, which accounted for over 60% of its revenues in 2023.

Its best selling drugs are Trulicity and Mounjaro, which are both used to treat type 2 diabetes and use GLP-1 as its active ingredient. However, Mounjaro was often used for weight loss off-label. In 2023, Eli launched Zepbound in the US, which is marketed specifically for weight loss. For now, its sales are meager, but will take off. Very likely, Zepbound will cannibalize some of Mounjaro sales, as people switch.

The other 40% of Eli’s sales come from oncology, immunology and neuroscience drugs. Besides Mounjaro and Zepbound, an immunology drug Taltz and cancer treatment drug Verzenio hold that biggest sales potential for Eli Lilly. The company is also working on a highly promising treatment for Alzheimer’s disease called donanemab.

Massive Profitability

Similar to Novo, Eli is massively profitable, although maybe not as high as Novo. Here is a side-by-side comparison of Novo and Eli.

We see that the sales growth rate for Eli accelerated with the introduction of Mounjaro. One interesting note on Eli Lilly vs. Novo Nordisk is this. Eli spends much more on research and development compared to Novo or other pharma companies. This could partly explain why its returns and profitability metrics lag behind Novo.

Also, Eli has relative multiples of stratospheric proportions.

We may argue why that is. But, it is very likely due to a robust pipeline of drugs and clinical studies that Eli is pursuing on many fronts.

Rising Obesity Drugs Competition

But, Novo Nordisk and Eli are probably not going to be the only players in town in a matter of five or less years. Many other companies are working on their own versions of weight loss drugs. Here is a summary of a future competition.

Pfizer (PFE)

First is Pfizer. Pfizer is working on a once-daily oral pill called danuglipron (PF-06882961). I have no idea who comes up with these complicated names for drugs. But, they surely sound weird. Oral pills are the future of obesity drugs, not injections. They are more convenient and easier to administer. Currently, danuglipron is in a phase 2 clinical trial, showing promising results. Judging by the average approval time, Pfizer may get this drug on the market by 2028 or shortly later.

Amgen (AMGN)

Second is Amgen. Amgen is working on a drug called AMG133. The company also has other weight loss drugs in phase 1 preclinical studies. As for AMG133, Amgen wants to develop a drug that patients can take once a month. The phase 2 results from the AMG133 drug should be ready sometime by the end of 2024 or early 2025. So far, little is known about AMG133 progress. So, it is a big unknown at this point.

Roche (RHHBY)

The third big pharma working on obesity drugs is Roche from Switzerland. Roche shares jumped in July of 2024 on news that its weight loss drug CT-996 showed promising results in phase 1 trials. Patients lost 7.3% of their weight in a matter of a month. The company intends to use CT-996 drug for treating both type 2 diabetes and obesity.

Other Candidates

Another much smaller company working on obesity drug is Viking Therapeutics. Viking’s VK2735 drug is undergoing phase I trials or getting close to phase II trials for both oral and subcutaneous uses. The drug showed promising results and will likely transition to Phase II trials at the end of this year.

Viking is a small and unprofitable biotech company unlike its bigger pharma counterparts. So, it is more speculative compared to established players. But with higher risk, you may get a bigger upside or downside.

Finally, here I have two more honorable mentions. These are Structure Therapeutics and Altimmune. Again, both are small and unprofitable biotech companies also pursuing similar GLP-1 therapeutics.

Takeaways

Overall, we see that many companies are pursuing obesity treatments. Their mechanism is very similar to drugs that Novo and Eli are already selling on the market. So, very likely around 2030 or maybe earlier, there will be more competition.

And, it may seem like the end for Novo and Eli, but it is not. Both companies are working on improving their drug efficacy by combining GLP-1 with other drugs. Or, they are working on better and novel delivery mechanisms. All this results in new patents that can extend protection for profits. Despite seemingly mounting competition, it will not be that easy to dethrone this duopoly.

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Finally, very likely more countries will approve obesity drugs based on clinical trials. Looking at the addressable market, there is a lot of disagreement among analysts. Even a small change in usage rates can cause large differences. But, one thing is for sure: obesity drugs proved that they work.