The weight-loss drug boom: who stands to gain?

24 April 2024

With the majority of the world population expected to be overweight or obese by 2035, and an effective way to treat obesity now existing, the market for obesity drugs is expected to grow more than twenty-fold by the end of this decade, reaching $105 billion.

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Novo Nordisk and Eli Lilly dominate the market now, but there are plenty of other players that could enter the fray: Pfizer, AstraZeneca, and Roche, or earlier-stage firms like Zealand Pharma, Structure Therapeutics, Viking Therapeutics, and Amgen.

The most interesting investment opportunities may be outside of pharma, though, with packaged foods companies, restaurants, beverage makers, retailers, gyms, lifestyle brands, health insurance, and even dating apps potentially winning big.

What’s the big deal about these drugs?

The obesity drug market could be the biggest and best investment idea, thanks to a global weight problem that just keeps expanding. Projections show that over half the world’s adults will be overweight or obese by 2035. And these therapies can slim waistlines by 15% or more. They do this by mimicking a natural hormone (GLP-1) that makes people feel full faster. As a result, they eat less and lose weight (and may see improvements on other medical conditions too). And that’s without having to resort to kale salads or 5 a.m. jogs.

The meds work so well, in fact, that Novo Nordisk’s Wegovy and Ozempic and Eli Lilly’s Zepbound are being hailed as “miracle drugs”. Not everything’s miraculous for their customers, though: these prescriptions are pricey, mostly not covered by insurance, and require a needle injection. Plus, they stop working when people stop taking them – meaning their users can easily put some of the weight back on – and the potential long-term side effects are still not fully understood.

Regardless, the appetite for these drugs is already reaching record levels. And Morgan Stanley says that by 2030, this market could reach $144 billion at best, and $55 billion at worst – and that’s only if supply can’t keep up.

Which stocks are likely to benefit now?

Two companies are at the top of the class and have been building a strong competitive “moat” around this drug treatment trend: Novo Nordisk and Eli Lilly. They’re your most direct way to play this theme. They dominate the obesity prescription market and aren’t expected to lose their duopoly anytime soon. Morgan Stanley, for one, predicts that they’ll hold a hefty 84% share between them for years to come.

Other established biopharma companies with established commercial platforms like Pfizer, AstraZeneca, and Roche could potentially get in on the action in this field too, along with some more innovative earlier-stage players like Zealand Pharma, Structure Therapeutics, Viking Therapeutics, and Amgen. With so much demand, there’s plenty of financial incentive to shake up the market with cutting-edge innovative treatments – from pills that would replace injections to therapies that might tackle obesity at the metabolic level.

But here’s the catch: investing in biopharma stocks is complicated. Extra-long regulatory hurdles, uncertainties from clinical trial outcomes, stiff market competition, and a lot of product launch challenges. And because drug companies tend to be involved in multiple expensive research and development project at once, pharmaceutical success in one area doesn’t necessarily translate to a boost in overall stock performance.

So it may be worth looking at the more indirect ways to invest in this space. According to Morgan Stanley, two themes prevail: firms that promote healthy eating (certain beverage and consumer staples, packaged foods, restaurants, and grocery stores), and firms that promote an active lifestyle (apparel and footwear, lifestyle brands, and fitness clubs).

Three ways to play the obesity theme
Three ways to play the obesity theme: treatment and prevention, healthy eating, and active lifestyle. Source: Morgan Stanley.

These obesity meds are about more than just cutting calorie intake – they’re reshaping how people eat. People on these drugs are ditching high-calorie treats and opting for healthier options like nuts and protein bars – and those choices often end up influencing the whole family’s diet.

This could have powerful ripple effects across different industries:

Packaged Food. Companies selling sugary junk like Hershey are likely to be put under pressure, while “better for you” brands like Simply Good Foods, BellRing Brands, Vital Farms, and Danone should benefit.

Restaurants. Fast food joints like Wendy’s and Shake Shack may need to overhaul their menus if they don’t want to risk losing patrons, whereas places like Chipotle and Sweetgreen that champion healthier choices might actually see a boost, along with hot-drink-focused Starbucks.

Beverages. Sales of sugary sodas and alcoholic drinks are expected to drop by 3% to 4% by 2025, and that’s not likely to benefit brands like Molson Coors and Boston Beer. On the flip side, makers of more virtuous beverages like Zevia may find the change refreshing.

Retailers. The impact on grocery sellers will vary greatly based on their customer demographics and product mix. Giants like Costco, Albertsons, and Kroger may be well-positioned to adapt, but others like BJ’s, Dollar Tree, and Dollar General could find the going gets tough – especially for those that don’t have pharmacies to offset their losses with sales of obesity drugs.

Gyms. This trend goes beyond food: Morgan Stanley’s research found that people are ramping up their exercise routines, sometimes kicking off their fitness journeys for the first time as a result of these medications. This trend could pump up foot traffic for big gym chains like Planet Fitness, Life Time Fitness, and Xponential Fitness.

Health insurance companies. Unlike life insurance companies, health insurance companies can’t legally deny coverage or charge higher premiums based on someone’s weight. If obesity drugs lead to better overall health for people, these companies could see significant cost savings in the long run and emerge as major winners. Companies like Cigna, UnitedHealthcare, Humana, and Centene could be particularly interesting to watch.

The US companies that are best and worst positioned in the battle of the obesity bulge. Source: Morgan Stanley.
The US companies that are best and worst positioned in the battle of the obesity bulge. Source: Morgan Stanley.

Apparel, footwear, and lifestyle brands. 30% of consumers said they upped their purchases in athleisure apparel and footwear since starting on obesity meds, according to Morgan Stanley – the biggest growth across all categories. Brands like Lululemon, Nike, On, Skechers, and Under Armour could run a few victory laps on that.
Let us not forget. Plenty could change. Stocks in leading positions could get dragged down by other factors. Badly positioned stocks could adapt and spring forward. But the ones with a head start today are arguably a lot more likely to win in the medium term.

Dating apps. This may seem a bit of a stretch, but health improvements tend to lead to better confidence and that could spur more activity in the dating scene. This kind of uptick might benefit platforms run by Match Group and Bumble, as more people feel motivated to put themselves out there.

So what’s the bottom line?

There are no tailor-made obesity-drug ETFs that are all-encompassing, and offer an easy play. Best to build one own’s portfolio.
First, the heavyweights: Novo Nordisk and Eli Lilly. These core enablers of the anti-obesity movement are pivotal players and should form a substantial portion of an investment mix. They’re not just direct bets on the theme: they’re also robust companies with strong market positions. Their stock prices might seem steep, but when stacked up against their potential earnings growth over the next couple of years, the numbers start to make more sense.
Then, large pharma players: like Pfizer and AstraZeneca and emerging contenders like Zealand Pharma and Viking Therapeutics.
Lastly, indirect beneficiaries. Gyms, active apparel, and lifestyle brands are more straightforward investments than biotech and pharma companies, and they’re less at risk from litigation or adverse drug side effects. And the best is that these industries stand to gain even if the obesity treatments underperform. Obesity is one of the world’s most pressing health issues and a public opinion’s support could drive momentum, no matter what happens with the obesity drug trend.

One last thing to keep in mind: the fight against obesity is a long-term one. Dollar cost averaging is a prudent idea to pace investments: ups and downs are likely to happen along the way.

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