Weight-loss drugs: the investment opportunity of the decade?

Indeed, the development of a cure for obesity can be likened to the frenzy around AI that has driven up the capitalizations of big tech companies this year. The cure for obesity, however, is something much more tangible and can hardly be described as a bubble. According to surveys, by 2020, approximately 38% of the population over the age of 5 were slightly overweight or obese. These numbers are only going to get worse. This is not a "one-hit wonder" like the coronavirus vaccine, which helped several companies to all-time highs, only to fall back to 2019 levels a few years later.

The market for obesity drugs could be worth an estimated $50 billion by the end of the decade, with some investment banks even predicting double that level. Two companies in particular stand to benefit - Eli Lilly could generate around half of the revenue, with Novo Nordisk accounting for the other half. Moreover, the aforementioned estimates may still be relatively conservative. Yet for the full year 2022, Eli Lilly had total revenues of 'only' $28.5 billion. Novo Nordisk, meanwhile, has become the most valuable company in the European market. While both companies may be expensive now, they could be much higher in a few years.
 

_{Morgan Stanley obesity drug market volume forecast. The market volume could reach $77 billion by the end of the decade, according to the bank}

Is it already late? Are stocks overpriced?

At first glance, Novo Nordisk and Eli Lilly shares may appear overvalued. Eli Lilly's value has risen by almost 65% this year, while the main US stock index, the S&P 500, has risen by 'only' 15%. Novo Nordisk is up 50% so far this year, while the broader European stock index, the Euro Stoxx 600, is up just under 8%. Both companies have had a great year thanks to the development of obesity drugs, and the current rally is in some ways reminiscent of the frenzy around artificial intelligence.

A slight overvaluation is indicated by the P/E ratio, i.e. share price to earnings per share. While there is no ideal value here, a number around 20 is seen as good by investors. However, there are also companies that have been operating at a significantly higher P/E for a long time, especially in the technology sector - Tesla and Nvidia, for example. For pharmaceutical companies, the P/E ratio should be somewhere around 20 to 40. Novo Nordisk currently has a P/E ratio of almost 42, and Eli Lilly is even over 100. From this perspective, both companies may be overvalued. On the other hand, a too-low P/E does not inspire much confidence, for example, Pfizer's was below 10 before last quarter's results.
 

_{Novo Nordisk shares, source: Google}

However, looking only at the P/E is not enough; investors like growth and can price it appropriately. It is precisely the earnings and revenue growth that both companies now offer. Moreover, the cure for obesity is literally the investors' dream - it solves a pressing problem for humanity.
 

_{Eli Lilly shares, source: Google}

Seize the current opportunity around obesity drugs

Why isn't Pfizer doing well? Is it time to buy?

Investors love growth and unfortunately, Pfizer is not offering it now. The gold mine for Pfizer was coronavirus and its vaccines. But the world is gradually forgetting about coronavirus and Pfizer stock is falling into oblivion. Since the beginning of the year, they have written off almost 40% of their value. Currently, Pfizer is near its lowest level in more than three years. The development of the shares in question seems a little unfair, they are at the same value as before the coronavirus, but Pfizer is a different company.

Revenues for 2022 were practically double compared to 2019. The same is true for earnings. So Pfizer has a lot of resources to develop new drugs, so it is definitely not a one-trick pony. The stock may also be attractive for long-term investors due to its interesting dividend, the yield is currently over 5% per year. Moreover, the coronavirus is not over yet, Pfizer has recently entered into an agreement with the US government to supply additional vaccines.

_{Pfizer shares on W1 chart, MT4}

To get investors excited again, however, Pfizer will need something new. So far, it hasn't been very successful. Pfizer is also in the race for an obesity drug, and its testing has been relatively successful - people lost weight faster than Novo Nordisk's rival drug, but the drug has shown potential liver damage in development, so Pfizer is at a big disadvantage here against Eli Lilly and Novo Nordisk. The company does have several other promising projects up its sleeve - but the drugs must first pass the US FDA.

The stock has also been knocked by the expectations of the company itself, which revised earnings and revenue significantly lower. For this year, profits are expected to fall by as much as 75% year-on-year and sales by more than 40%. The company even ended last quarter in the red. Given this, we cannot now mark Pfizer as a buy despite its attractive capitalization and dividend. Still, Pfizer stock was among the top 3 stocks traded by our clients in October 2023, mainly because of its shorting potential.

Speculation against fast food and sweets?

The rise in popularity of weight loss drugs may have a significant impact on companies that produce sweets, sugary drinks, and fast food in the long term. People will be more aware of their calorie intake and will think twice before indulging in sweets and fast food. Investors are starting to see this too, with shares of Coca-Cola (-9%), PepsiCo (-7%), Hershey's (-17%) and McDonald's (+1%) all significantly underperforming the overall market this year. To some extent, this can also be attributed to the general mood of the markets; high-interest rates in the US will sooner or later force consumers to tighten their belts.
 

_{Shares of Coca-Cola Company on D1 chart, MT4}

Once the obesity drug becomes widespread, those stocks may lag the market further. Moreover, the aforementioned companies don't have much room to expand or diversify their portfolios. While they may increase sales through well-executed marketing campaigns, over a long enough period of time they may be some of the biggest victims of the obesity cure. The latter has long been a huge problem, particularly in the US, where the aforementioned companies generate a large portion of their revenues. This year's sell-offs may therefore be just the beginning. Obesity drugs may thus be one of the biggest investment opportunities of this decade - whether speculating on the stocks of their makers or against companies that produce sweets and fast food meals.

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