Obesity companies continue to deliver superior growth in the first quarter of 2024

Both Novo Nordisk and Eli Lilly have reported quarterly results in recent days and continue to show growth rates well above their peers in the pharmaceutical industry.

ELI LILLY - QUARTERLY RESULTS
Of the two companies, Eli Lilly was the first to report quarterly results on April 30. The company posted year-over-year revenue growth of 26.0%, which translated into adjusted EPS growth of 59.3%. While these numbers are outstanding in a vacuum, revenue came in 1.8% below consensus expectations, while EPS growth beat expectations by 5.9%. Based on these results, the company raised both its revenue and EPS guidance for 2024. More importantly, Lilly's new obesity drug, sold under the brand name Zepbound, generated $517 million in the quarter, which is quite remarkable given that the drug wasn't approved until November 2023, making this the first full quarter of launch that the drug has already generated over $2 billion in annualized sales. This demonstrates strong demand in the obesity market, coupled with solid execution by Lilly's commercial team. The markets clearly appreciated these developments, as Eli Lilly's share price rose nearly 6% on the announcement, adding approximately USD 40 billion to the company's market capitalization.

NOVO NORDISK - QUARTERLY RESULTS
Novo Nordisk reported results on May 02. The Nordic obesity and diabetes company delivered 22.5% year-over-year sales growth, accompanied by 29.4% EPS growth, and raised its sales and operating profit guidance for the year. While these results were both above the consensus of 2.5% and 8.6% respectively, interestingly Novo's share price opened lower after the announcement. Similar to Lilly, the explanation is in the details. The revenue beat was mainly driven by the company's diabetes franchise, specifically the strong performance of insulin products. At the same time, sales of the obesity franchise and its leading drug, Wegovy, which is the focus of most investors, came in more than 10% below expectations, causing a negative reaction in the stock. Still, Novo says it is delivering four times as many introductory doses as it did at the end of last year, with 20,000 patients starting treatment each week in the U.S., so there is reason for continued optimism.

EXPANDING MANUFACTURING CAPACITIES
Due to the strong demand for anti-obesity drugs, both companies' sales have been limited by supply. As a result, both companies are working to expand their manufacturing capacities as they are currently unable to produce enough drugs to meet patient demand, leading to periods of drug shortages. At the end of April, Eli Lilly acquired a manufacturing facility from Nexus Pharmaceuticals that is expected to be operational in 2027. This acquisition comes on top of Lilly's recent investments of $2.5 billion and $1 billion in new manufacturing facilities in Germany and North Carolina, respectively. At the same time, Novo Nordisk is acquiring three manufacturing sites from Catalent, which Novo Holdings acquired for USD 16.5 billion. In addition, Novo has decided to invest USD 6 billion to expand capacity in Denmark.

DEBATES AROUND PRICING
In addition to volume and manufacturing capacity, the other component of revenue generation is pricing. The current U.S. list price (i.e., the price before insurance coverage and any discounts or rebates) for Zepbound is $1059.9 per month, while a monthly supply of Wegovy sells for $1349. Both companies are keen to point out that patients with insurance coverage or through corporate assistance programs are expected to pay significantly less for these medicines. In addition, drugs that target the GLP-1 receptor, such as Wegovy and Zepbound, continue to show benefits in a number of conditions related to metabolic disorders, ranging from cardiovascular health to kidney disease to sleep apnea, which helps companies justify their price points because the use of these drugs would save healthcare systems money in the long run. Despite these comments, Senator Bernie Sanders, chairman of the Senate Committee on Health, Education, Labor and Pensions, recently launched an investigation into the pricing of Novo's Ozempic and Wegovy.

EVOLVING PIPELINE
While many investors focus primarily on commercial results, both companies (along with several others) are working on the next generations of anti-obesity treatments. These include combining the primary mechanism of targeting the GLP-1 receptor with other modes of action to increase patient weight loss and improve the known gastrointestinal side effects (diarrhea, nausea) of these drugs. Efforts are also being made to improve the convenience of these treatments with less frequent injections and oral options. In addition, drugs with new mechanisms are being developed that may be better able to preserve muscle mass in patients while still leading to fat mass loss, whereas current anti-obesity drugs lead to both muscle and fat mass loss.

OBESITY MARKET OUTLOOK
With these recent developments, the momentum of the obesity market remains intact. As companies work to expand supply and develop new ways to treat the condition, Eli Lilly and Novo Nordisk are expected to generate more than $80 billion in obesity sales by the end of the decade. Given that the obesity market has not yet peaked at this point and that there are several other companies developing anti-obesity drugs, analysts estimate that by the 2030s, obesity alone could be a $100 billion to $150 billion market.

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