Novo Nordisk (NVO -2.80%) and Eli Lilly (LLY -0.93%) stocks have bucked the bear market trend so far this year, gaining 6% and 20% respectively, compared to the S&P 500's loss of more than 17%. These two pharmaceutical giants, which each bring in over $20 billion in annual revenue, are evidence that as inflation wreaks havoc on consumer spending habits, healthcare remains a necessity.
After strong first-quarter earnings reports, followed by bullish comments from analysts, there is more reason to like these stocks as part of a long-term investment strategy. Can anything slow down the momentum at this point?
Analysts at Morgan Stanley recently noted that obesity has the potential to become the next blockbuster pharma category, reaching a value of $54 billion in 2030. The main reason for that projection is that treatment trends are showing more of a focus on upstream causes of diabetes and cardiovascular disease, rather than on treating the resulting diseases.
Novo's Wegovy is helping patients with weight loss
Wegovy is just one of six U.S. Food and Drug Administration (FDA)-approved medications for long-term treatment of obesity, and is the first and only FDA-approved weight management medication since 2014, after receiving approval on June 4, 2021. Three weeks after that approval, I wrote about the potential for Novo investors to benefit from the growth potential.
What makes this drug important is that 70% of U.S. adults have obesity or are overweight. This can lead to potentially fatal issues such as diabetes, cardiovascular disease, and stroke, and has a link to increased risk of cancer. During clinical trials, the drug showed success in helping patients lose an average of 12.4% of their body weight. A 5% to 10% weight loss has been shown to reduce the risk of cardiovascular disease.
For Novo to have the best-in-class obesity drug, it will need to make sure the drug is priced for easy accessibility by patients. The Institute for Clinical and Economic Review (ICER) took a look at Wegovy, along with three other previously approved and established obesity drugs, noting that the Novo drug has shown to achieve the best weight loss numbers.
Be that as it may, ICER also noted that the treatment remains at a disadvantage when it comes to pricing, as mentioned in my previous article. So success may come down to whether patients are willing to pay a higher price for the potential of greater weight loss. As of 2021, Novo doesn't seem to be having problems getting its obesity treatments in the hands of providers and patients. It has seen an increase of 50% in obesity treatment sales on a year-over-year basis, to $1.2 billion.
Novo's stock has performed well over the past five years, growing by 141%. That momentum should continue for long-term investors as the growing anti-obesity drug market pads Novo's annual revenue.
Eli Lilly is developing a competitor of its own
The obesity market is drawing a growing set of competitors. Eli Lilly has its own anti-obesity drug candidate, tirzepatide, which is currently in phase 3 clinical trials and has proven effective at achieving up to 22% body weight loss for patients, with an average 15% loss. Lilly's Vice President of Product Development, Jeff Emmick, has confidence in the drug's potential, which could potentially become a strong challenger to Novo's Wegovy if given FDA approval.
In addition, Regeneron has teamed up with AstraZeneca to develop an anti-obesity treatment, adding still more competition.
Tirzepatide is not the only momentum Lilly has going for it. The company's annual revenue for 2021 came in at $28 billion, a 15% year-over-year increase. That has helped boost the stock price by 20% year to date.
Second, the company has a pipeline that includes positive phase 3 data for lebrikizumab, its clinical study treatment for moderate-to-severe atopic dermatitis, and mirikizumab for treating moderate-to-severe ulcerative colitis. The company believes that final data results for these treatments will be strong enough to support regulatory submissions in 2022, which could lead to potential FDA approvals in 2023.
There are many pharmaceutical stocks that provide an opportunity for growth, especially after coming out of a bear market. But for long-term investors looking for big gains in a market with the potential to explode over the next seven years, Novo Nordisk and Eli Lilly both offer that opportunity on top of historically successful growth already in place.