It is estimated that weight loss drugs will generate $105 billion in annual revenue by 2030. That’s why Ely Lilly (NYSE: LLY) is a $800 billion company. And Norway’s Novo Nordisk (NYSE: NVO) is worth $500 billion. The two weight drugs they brought to market – Lilly’s Zepbound and Novo Nordisk’s Wegovy – command roughly 40% of the weight loss drug market and will bring in over $14 billion in revenue this year.
Project that out to 2030, and these two companies could be pulling down $40 billion in annual revenue if they can maintain their market share.
In 2023, Novo Nordisk and Lilly combined to treat 5 million people for obesity (numbers for this year are not available). An industry insider says the addressable market is 100 million in the U.S. alone.
Any way you look at it, there is a huge market for weight loss drugs. And any way I look at Lilly, I see an expensive stock…
Eli Lilly trades for 20 times its current revenue and has trailing Price-to-Earnings (P/E) ratio of 110. Now Lilly is expected to grow earnings 40% in fiscal 2025, from $16.41 to over $23 per share. And that gives it a forward P/E ratio of 39. That’s still more expensive than Nvidia…
The thing is, the comparison to Nvidia isn’t accurate. Because Nvidia’s graphic processors (GPUs) that are in such high demand are unique. No one else can build a GPU that performs as well. Nvidia has captive customers…
That’s not really true for weight loss drugs. Lilly and Novo Nordisk’s drugs have comparable metrics. And there are a host of other biotechs with weight loss drugs either already on the market – like Farxiga from Astra Zeneca (NYSE: AZN) – or in development at companies like Roche (ROG.SW), Amgen (NASDAQ: AMGN), and even Pfizer (NYSE: PFE).
Now, these are all massive companies. The smallest, believe it or not, is Pfizer, with a market cap of $165 billion. Yes, going all in on COVID vaccines wasn’t the best plan for Pfizer – the stock has been cut in half in the last two years.
Roche is a $212 billion company, Astra Zeneca is worth $238 billion and Amgen is worth $177 billion. Of course success with weight loss drugs for any (or all) of these companies will boost their share price (though I should note that Pfizer is apparently struggling with its development), we’re not likely to be talking about life-changing gains.
To really hit a winner in the weight loss drug space, you gotta think small…
Small Players, Potentially Big Hits
There are three small weight loss drug companies you should know about.
Terns Pharma (NASDAQ: TERNS) with a $700 million market cap, Structure Therapeutics (NASDAQ: GPCR) with a $2.5 billion market cap and Viking Therapeutics (NASDAQ: VKTX) with $7 billion market cap.
I’m not going to dig into each company’s drug strategy and results. For one, I’m not a chemist or a doctor and I don’t really understand the technology. And if you’re going to pick winners in biotech you better know your stuff.
Plus, it’s not necessary to take night classes in chemistry to get a handle on the outlook for each stock. That’s what the stock market is for…
Each of these companies is development stage. They do not yet have revenue. Their valuations are based solely on expectations for success as determined by analysts and investors who do have degrees in chemistry and are actual doctors.
The fact that Viking carries a $7 billion market cap tells us that it has the highest odds of success among the three. At just $700 million, Terns has the worst chance for success.
Now I’m going to take this one step further and tell you that if you’re interested in the next big winner in the weight loss drug, think about it this way: if the weight loss drug market is truly going to be worth $105 billion in 6 years, it is not necessary to be the big dog in the space. Even if a company can capture 5% market share, that’s $5 billion in recurring annual revenue. Enough to turn Viking’s $7 billion market cap into $50 billion, or more…
This a prime sector to avoid picking winners. Take your investment money and buy shares of each of the small stocks.
Cheers,
Briton Ryle
Chief Investment Strategist
Outsider Club
X/Twitter: https://twitter.com/BritonRyle
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