Is there a GLP-1 bubble?

Unlock Editor’s Digest for free

FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.

Good morning. Hurricane Milton hits Florida. The conflict in the Middle East is still hot. It’s fair to say that we’ve already had a few surprises in October. Let’s hope the CPI, released this morning, is no different. Email us your concerns: [email protected] and [email protected].

Is there a GLP-1 bubble?

AI gets a lot of attention. There have been thousands of ideas about how it will transform society, and nearly as many have argued that AI hype has driven tech stocks into bubble territory. Glucagon-like peptide-1 (GLP-1) obesity drugs are also receiving a lot of attention for their impact on fashion, exercise, and health. But hardly anyone seems to question whether there is a GLP bubble.

Eli Lilly and Novo Nordisk, which are the top GLPs on the market, have significantly outperformed the S&P 500 over the past five years:

Eli Lilly has a price-to-earnings ratio almost as high as Nvidia’s:

Expectations for both companies are very high. Morningstar estimates that the GLP-1 drug market will be worth $200 billion by 2031, and analysts expect Eli Lilly and Novo Nordisk to take the lion’s share. Revenue is expected to triple for Eli Lilly between now and 2031, largely driven by its GLP-1 successes Zepbound and Mounjaro:

Novo Nordisk is on a similar trajectory, although Wall Street expects its GLP-1 revenues from Wegovy and Ozempic to start declining after 2029:

Free cash flow estimates for the two companies are even more staggering, with both expected to pull in more than $35 billion by 2031:

Are the expectations too high? There are several factors to consider.

The competition is fierce. Profitable drugs invite competitors with slightly different formulations or delivery methods. Here is a chart from Morningstar of GLP-1 market entrants. Novo Nordisk and Eli Lilly can keep their edge for a while with their own new products – Novo Nordisk already has an oral drug on the market, although it’s not as popular as the injectable, and both companies are in first place. of the portion on oral GLP-1 with lower doses. But Pfizer and Roche will soon follow after:

Then there are the patents. Novo is scheduled to lose its US patent in 2032, while Eli Lilly is slated for 2036 (this partly explains its valuation premium over Novo Nordisk). But importantly for both, Novo Nordisk’s GLP-1 products lose their Chinese patents in 2026, potentially opening up the US and European markets to trafficked generics.

The market will start discounting patent expirations years before they actually arrive. AstraZeneca’s stock traded sideways for years (at a single-digit price-to-earnings valuation) before the main patents for its blockbusters Nexium and Seroquel expired in the early teens. Pfizer launched its mega-blockbuster Lipitor in 1996. Its revenue peaked at nearly $13 billion in 2006 and was still around $10 billion in 2010, a year before its US patent expired. But the stock peaked by 2000 and traded at less than 10 times earnings from 2008 to 2011.

It’s also worth noting, in the context of the competition, that while Lipitor was by far the best-selling cholesterol-fighting statin drug, it was the fifth to launch. Just because Lilly and Novo were first in the BPL doesn’t mean they will maintain their lead.

Pricing will also be a question going forward. GLP-1 faces Medicare price negotiations in 2027, and this week’s CBO report suggests Medicare and other insurers may demand significant price cuts.

There is also uncertainty about future volumes. Here’s Morningstar’s Karen Andersen, one of the few analysts who expressed skepticism about the buy case for Lilly and Novo:

One of the (big questions) is how long patients will have to stay on therapy. So far from what we’ve seen, it’s difficult to maintain weight loss when patients come off therapy. Eli Lilly, Novo Nordisk and competitors are thinking about how best to help patients comply with a maintenance regimen. The answer may be to take the medicine less often or at a lower dose. . . This will have huge implications for the long-term revenue forecast of these companies and the potential health benefits of drug use.

Finally, weight loss drugs have an embarrassing history. Some readers may remember the rise and fall of Fen-Phen, or how Sanofi’s Acomplia was pulled in Europe and never won approval in the US. There have been rumblings about muscle wasting and other problems with GLP-1 drugs. As the population of people being treated grows, new problems may arise.

We don’t know if Lilly and Novo are overvalued. If other drug companies don’t develop good alternatives in the next couple of years, no worrisome side effects emerge, most patients are happy to stay on the drugs long-term, and price negotiations go well, the two companies should be printing money for years to come What worries us is that no one in the market seems to be taking the bear side of the GLP-1 deal. In markets, unanimity is dangerous.

(Reiter and Armstrong)

A good read

Mystery (maybe) solved.

FT Unhedged Podcast

Can’t get enough of Unhedged? Listen to our new podcast for a 15-minute dive into the latest market news and financial headlines, twice a week. Keep up to date with previous editions of the newsletter here.