Weight loss drug war heats up

The field for weight loss drugs has become more crowded, but US-based Eli Lilly (NYSE: LLY) and Denmark’s Novo Nordisk (NYSE: NOVO) still have a big lead even as challengers loom on the horizon.

The potential for outsized profits always attracts competition, so within the last month Pfizer Inc. (NYSE: PFE) and Switzerland-based Roche Holdings Inc. (OTC: RHHBY) have tossed their hats into the ring. Both released encouraging results of early-stage weight loss pill trials which moved their shares higher. “Early stage” is a key thing to remember, but Roche is up 30% in the past three months as of the time of writing and Pfizer is 4% higher.

But Lilly and Novo Nordisk are also on the move. Both are improving their formulations and exploring applications for other conditions such as high blood pressure and liver and heart disease. Both are developing pills which will eventually do away with the inconvenience and discomfort of weekly injections.

In July, the UK’s health regulator approved the use of Novo Nordisk’s Wegovy for obese adults suffering from heart problems or strokes. It follows a similar decision by the US Food and Drug Administration in March. Lilly is exploring whether its drug can help with obstructive sleep apnea. In early tests it has shown potential to reduce the severity of the condition.  

Both are also spending billions to build manufacturing facilities and expand their marketing and distribution reach. You may have noticed that Ozempic ads were front and centre during CBC’s Olympic coverage. The competition will have to come up with something markedly better to overcome this sort of head start and persuade customers to switch.

Both Lilly and Novo Nordisk released earnings updates this month with their shares moving in different directions. Novo Nordisk’s sales surged 55% year-over-year, but that was less than expected because of discounts to US buyers. Its shares fell 7% on the news, though rebounded later. They are still up 30% on the year, as of the time of writing.

Lilly’s shares surged a day later after it reported second-quarter earnings that beat estimates and raised its outlook for the year. Its shares are up 58% year-to-date.

Pfizer stopped development of a twice daily pill last year because patients had difficulty tolerating the nausea and gastric issues which led to a high dropout rate. There were also concerns about its impact on liver function. Pfizer has continued developing a once-a-day pill based on the compound called danuglipron. It is similar to the formulations used by Novo Nordisk and Eli Lilly for Mounjaro, Ozempic, and Wegovy. 

Meanwhile, Roche says patients who took their medication for four weeks in a Phase 1 trial lost an average of 6.1% of their bodyweight. It is moving on to the next phase of testing. 

The drugs work by stimulating insulin production, which slows digestion and makes people feel fuller, longer. They eat less and lose up to 15% or more of their body weight in a year on average. For those who are obese, the weight loss reduces stress on their heart and other organs, cutting risks of heart attack and strokes.

I spoke to Elliot Johnson, chief investment officer of Toronto’s Evolve ETFs for some insight.  Evolve’s Healthcare Enhanced Yield Fund (TSX: LIFE) holds all four of these companies among its broader portfolio of global health care stocks. The ETF was one of the first the company launched six years ago and is discussed below.

Mr. Johnson feels the big weight loss story is the development of pills which may still be some years away. He believes they will eventually push weekly injections aside and make the drugs more attractive to a wider market.

“Ozempic is a super drug, and people love it, but you have to keep the shots in your fridge and then inject yourself. Compare that to a pill,” he said.

The other notable development is efforts to persuade US medical insurers to provide the weight loss versions of these drugs under company drug plans. Employees want them and employers see them as an attractive benefit.

He says Eli Lilly has done a lot of work with insurers to persuade them to pay for Zepbound, the weight loss formulation. It is also working with Medicare, which covers about 65 million Americans, to see how it might adopt payment for the drugs, particularly in pill form.

“We think there’s game changer dynamics to that,” he said.

For now, Mr. Elliott believes that Lilly and Novo Nordisk have a significant advantage, though whether there they are the ultimate winners is unknown. Not surprisingly, he believes an ETF is the way to go because it allows investors to capture the theme via a bigger basket of companies while cutting their risk.

Here’s a close look at the Evolve Healthcare Enhanced Yield Fund ETF.

The security: This passively managed ETF holds 20 global healthcare companies that are the constituents of the Solactive Global Healthcare 20 Index. It has hedged and unhedged options and uses a covered call strategy for up to a third of the holdings to enhance yield. 

Performance: At the time of writing the fund has a total return of 11.8 year-to-date and a three-year average annual return of 6.8%, according to Morningstar Research, .  

Key metrics: The ETF has $291 million in assets and a MER of 0.45%.

Portfolio: About 70% of the holdings are in the US, 11% in Switzerland, and 10% in France. Roche is the top holding (5.7%), followed by Danaher Inc. (5.5%) and Thermo Fisher Scientific Inc. (5.51%). Roche, Eli Lilly, Novo Nordisk, and Pfizer combined make up 20% of the fund.

Discussion: This ETF offers exposure to a diversified group of global drug firms. It also captures developments in weight loss medications with these companies. The holdings have the financial depth to invest in research, expand production, leverage their global marketing reach, and navigate differing regulatory demands. The covered call strategy reduces some upside gain, but the tradeoff is income for those seeking it.

Distribution policy: The ETF’s trailing 12 month yield is 8.86% with payments made monthly. The monthly distribution was raised from 16 cents to 19 cents in July. The dividends are not eligible for the dividend tax credit.

This article appeared in the The Income Investor  on Aug 15, 2024.  For information on how to reprint this article please view this page.