The obesity market is expected to grow into a $54B market — dominated by these two companies

And it doesn’t involve eating less or exercising. All it requires is $1,000-$1,500 a month and potential nausea or diarrhea. After years of failed drugs, a new class of weight loss drugs reached the market last year — proving to be highly effective.

Weighing the 1.2 million tonne problem

Obesity can lead to heart disease — one of the leading causes of death in the U.S. With nearly 40% of Americans over 20 years old being obese, the estimated cost of U.S. obesity was ~$173B in 2019.

Wall Street has high hopes for the industry, with Morgan Stanley expecting global obesity drug sales to reach $54B by 2030 — up from the $2.4B estimated sales this year. Two giants are expected to dominate the market:

• Novo Nordisk (NYSE:NVO) received FDA approval for its weight loss drug last year.
• Eli Lilly (NYSE:LLY)’s Tirzepatide received FDA approval to treat diabetes and, in phase three trials, helped obese people lose as much as 22.5% of their weight.

These drugs are expensive, and many insurers think such treatments shouldn’t be covered — a decision that will greatly impact industry sales.

Incoming catalysts

Analysts are comparing the obesity market with the high blood pressure market of the 1980s — which grew into a $30B market by the end of the ‘90s. There are a few catalysts incoming for the industry:

• Trial results: This year, Novo trial results will show if the drug can reduce heart failure and other risks among obese patients — a selling point to insurers.
• Policies: Morgan Stanley analysts expect Congress to expand Medicare and Medicaid coverage for obesity treatments in the next few years.

Eli Lilly — which is expected to generate a smaller portion of its sales from obesity drugs — is seen as a more diversified bet.

Investors: Pharma has been a hot sector

High expectations for these drugs have sent both Novo and Eli’s stocks up in recent years — both of which are:

• Defensive stocks and have outperformed the S&P 500 in 2022 ($LLY up 14%; $NVO down 6%).
• Trading at steep premiums compared to the rest of the pharma sector.

One concern: If the market does begin recovering, money could rotate out of defensive sectors into higher-growth sectors — which are more sensitive to economic changes.