Big Pharma’s obesity bonanza faces new tests

Powerful weight-loss drugs like Wegovy and Zepbound have driven nearly $1 trillion in market-capitalization gains, with most of those gains flowing to Eli Lilly and Novo Nordisk, the dominant players in the obesity-drug market. Would-be challengers such as Amgen and Viking Therapeutics have also seen their shares surge on promising data.

Two major factors have powered these gains. First, the health benefits seem genuine: Clinical trial data for GLP-1 drugs have shown not only impressive weight loss but also potential reduced risk of heart attacks and sleep apnea. Second, there is exploding consumer demand, being driven in part by the psychological gratification that many people experience as their weight drops. That has fueled huge patient demand that, until very recently, has outstripped supply while creating a booming industry for compounders and telehealth companies.

But with so much optimism now priced into these stocks, further growth will be more challenging. Already, Lilly and Novo stocks have begun to lose momentum. It isn’t that Wall Street doubts the massive opportunity to treat hundreds of millions of people with obesity worldwide; rather, investors are anticipating several pivotal commercial and clinical developments that could either keep the party going at nosebleed valuations or lead many to take a breather.

All eyes will be on Novo Nordisk when the Danish company prepares to report quarterly results on Wednesday. The fear on Wall Street right now is that after Eli Lilly reported a shocking sales miss with Mounjaro and Zepbound, a poor showing for Novo’s Ozempic and Wegovy—which are both based on the active ingredient semaglutide—could signal a broader slowdown for the industry.

Investors are also anxiously awaiting late-stage data from Novo’s experimental drug CagriSema, a combination of semaglutide and cagrilintide, which has shown greater blood-sugar control and weight-loss benefits in diabetic patients. Investor skittishness has sent Novo Nordisk’s U.S.-traded shares down 13% over the past six months. But if Novo can clear these coming hurdles, as well as close its controversial acquisition of a U.S.-based contract manufacturing firm, it could set the stage for a significant relief rally.

Amgen is also facing a critical moment that could help position the biotech as the most serious contender to join the current duopoly. Much is riding on mid-stage trial data expected by year-end. If all goes well for Amgen, it could have a drug in the market in about two years. The drug currently undergoing testing, while effective, is known to cause side effects like vomiting and investors will be eager to see how prevalent such symptoms are. A key advantage for Amgen could be convenience: The drug is being tested as a once-monthly injection, compared with weekly for the current drugs.

Amgen’s reputation as a skilled manufacturer strengthens its prospects, especially given the complexity of producing these weight-loss injections, says Evan Seigerman, an analyst at BMO Capital Markets. With current supply shortages, a treatment that requires only 12 injections a year could also offer a manufacturing edge, he adds.

In many ways, Eli Lilly still controls its own destiny as the largest player in this space. Its drug Zepbound is more potent than Wegovy and its pipeline of injectables and pills looks more promising, with late-stage results from orforglipron, its non-peptide GLP-1 pill, expected next year. Over the coming months, investors will be watching closely to see if Lilly can deliver commercially.

While Novo’s Ozempic has wide name recognition, Lilly’s Zepbound is less known. The company last week announced it will start advertising the drug to consumers. It will also need to step up its work with wholesalers and the entire medical apparatus, from insurers to doctors, to make sure people are able to access its drugs. Right now, many employers don’t want to cover them for obesity and doctors are still hesitant to prescribe them. If the company delivers another disappointing report early next year, the GLP-1 thesis could start to face some real cracks.

The roster of companies vying for a place in this lucrative market is extensive. In the next few months, investors are anticipating updates from several other big players—AstraZeneca, Roche and Pfizer—as well as from smaller biotechs like Structure Therapeutics, Viking and Zealand Pharma. And investors are still waiting for Merck, which needs to find a way to replace the expected decline of its cancer blockbuster Keytruda, to write a big check to get in on the action.

Tim Opler, a managing director of investment banking at Stifel, argues that the challenge for a Big Pharma acquirer is that they don’t just want to buy an asset with similar efficacy to Wegovy and are instead hunting for next-generation technologies. With Wegovy’s patent expiring early next decade, generics will follow, so to compete in obesity treatments long term, companies must push the frontier of innovation, much of which is being driven by early-stage firms.

While still in its early days, the obesity-drug boom has already generated substantial fortunes on Wall Street. The pressure is now on for reality to match those sky-high expectations.

Write to David Wainer at david.wainer@wsj.com