By Jacob Sonenshine
Stocks of anti-obesity drugmakers Eli Lilly, Novo Nordisk, and Amgen have gotten hit as the market frets over what a Robert F. Kennedy Jr.-run Department of Health and Human Services would mean for the group. The worries are overblown, and investors should use the selloff to scoop the stocks up on the cheap.
It's been a difficult second half of the year for Amgen, Lilly, and Novo Nordisk, which have tumbled since peaking during the summer. The selling started as run-of-the-mill profit-taking, as investors locked in gains from these names. It picked up steam after the Federal Reserve cut interest rates and the election approached. When President-elect Donald Trump appointed RFK Jr. to lead the agency, panic selling set in -- and no wonder.
Kennedy isn't a fan of Novo Nordisk's weight-loss treatment Ozempic, which costs the government too much money to insure. Investors are concerned that he may push for less insurance coverage of the drugs or even lower GLP-1 prices. Amgen stock has dropped 9% in November, while Lilly has fallen 17% and Novo Nordisk has declined 10%.
Don't expect much to come of the fears. For starters, the agency, for all its responsibilities, doesn't have unilateral power to change the landscape of drug coverage and pricing. It would take an act of Congress to allow Medicare to pay for anti-obesity drugs.
BMO Capital Markets analyst Evan Seigerman reiterated his Outperform ratings on Lilly, Amgen, and Novo Nordisk on Monday. "Continued selloffs of obesity names within our coverage...reflect more fear than real fundamental downside risk," he wrote.
There's still plenty of room for growth in the obesity space. A little over a billion people now suffer from the condition globally, according to the World Health Organization, and with the treatments selling for hundreds and sometimes thousands of dollars, the long-term sales opportunity could be huge. Patients are only starting to adopt the treatments, which means drugmakers could experience a massive boost to profits in the years to come.
That should mean supercharged growth for Lilly. Sales of Zepbound and Mounjaro are expected to hit about $18 billion by 2026, according to FactSet's analyst consensus forecast, up from projections of just over $8 billion for this year. Its total revenue is expected to hit $69 billion in 2026, up from $45.7 billion in 2024, while earnings surge to almost $30 a share, from $13.26. What's more, at $753, Lilly stock fetches 35 times 12-month forward earnings, down from a July peak of 57.2 times -- a far less demanding valuation for a stock that is still producing double-digit growth.
Novo is in a similar situation. Sales of Ozempic and Wegovy are expected to rise from $26 billion this year to about $41 billion by 2026. While its other medications are growing at a slower pace, the obesity drugs should still drive double-digit cumulative revenue and earnings growth over the next two years. The Swedish company's American depositary receipts trade at a more compelling 26 times 12-month forward earnings, down from a July peak of 38.9 times.
Amgen stock never enjoyed the same boost as Lilly and Novo, partially because its obesity drug has yet to hit the market. The company, however, said on its third-quarter earnings call that an obesity candidate, currently known as AMG 513, has begun Phase One testing. Eventual approval of the product could result in billions of dollars of additional sales, boosting earnings. Amgen needs any boost it can get. Its sales are expected to grow to $34.9 billion by 2026, up just 11% from 2024's $31.1 billion, as some of its popular drugs go off patent and it loses market share. But at just 13.8 times 12-month forward earnings, down from its July peak of 16.7 times, those worries -- and RFK Jr. -- seem priced in.
Never let a healthy selloff go to waste.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
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November 21, 2024 02:00 ET (07:00 GMT)
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