Will Ozempic hurt healthcare stocks? Here are 5 reasons we don’t think so

Nick Sundich Nick Sundich, July 8, 2024

Will Ozempic hurt healthcare stocks? Investors who’ve been selling healthcare stocks left right and centre – except Novo Nordisk of course, now the largest stock in Europe by market capitalisation – believe it will. But even though we hear these arguments loud and clear, we think these fears are overblown.

Ozempic is a weight-loss drug that is not the first to have been invented, but is the most popular. Although it is only approved as a diabetes drug, the weight-loss impact has led to non-diabetics taking it, even though it is not FDA-approved as a weight-loss drug.

Sure, Novo Nordisk had no regulatory approval for non-diabetics, but just as we saw with Uber, when a business’ product or service has that compelling an impact, people will go to the point of defying the law in favour of it. And regulators can only keep flipping the bird for so long before they realise their efforts are all in vain.

Ozempic is a weekly injection into your gut that helps lower blood sugar by helping the pancreas make more insulin. Ozempic is a so-called Glucagon-like peptide-1 (GLP-1) drug after the impact of the hormone it impacts while eating.

 

Why investors fear Ozempic’s impact

If you can aid weight loss and rescue obesity – and the data overwhelmingly depicts that the drug can – you can reduce the risk for many health conditions caused by obesity such as heart disease. In doing so, you eliminate the market for many medtech and biotech companies.

The impact may go beyond the healthcare sectors – Walmart (NYSE:WMT) publicly commented last year an observation that people who were buying weight-loss drugs like Wegovy and Ozempic (not to mention Mounjaro by Eli Lilly) were buying less food.

Investment bank Goldman Sachs and Morgan Stanley released data showing that those on the drug used had 52% lower coffee consumption, 58% less casual dining, 71% less pizza consumption and 73% fast-food consumption generally.

In our view, the impact has been exaggerated and too many healthcare stocks have been sold off unfairly. Here are 5 reasons why.

 

5 reasons why the answer to the question ‘will Ozempic hurt healthcare stocks?’ is no

 

1. It doesn’t aid those already suffering from obesity-related conditions

Weight loss drugs like Ozempic do not treat any diseases when they finally show up. Also, even though the risk of obesity-related diseases is lower if you’re not obese, it does not entirely eliminate the risk altogether. even if drugs like Ozempic could impact the market for healthcare stocks in the long-term, it would be a while (i.e. decades) to see such an impact take place.

 

2. Supply chain issues

This could be resolved in the future, but there have been severe supply chain issues for Ozempic since it has taken off in popularity. We documented this in our analysis on Novo Nordisk earlier this year. With such rapid demand, the company will need to invest billions to keep up. Indeed, it spent US$6bn to expand production in 2023, nearly four times the amount spent two years ago. And it will also need to hire thousands of employees. There’s no promise that these efforts will be successful.

 

3. The market may become too fragmented for Ozempic to have an impact

As popular as Ozempic has become, there is the risk of competition, particularly from Eli Lilly, which sells Mounjaro for diabetes and Zepbound for weight loss. Obviously, this could put downward pressure on prices and with it margins. With so many products on the market, it would certainly be difficult for Ozempic to dent healthcare companies in the way that it could if it rose to world domination. We concede that Novo Nordisk is looking to future-proof itself. With patents set to expire in 2032, Novo is working on new treatments, including a potential oral tablet.

 

4. Regulators may step in

So far, major regulators (i.e. the FDA) have not stepped in, but don’t discount the prospect of them doing so in a major way. There have been some minor interventions in 2024. For instance, the Danish Medicines Agency plans to reduce subsidies and only pay for the drugs if patients cannot be treated with better alternatives. And doctors in the UK were instructed to stop prescribing the drug to non-diabetics and prioritise alternatives. Even if you assume Ozempic really works so well, it may not be of much use if regulators step in.

 

5. Some stocks may benefit

We already mentioned above that Novo Nordisk is having to invest a lot of money to keep up with demand. Don’t discount the possibility that some healthcare stocks may called into help. And we’re not just speculating here. Thermo Fisher, one of the most prominent healthcare companies in the world was last year, hired as a contract manufacturer by Novo Nordisk for Wegovy. And it may not be the last if demand continues to hold. Also, companies that develop drugs to challenge Ozempic could be winners, even years before Ozempic’s patents expire.

 

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