(Bloomberg) — The weight loss drug frenzy that’s driven Eli Lilly & Co. and Novo Nordisk A/S to record peaks is raising the stakes for investors, according to Goldman Sachs Group Inc. analysts.
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“Expectations are high, which heightens the risk to potentially disappoint,” according to analyst Chris Shibutani, who said investors have been buying into the obesity drug demand narrative and pricing in “a significant amount of optimism.”
Shibutani, who maintains a hold rating on Lilly, said if the drugmakers were unable to meet the surging demand for the drugs, that could dent the enthusiasm for the stocks. Supply shortages have dogged the popular medicines. He added that competition from other developers and a failure of new medications in the pipeline could also “lead to some retrenchment.”
The rapid uptake of medicines including Mounjaro and Ozempic has catapulted Lilly to becoming the biggest health-care company in the world by market value, and Novo has overtaken its peers to be the most valuable listed company in Europe. Goldman expects the market for such drugs to reach $100 billion by 2030.
In the wake of the rally, risks for the drugmakers are now fairly balanced, strategists led by Allison Nathan said in the note examining the reach of the drugs known as GLP-1s.
“Scope remains for further important positive developments to send these stocks even higher,” according to the bank.
The most critical catalyst could be a decision to have Medicare cover the medications for weight loss.
Novo’s Wegovy is currently covered under Medicare prescription drug programs for heart disease. Given the current prices, experts don’t expect the government to expand coverage to weight-loss anytime soon. Shibutani puts the odds of Medicare covering the drugs for obesity as a 50-50 shot.
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