Novo Nordisk, Eli Lilly and the GLP-1 economy

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0:26Pushkin. Eli Lilly and Novo Nordisk are already the biggest drug companies by market capitalization that have ever drug companyed. And there is reason to think they may be getting even bigger. And the reason, as many listeners may know, is the GLP-1 weight loss drugs, a class of drugs that some analysts believe could grow to be$100 billion. What should we use? Could grow to be - It sounds like Dr. Evil in Austin Powers. $100 billion. Some analysts believe this class of drugs could eventually be worth upwards of$100 billion a year. This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin.

1:19I am Rob Armstrong. Coming to you from Unhedged World Headquarters in beautiful New York City, I'm joined today by my partner in crime on the Unhedged newsletter, Aidan Reiter. Pleasant tidings. And also, and more importantly, by the FT's pharmaceuticals correspondent, Oliver Bad News Barnes. Thank you for having me, Rob. You know why I call you Bad News Barnes? Why? There was a quite famous basketball player in the early 80s called Marvin Barnes. I've seen the ESPN about him. And the most famous anecdote about Marvin Barnes is he was going to take a team flight going from east to west that was such that the plane actually landed in the new time zone before it took off.

2:07And Barnes refused to board the plane on the grounds that he wasn't going to get any goddamn time machine. and he rented a car and drove instead. So that is by the by nothing. Oliver, I'm going to start with you. Do the GLP-1 drugs live up to the hype? Are they going to be as transformative as we are told? I'm of the opinion they do. Clearly, there is a kind of hype bubble around them. In a way, there is around AI. But what you have with AI is a ton of companies just trying to raise money and slapping an AI sticker on the side. What you have with weight loss drugs are a kind of transformative treatment that goes to the source of treating obesity, which a billion people worldwide have, a hundred million people have in America.

2:57And being obese is not good for your health. There's a ton of cascading effects. It has effects on your heart, stroke risk, cancer. And so on. All very expensive. Yeah. And also they kill you. Yes. And the argument is, you know, as these drug makers tweak, perfect, improve these treatments, and then also convince health insurers in the U.S. and health systems, you know, single payer health systems in Europe of like the merits of this, of how they can make cost savings, as well as just, you know, making people look thinner and hotter. Yeah. That these drugs will be rolled out very, very wide scale.

3:32On what scale have these been rolled out so far? Aidan, do we have some numbers around this? I believe in the U.S. there are 15.5 million people who are on these. Is that right, Oliver? I think it's a little bit unknown. Like there's a lot of people who've been on them and then come off them. Because they do also have side effects, as with a lot of drugs. They have downsides. You know, you get nauseous and stuff like that. But let's assume there's a large number of people that are on them. And a lot more people who could be on them. Exactly. Many of whom are on the Upper East Side of Manhattan and maybe don't need them for medical reasons.

4:05But then also many of whom are in places. And many take them for diabetes too. Exactly. That's what they were originally for. Yeah, indeed. There's two market leaders right now. Do you think that these market leaders can deliver on what Wall Street and what everybody expects? Yeah. So that's the thing. So I'm looking at the stock prices. Gangsters. Eli Lilly, which is not the company we talk about the most in terms of these drugs. We talk more about Novo Nordisk. And in fact, the FT ennobled Novo Nordisk CEO as person of the year last year. Ah, indeed. So Eli Lilly up about 750 % over five years.

4:42Novo Nordisk, 360%. It's been an awesome run for these companies. Eli Lilly is an$850 billion company now. Could be the first trillion dollar drug company. And its forward price earnings ratio has been, at least for most of the past six months, higher than NVIDIA. Yeah. Which is the stock that everybody goes crazy about. It's higher than an individual. But again, it's not a bubble. No. These two companies have been going like head to head for literally a century. Novo used to be Novo and Nordisk. Yes. At one point during the war, one of the companies went and worked with the Nazis and the other one didn't.

5:16Yes. But nonetheless, basically, they've been going back and forth over who has the best insulin products for diabetics. They were insulin companies, both of them, right? For literally a century, right? And they are kind of rivals. And naturally, what grew out of insulin, because you're looking at like cardiometabolic disease and the kind of functions in the body that affect insulin and diabetes, was how might these the secondary ramification of some of these treatments be weight loss. And they started to observe both these companies in the past few decades, you know, kind of R &D people locked away in some random back room at Lilly and at Novo.

5:54Hold on. There's another ancillary effect of these diabetes drugs that they're also, you know, reducing people's weight. And weirdly, they stumbled across these things. The first approval was in the mid 2000s for a kind of unknown Eli Lilly GLP-1. I would just like to throw my favorite piece of trivia was that the compound was originally found in the venom of the Gila monster. Exactly. Right, which is - The what? The Gila monster. It's a strange little lizard in the desert. It's a big lizard, I think. Maybe it's in the South. Anyway - I assumed it was skinny the whole time. It's a very lean, handsome lizard that lives in the Southwestern United States.

6:35So there have been GLP-1s approved for a while, but they weren't very good. They burn up in the body. They didn't last long. You had to inject yourself like six times a day. Yes. The big moment that shifted everything, that changed everything was a Zen pick getting approved, I believe, in 2017 for diabetes. And then once it's approved for diabetes, obviously you've got a load of doctors, including maybe some of those doctors on the Upper East Side, who can start prescribing off label for weight loss. This is something that's important about the American medical system is that once you've got a drug, it's approved.

7:06It's totally the doctor's discretion who they give it to. You can, doctors have the license to use these things off label. So we get this stuff. It's really working. We have a zillion people taking them. What are the potential repercussions? Let's start with the non-financial repercussions. How does this kind of change the world? Aiden. Yeah. I mean, a lot of our colleagues in the FDA have written up about how it changes the approach to fitness, right? Brook Masters had this great column about gyms are going to be all muscle gaining as opposed to fat losing. And it may end a company. It may end Weight Watchers.

7:45End Weight Watchers. You know, it's affecting how Americans buy groceries theoretically, right? Walmart has talked about this. Yeah, there was this comment a year or two ago where a Walmart exec speaking at a conference said, We are seeing changes in the average basket of goods in our grocery operations in the United States, that there's slightly less volume, slightly less calorically dense foods in there, et cetera. Now, retail executives had been known to say just about anything to justify a slightly soft quarter or performance that is. So we can't take – we have to take these things as we take our food with a grain of salt.

8:20high up at a fashion company, a well-known fashion brand, who says they already have started to observe different demand patterns for different sizes. And they attribute that, again, to weight loss. But one can never take a company at its word when it comes to that stuff, because it could just be writing off other big problems. And also, there's the cultural things, right? We have an American culture that's obsessed with being skinny. If you have this route for people to get skinny, it's going to change how we talk about these things. I do think, though, that they are going to have a very dramatic effect on society, not least because clearly, as we discussed earlier, weight is a problem.

8:56And there's lots of, you know, we didn't type one diabetes was a thing when Nova and Lily were competing 100 years ago. Type two diabetes wasn't. And it's a function of our society and our food and the food that we eat. And it's bad. And just to be clear for our listeners, type one and type two diabetes are different. Type one is often genetic. Type two usually results from other cardiometabolic problems. And type two is a function of this, of the kind of society we have and the food we have and, you know, how unhealthy much of it is. And obesity is a function of that, too. And there's lots of disease stemming from that.

9:26And I think that's a convincing case for these drugs. But then also there's lots of other intriguing things. They have effect on inflammation. They could be put to work in autoimmune diseases. People anecdotally report reducing smoking, reducing drinking. It seems to have effects on the appetite system in general. The gut brain. Yeah, yeah. Yeah. Let's talk a little bit about price. How much do these things cost? You know, roughly, you know, I know quite a lot. So I believe Novo Nordisk compounds, which are a Zenpec and Magovi cost around$1 ,350 a month wholesale price. And then Lily's is just below a thousand.

10:03So they're quite expensive. Yeah. Or, you know, you could say they're really cheap. If, you know, if you're going to solve all your problems and or look great on the beach, you know, that might be worth it to some people. Or certain insurance companies, more to the point, Right. If you're going to save money on treating people for other chronic diseases, maybe this is on a net basis, not very much for an insurance company to pay. Exactly. And one has to take into account in the US, there are rebates on those list prices. Right. So that is actually not the kind of true reflection of the price that is being paid by the employer, for instance, for their employee who they're covering it for.

10:37When you look at the coverage, they're almost universally covered for diabetes. For obesity, the companies are still having to kind of sell the merits of these drugs. So you have some employers who are covering them at certain kind of like BMI cutoffs. And then the big beast Medicare, the state-backed healthcare system in the US for the elderly, covers the obesity drugs for other indications. So, for instance, Novo has had an approval for Wagovi, its weight loss drug, to treat heart disease and cardiovascular conditions. So then four people can get that through Medicare if they have those conditions.

11:14And then they'll also benefit with the weight loss, if you see what I mean. We should probably note here that just this week, the Congressional Budget Office looked at this and they did an analysis of what is going to be the cost savings for the system. And they concluded that the price that is currently being charged for these medications does not make up for the benefits, right? So it's too expensive for the benefits the Medicare population in the U.S. is going to receive going forward. And there is a 2027 price negotiation on Medicare for these things. For a Zempic. For a Zempic specifically or is the other ones as well?

11:43Well, for semaglutide, the compound underlying is Zempic. So it would basically mean that Novo is taking a haircut in terms of the amount of money it makes from Medicare. How long did it take you to learn to pronounce the word semaglutide? There is a degree of controversy within the space. Well, first of all, you don't say controversy. This is America and you say controversy. Controversy. There is a debate as to whether it's semaglutide or, what is it, semaglutide? I don't know. There's some debate about exactly how it's pronounced. Yes. And I've gone on the semaglutide side of whatever the other side is.

12:16Okay, fine. Let's go back to the companies a little bit. So these are relatively expensive. Insurance is covering some, not all of it. And there's this question of whether or not the cost savings are worth it for Medicare and some of the big buyers. You recently wrote a big read on, can Eli Lilly be a$1 trillion company? Pharmaceuticals are often subject to boom and bust cycles for a number of reasons. What do you think? Do you think they're going to surge ahead? Is there too much competition? Is this a market bubble in the sense that the market is not really thinking about who else might be coming in?

12:46Yeah. I mean, I always think back to the case, the sort of 90s equivalent of this was the statin drugs. Lipitor, Crestor, et cetera. And it ended up that every drug company had one of these drugs and that was a fiercely competitive market. Is something similar possibly going to happen with semaglitude? Semaglitude-based drugs, GLP-1 drugs? Semaglutide. Semaglutide. So I think there's a few things weighing on how this pans out over the next few years in the shorter term. And then there's the longer term question of competition. Shorter term is, can Eli Lilly and Novo Nordisk get this approved in loads of different indications?

13:24Can they convince payers and insurers and health systems of the merits of covering this? That will have an effect on how the hockey stick of demand, how much of a hockey stick it looks like, right? Then there's also the manufacturing element of it. These are both biologics. They are complex drugs to manufacture. The raw ingredients, the active pharmaceutical ingredients are complex, more difficult and more constrained for both companies. is the fill finish process, the actual process of putting them in the injector pans. And Novo Nordisk and Lilly are throwing money at this. I mean, Lilly has spent$24 billion on it since 2020.

14:01So I should mention there's a lot of history of this in the drug industry, both where you say complex molecules, which is always explained as, you know, a simple molecule is like a chemical. You can see a chemical map of it. These biologics, it's like a soup. It's like grandma's chicken noodle soup. And it has a special recipe and it's cooked up in a cauldron. And, you know, it's not necessarily easy to reproduce. So companies that specialize in this kind of drug like Amgen, you know, with all its drugs has been able, even when the drugs go off patent, to keep a significant amount of the market because nobody knows the special sauce.

14:37Exactly. Then I think longer term, and I speak to a lot of the big shareholders in these companies because they're all kind of wondering, have we called the top yet? When are we calling the top? the kind of longer term question or medium term question is can Lillianova sustain this duopoly they have over the weight loss drug market and there's lots of other weight loss drugs coming through doing lots of slightly different stuff so there's some which adjust for the muscle wastage that you experience and improve that there's some that are like monthly injectables there's some that are pills and all of them have different plays and some seem more effective than lily and novos all of them have different plays and stuff like that my theory though on it is when you look at what we're talking about that kind of centuries-long expertise in this area and the depth of lily and novos pipeline lily for instance has 11 experimental treatments in in weight loss in kind of early stage to late stage trials i think they sustain a large share over this and And you mentioned Lipitor just then.

15:41Lipitor is the example everyone talks about in the industry. Pfizer were fourth to market and they ended up with the biggest drug. Yeah, they were doing$13 billion a year of that drug. I would argue that Lilly's compound, Zetbound, Manjaro is probably already the Lipitor. And maybe that weight loss pill is too. It seems, and from your reporting and from the numbers on Wall Street, that people think Eli Lilly is going to already pull ahead, right? So looking at Wall Street's estimates going forward, it looks like the revenues for Novo Nordisk from these two drugs are going to start declining starting in 2028.

16:16So Novo Nordisk, their Ozempic patent goes off patent. Main U.S. patent. Yeah, their main U.S. patent goes off in 2032, but they lose China in 2026. That's very important. So you can have these traffic generics coming across affecting both of them. And there's pricing. So all my sell side analysts guys keep on talking to me so that they basically in their models have all baked in different price reductions over time, both because, as you discussed, Exempic and semaglutide are up for Medicare negotiation next year. And therefore, that will have an effect on the price cut that may cascade across the system and have effects on Lilly's drugs.

16:50and then also as competition enters the market. And at the moment, we're kind of estimating that the first competitor to get in there might be Roche or AstraZeneca in like 2028 or something like that. When competition enters the market, the obvious thing, if you're someone looking to play as the third, fourth player in weight loss, you're gonna be like, I'm offering the cheap weight loss drug. And then you have an effect on the wider market. And you mentioned Orals before. There's a ton of companies piling into Orals. So do you think that's where these things could shake up for the two companies?

17:18Novo has a a biologic one of these complex soup versions of a pill which is basically an oral version of of semaglutide right? It does not have a small molecule and Novo in fact has never made small molecules So it would be if it was to push into that area would be completely like new territory for it Lily has a small molecule pill called awful glipper on I've got another Can you try and pronounce that? I loved that character in the Lord of the Rings yeah which one was he again yeah i think it was the wizard on the gray um but yes all for glipron which is an amusing side note about making business development decisions in in pharma and there's someone who's probably just like pulling their hair out about this through its sister company chew guy a japanese pharmaceutical company roche had an option for all for glipron to pay upfront less than$50 million a few years ago, to own the rights to it.

18:19And that drug is probably going to be making like upwards of$10 billion a year at its peak. And I think it's maybe the most important side of where this all goes next, because once you have a small molecule pill, it can be way more easily manufactured. You don't have to fill these complex pens. And also there's tons of manufacturing capacity for small molecules outside of the US. You know, there's lots of obese people in Mexico. There's lots of obese people in India, and they will want these drugs. And as one analyst put it to me, Orphaglipuron has the opportunity to blanket the world. And one could argue that is still a bull case for Lilly.

18:53As a very well-known investment banker said to me just the other day, everyone's got Lilly envy. On that happy note, we will be back with Long and Short.

19:15This is long and short. It's that portion of the show where we go long things we like and we go short things we don't like. Bad News Barnes, you have a longer short for us? I've got a short. Tell me. Running clubs. I go down the West Side Highway and I see all these people running and I hate them. And I'm a runner myself, so yeah. You're a runner yourself. All right. But you're only into pharmaceutical weight loss, not... Okay, I've got a short too. My short is inflation. We had the inflation report this morning. Core inflation was like a tick higher than people expected. It doesn't matter. Inflation's dead.

19:49It's over. We can all go home. That is, unless, you know, conflict in the Middle East should rock its oil prices. Okay, Mr. Negative. Listeners, we'll be back in your feed next week. And until then, stay sharp. Unhedged is produced by Jake Harper and edited by Brian Erstad. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhez. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn, and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else.

20:28Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

20:51By the way, I've just remembered it's semaglutide and semaglutide. Those are the two different ways it's pronounced. Okay, we'll get that in later.