Andrew Baum, M.D., Citi Research
Citi Research Health Care Analyst Andrew Baum, M.D., maintains a “buy” recommendation on GLP-1 drugmakers Novo Nordisk (NYSE:NVO) and Eli Lilly (NYSE:LLY) despite their lofty valuations.
Dr. Baum is the Global Head of Healthcare Research for Citi Research. Before joining Citi in 2011, he covered European Pharmaceuticals at Morgan Stanley for 14 years. Previous to that he was a U.K. Pharmaceuticals and Biotechnology analyst at Salomon Brothers.
Dr. Baum holds an M.A. degree in Physiological Sciences and an M.D. degree from Oxford University. He is a member of the American Heart Association, American Society of Oncology and the DIA. He is also a Fellow of the Royal Society of Medicine.
He says:
“The momentum remains very much with the two names, which are obesity plays and which have growth rates which have escaped the orbit of the rest of the pharma sector. And so, they are benchmarked more against tech stocks than they are against their pharma peers.
And the investor base reflects that as well. It’s heavily populated by generalists for those names, but less so for the other pharma names, much less so.
So, the two standout names for last year were the two incretin manufacturers, which address the diabetes, but particularly obesity, market, with phenomenal share price appreciation. And that pattern has extended into 2024. And the willingness of investors to continue to envisage ever greater peak sales of these forecasts is unabated.
So this is why you have stocks trading up to 40x times multiples compared to the rest of the sector, because of the expectation of growth and just the sheer size of the obese patient population, which, as you know, is somewhere between one and two, or one in three in the United States.”
Dr. Baum cites the effectiveness and safety record as factors behind the drugs’ rapid adoption.
“Well, these are without doubt the most effective and safest drugs for addressing obesity. And the magnitude of weight loss is 18% plus. And we are just at the beginning of the evolution of these drugs; not to become any more potent, but to be easier to dose, less frequent dosing required.
As well as in the future we may well have an adjunctive therapy which will increase the lean muscle mass at the same time as reducing body fat.
So when you think about the enormity of the public health issues which are attributed to obesity and just the magnitude of how many patients just simply struggle to control their weight — losing weight is one thing, but maintaining the weight once you’ve lost is another.
If you know anyone who’s ever been on a diet, these drugs are a sort of miracle cure. And this has been the case for the best part of 18 months. Media platforms are full of stories of individuals who have gone through miraculous weight loss.
What is as important, if not more important, is that these drugs have a history of being used extensively in diabetics, particularly the Novo Nordisk (NYSE:NVO) drug, for the last 13 years. So, unusually, we have a very long and very large database to provide reassurance on safety.
And given some of the historic obesity drugs of many years ago, where there was a combination of amphetamines called the Fen-Phen diet, very, very effective drugs, but they caused cardiac toxicities. Here, we don’t have this concern because it’s been in millions of patients over a prolonged period. So that’s the first thing that’s different about these drugs.
The second thing, which is as important, is that as well as causing very significant weight reduction and weight maintenance, there has been a stream of positive outcome data for these drugs showing there’s a 20% reduction in the risk of having a heart attack if you’ve already had an event previously, a reduction in the rate of chronic kidney disease. We’re also anticipating similar reductions in diseases such as sleep apnea.
So not only you are getting the cosmetic benefit of patients achieving a goal they’ve sometimes striven for years, but you’re getting very, very significant health benefits.”
Dr. Baum notes that the market has already priced in the potentially wide-ranging impacts of the drug class.
“And the question is, how big is that market ultimately going to be? And today, probably these stocks are pricing in $160 billion in peak sales for diabetes and obesity combined, with the bulk of that being obesity. But it could be double that or more. And the question is, why is that not going to happen? And this really is going to determine the future share price trajectory.
But obviously, when you’re trading on that type of multiple and when the stocks are already discounting a forecast for peak sales which is a multiple of anything in history, obviously you have to be very thoughtful about potential risk to those revenues.
So the two incumbents and market leaders are Novo and Eli Lilly (NYSE:LLY). And if you look at the share price, that’s all you need to know in terms of how effectively the market’s priced it in. And both of them are actively developing the next generation of weight loss and weight maintenance drugs, and in some cases muscle-building drugs in order to continue the lead they have, compared to the competition.
Of course, when you have a market of that size, everyone wants in. And so, there is no shortage of competitors to those companies that currently do not yet have an approved agents, but who are pushing drugs as fast as they can through the clinic, either because they potentially can be dosed less often — so that would be a drug like Amgen (NASDAQ:AMGN); they have a drug that can be dosed once a month, maybe once every two months, maybe less frequently than that, as opposed to once every week. So that’s their play.
And then you have other companies who are developing therapies on the basis of more effective, so greater, faster weight loss. And then you have other companies who are prosecuting the muscle build.
But there are other dimensions to go down, because there’s a whole pack of competition from both pharma and biotech to try and get a slice of this very substantial market opportunity.
We have ‘buys’ on both Lilly and Novo. The valuation makes you somewhat hesitant, but because we’re sort of at the beginning of a cycle, we think there’s risk in stepping away too early. So both those two names with the obesity drugs are very much on our “buy” list. But they’re not at the top.”
Outside of the weight loss arena, Dr. Baum continues to like Merck.
“The name that we added to our most preferred major at the beginning of 2024 is Merck (NYSE:MRK), which is a name that we liked last year. They had a stream of earnings beats on the quarters, they’ve done some great business development, but yet the stock underperformed; it was fairly unremarkable.
And I think a key reason for that is Lilly and Novo have been sucking in all the capital that was going into pharma names, meaning that great stories like Merck just weren’t getting the share price that they truly warranted, given the data and the financials they were delivering.
So, since that time, Merck has received attention from investors and has had a very nice period of share price appreciation. And I think it’s set to continue. It’s not a play on the incretins, the drugs that address obesity and diabetes. Instead, it’s a call on their ability to manage their way through what is going to be the single biggest patent expiration of a single pharmaceutical product, which is Keytruda.
And the market’s been fearful that this drug, which will have peak sales of $35 billion or so, will prove very difficult for Merck to sustain revenues. And then to even accelerate out of that, because of the enormity and the profitability of that drug.
But Merck has been very creative and dynamic in their business development and portfolio management. That makes us confident at least they’re going to be able to manage their way through.”
Read more of Dr. Baum’s views on the large cap pharma sector, exclusively in The Wall Street Transcript.
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