Lilly, Novo and the quest for curing obesity (incl. Excel workbook)
Anti-obesity drugs are trending hard. This has propelled these two stocks to the moon. Is that justified?
Technological innovation can capture value for shareholders when it positively impacts customers. The more people are impacted by an innovation and the more profound the impact per individual, the more disruptive the innovation will prove to be.
Obesity is one of the biggest ailments of humanity and causes all kinds of follow-up issues ranging from mental health to cardiovascular diseases and even cancer. According to the WHO, obesity causes 5% of deaths globally and more than 650 million people are living with it. Direct and indirect costs associated with obesity are estimated to cost 2% of GDP every single year. A staggering number that is actually expected to increase dramatically over the coming decades.
It’s an enormous burden for individual well-being and collective healthcare budgets that appears to be insurmountable. But it’s actually not our nature to keep having the same problems. Mankind has in fact overcome many diseases. Think about the plague, smallpox or tuberculosis. These caused great suffering for centuries. Today, we could not care less about them.
Led by Novo Nordisk NVO 0.00%↑ and Eli Lilly LLY 0.00%↑ , the pharma industry has seemingly developed new wonder drugs that are effective at curbing appetite with allegedly little side-effects. The bread-and-butter business of these companies is treating diabetes. But they might be on the cusp of transforming from diabetes companies to obesity companies.
In this article, I will look into this opportunity and attempt to quantify the upside for these stocks if there is any. I have also attached my Excel model for the valuation exercise at the end.
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Diabetes is large market that is worth $60bn today and projected to rise to $120bn over the coming 10 years. Both Novo Nordisk and Eli Lilly have done very well capitalizing on this need. Both of them have been selling insulin for over one hundred years which has helped them to grow into companies worth $400bn and $500bn while generating $15bn and $11bn in EBITDA annually.
Serving an ageing, sugar-intoxicated and more and more sedentary population with diabetes drugs will continue to be very profitable for them. But the diabetes opportunity is actually dwarfed by the obesity opportunity, which is the true origin of many health issues, including diabetes.
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