Diabetes & Obesity Duopoly

Aug 23, 2024 8 min read

Florian

“Wegovy – my secret to looking fit, ripped and healthy”

– Elon Musk

arvy’s teaser: The diabetes and obesity markets have exploded, dominated by a powerful duopoly: Novo Nordisk and Eli Lilly. Their “wonder drugs” like Ozempic, Wegovy and Zepbound have become household names, driving significant growth – but not without risks.

TAM.

Or Total Addressable Market.

When building a start-up, this is one of the most important metrics to consider. It is about how big your market is that you can address. First things first: the bigger, the better. In the example of arvy with our investment app (waiting list) going live soon, this would be simplified as follows: The DACH region has 101 million people. Of these, 79% can save regularly. Our TAM would therefore be 79.8m people. If we go even deeper down the rabbit hole, we get the Serviceable Addressable Market (SAM; how many people are interested in investing, 59.8m) and the Serviceable Obtainable Market (SOM; how many people who are interested in investing could we reach with our solution, 44.8m).

We take the same approach when analyzing businesses that we would like to own. How big is the market, how fast is it growing and how many competitors are there in this area?

One market that has stood out in recent decades is the diabetes market (TAM: 537 million) and the newly emerging obesity market (TAM: >650 million) (chart 1). There are two figure-heads that dominate this area.

Together they form a powerful duopoly.

Novo Nordisk and Eli Lilly.

Chart 1: The Total Addressable Market of Novo Nordisk and Eli Lilly

Source: Novo Nordisk, annual report 2023

Ozempictown

Our first issue of arvy’s Weekly with 162 readers (now 5’000+ 😊) was all about the two giants. The title was “Wonder Drug”, and we highlighted the new drug and its enormous potential.

They are now the two largest pharmaceutical companies in the world making headlines with their obesity drugs – which were originally intended as new diabetes drugs. At Novo Nordisk they are called Wegovy (weight loss) and Ozempic (actually for diabetes) and at Eli Lilly Moun-jaro/Tirzepatide (diabetes) and Zepbound (weight loss). Their client list includes celebrities such as Adele, Kim Kardashian, Elon Musk and Oprah Winfrey.

Now they not only form a diabetes duopoly, but also an obesity duopoly. And of course, peers are just around the corner: Amgen, the Swiss Roche and many others are conducting studies for similar drugs. After all, everyone wants a slice of the big cake.

The biggest market is, of course, the US. And now hold on tight! There is even a town in Kentucky, Bowling Green, with a population of 74,000, that has been nicknamed Ozempictown (worth reading) because at least 4% of its residents have received a prescription for one of these drugs.

No wonder Novo Nordisk (chart 2) and Eli Lilly’s sales are skyrocketing.

But every good story has a villain.

Chart 2: Novo Nordisk’s flagship drugs: Ozempic & Wegovy

Source: Quartr

Outlive vs Side-Effects

Yes, there is always a catch. With drugs, of course, it is the side effects.

What makes miracle weight loss drugs particularly interesting from a business perspective is the fact that you must take the drug forever, as you experience a yo-yo effect once you stop taking the injection. This is mainly because most people do not change their behavior in terms of eating, healthy lifestyle or other habits.

Remember that the drug basically only stops your cravings for food and sugar or smoking.

That is it.

The other known symptoms are nausea, diarrhea, vomiting, constipation, abdominal pain or decreased appetite. An important factor that is now coming to light after the first studies is muscle atrophy. So, while you lose excess fat mass, you also lose muscle and bone mass. Again, this is mainly due to people not changing their lives. If you are taking these drugs, you really should be lifting weights alongside them.

Since we at arvy are deeply interested in these topics, here is another important statistic from our Summer 2023 reading Outlive by Dr. Peter Attia (chart 3). On average, adults lose 3 to 8% of their muscle mass per decade after the age of 30. This rate of muscle loss usually accelerates after the age of 60.

“Regular exercise (especially weightlifting) and proper nutrition are the keys to minimizing this loss and achieving longevity,” is one of the book’s key messages.

I know that is easier said than done.

Chart 3: Outlive, The Science & Art of Longevity, by Dr. Peter Attia

Source: arvy summer reading list 2023

Small Margin of Safety

Obesity treatment is a relatively new market, and we still have a lot of data, statistics and studies to collect.

Both companies enjoy a rich valuation due to high growth expectations and have experienced a so-called multiple expansion. This means that Novo Nordisk and Eli Lilly are trading at a pre-mium of 20 % and 65 % respectively to their historical average valuation.

The reason for this is that the outlook has improved in recent months because, despite some side effects, the “wonder drug” is truly living up to its name as it now appears to offer bene-fits in reducing cardiovascular disease (heart attack, stroke), kidney disease, fatty liver and more recently even sleep apnea or dementia.

Of course, it all boils down to people being less overweight and fitter and eating a less sugary and healthier diet, which has the same effect. Fun Fact here: Even Coca-Cola & Pepsi or Walmart have seen a decrease in demand for candy and soft drinks in some areas where people are on weight loss medications.

Looking at the rich valuation in our “Good Story”, where both have to meet expectations and where there is only a small margin of safety to be wrong, we also put a lot of emphasis on the price trend side, the “Good Chart”. Key indicators that we follow are a rising 200-day moving average and a price that rises above this average.

Because even with the best fundamental story and the rosiest outlook.

Remember: The trend is your friend until the end, when it bends.

Chart 4: Novo Nordisk and Eli Lilly over the last 10 years, in $