17 November 2023
The global healthcare sector in 2023 presents a mixed picture, marked by remarkable successes and significant challenges. On one hand, the weight loss drug market has seen incredible growth. Goldman Sachs predicts the market for these drugs could reach $100 billion by 2030, up from the current $6 billion, with the current leaders in the industry, Eli Lilly and Novo Nordisk expected to control a combined 80% of the market. On the other hand, some of the world’s largest pharmaceutical companies are experiencing a ‘COVID cliff,’ with projected significant declines in sales of COVID-19 vaccines and treatments. These companies, which include Pfizer, BioNTech, and Moderna, are estimated to see nearly two-thirds drop in sales and surplus inventory due to increased population immunity.
LEAD’s healthcare sector performance has significantly outperformed the broader healthcare market largely driven by our strategic overweight position to both Eli Lilly and Novo Nordisk. In addition, we made a tactical decision to sell our position in Pfizer as COVID sales started to decline, impacting our view on the company’s future growth outlook.
Earnings Surge on Frenzy for Obesity Drugs
Eli Lilly and Novo Nordisk have both been leading contributors to LEAD’s performance this year, as their weight loss drugs have continued to live up to the hype. Sales are booming, and the potential for further sales growth is massive. Further fueling the excitement surrounding the drugs, several recent clinical trials show further unforeseen health benefits including reduced risk of heart attacks and stroke, combatting kidney disease, and reducing risk of Alzheimer’s. The drugs have become so popular that the drug makers are struggling to keep up with demand.
Novo Nordisk reported stronger-than-expected earnings for the third quarter, with a remarkable 38% increase in revenue and a 47% rise in operating profit compared to the same period in 2022. The success has been primarily driven by high demand for its obesity and type 2 diabetes treatments, Wegovy and Ozempic, prompting the company to predict double-digit growth into 2024. The significant sales, particularly in the U.S., have led Novo Nordisk to revise its full-year forecasts upwards three times, now expecting up to a 46% jump in operating profit for 2023. With Wegovy and Ozempic also showing potential in reducing cardiovascular risks and other diseases, these drugs are central to Novo’s growth and its status as Europe’s most valuable company, surpassing giants like Nestle and LVMH.
Eli Lilly’s third-quarter earnings surpassed expectations with a substantial revenue increase of 37% to $9.4 billion, largely fueled by its type 2 diabetes drug Mounjaro, which alone brought in $1.41 billion. Despite this, the company cut its full-year profit forecast due to hefty charges from recent acquisitions totaling nearly $3 billion. Sales were also boosted by other medications, including the breast cancer pill Verzenio and the type 2 diabetes tablet Jardiance. Additionally, the FDA recently approved Mounjaro’s counterpart, Zepbound, for obesity treatment. With Zepbound expected to hit the shelves before the end of 2023, analysts expect the drug to significantly boost sales for the company as it helps reduce the gap in supply left by Novo’s Ozempic and Wegovy. The company also highlighted the anticipated FDA decision on its Alzheimer’s treatment, Donanemab, for early 2024.
Sales Fall Short as Covid Continues to Haunt
Big pharmaceutical companies that experienced explosive growth during the pandemic, faced a new challenge in 2023. The anticipated demand for booster shots did not meet expectations, and the shelf-life expiry of COVID-19 vaccines began to weigh heavily on their financial outcomes, leading to substantial inventory write-offs.
Pfizer’s Q3 2023 earnings were disappointing, falling short of market expectations, supporting our decision to sell the position earlier in the year. The company reported a loss, predominantly due to significant charges from unsold COVID-19 vaccines and the antiviral treatment Paxlovid. Specifically, Pfizer took a $5.6 billion charge for inventory write-offs, a stark contrast to its $13.23 billion revenue. In a preemptive move, Pfizer had already slashed its full-year sales forecast by $9 billion, acknowledging the decreased demand for COVID-19 products. Investors remain concerned as the company provided limited insight into its strategy for mitigating the impact of dwindling COVID product sales, seeking clarity on Pfizer’s path to sustainable growth post-COVID.
Where do we go from here?
The pharmaceutical sector has witnessed a stark divergence in 2023. While the previously surging COVID-19 product sales face a sharp downturn, leading to significant write-offs for companies like Pfizer, the burgeoning market for weight loss drugs has provided a counterbalance, propelling companies like Eli Lilly and Novo Nordisk to the forefront of industry growth. This dichotomy underscores a pivotal moment for the sector, as it pivots from pandemic-driven demand to a new era of chronic disease management and preventive care solutions.
Looking ahead, LEAD’s investment strategy remains focused on identifying and capitalizing on long-term trends in the healthcare sector. Our portfolio will continue to favor innovators like weight-loss drug makers and firms with robust pipelines, poised for sustained growth. We are committed to selecting companies that we anticipate will become industry leaders over the next decade and beyond.