What’s the Ozempic effect on the stock market?

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The latest stock market craze is upon us, captivating investors in a way that only the Next Big Thing can.

A new class of obesity and diabetes drugs known as GLP-1s is being hyped as the weight-loss holy grail the pharmaceutical industry has chased for decades.

It’s still early days in the development and commercialization of these drugs, but great fortunes are already being realigned within the pharmaceutical sector and beyond. Behold the Ozempic effect.

Is it overdone? Of course. Many of the hallmarks of a stock bubble are there: A parabolic rise in beneficiaries’ share prices. Wild speculation. A palpable buzz in trading circles. And the pricing in of extreme scenarios.

But that’s just the stock market’s way of processing a force that is genuinely disruptive.

The winners here are clear. Novo Nordisk A/S, the Danish firm behind the Ozempic shot for Type 2 diabetes and the Wegovy weight loss shot, as well as Eli Lilly and Co. LLY-N, whose competing drug Zepbound was approved by the Food and Drug Administration on Wednesday, have each seen their stock rise by more than 60 per cent over the past year.

They are now the two most valuable pharmaceutical companies in the world. Together, they have added about US$380-billion in market capitalization in one year, which is larger than all but 20 companies in the S&P 500 Index.

But it’s on the other side of the ledger where things get interesting. The losers of the weight-loss stock frenzy are plentiful and diverse, ranging from medical device manufacturers to packaged food companies and restaurant chains, and even casinos.

Over the past year or so, Ozempic has become a cultural as well as a financial phenomenon. A-list celebrities have credited the drug for their suddenly improved physiques. The hashtag #ozempic is all over TikTok.

Ozempic craze feeds into harmful weight stigma, some eating disorder specialists say

The injectable drugs work by imitating hormones that limit appetite and signal a feeling of fullness. Eli Lilly’s version of the drug helped people lose more than 50 pounds on average in clinical trials.

The buzz around GLP-1 drugs hit a new pitch in August, when a study showed that Wegovy also reduced the risk of heart attacks and strokes.

“These drugs fundamentally change how we treat obesity and diabetes, which is an epidemic,” said Eden Rahim, portfolio manager of the Next Edge Biotech and Life Science Opportunities Fund.

Consider that more than 40 per cent of the U.S. population is classified as obese and you start to get an idea of the vast market potential. Goldman Sachs recently forecast that the global market for obesity drugs could hit US$100-billion by 2030 – a number that would have seemed outlandish just a year ago. Several analysts have predicted that Zepbound is fated to become the single best-selling drug in history.

As the stock market hype machine has revved up on the weight-loss trade, a great number of companies have been relegated to the ranks of the disrupted.

Any entity profiting from obesity, even in the most indirect way, has been a target for rerating. Companies that make insulin pumps and glucose monitors have seen their shares pummelled – on the order of 50 to 65 per cent downside. Zimmer Biomet Holdings Inc. ZBH-N, which makes components used in knee replacements, is down by 19 per cent on the year. Resmed Inc. RMD-N makes devices to treat sleep apnea, which is associated with obesity. Its shares have lost 32 per cent year to date.

Big Pharma names on the sidelines of the GLP-1 wave, such as Merck and Co. Inc. MRK-N and Pfizer Inc. PFE-N, are all nursing losses on the year, as investors have shifted their health care exposure to the sector’s hottest trade.

Then there are second- and third-order effects. In the apparent expectation that GLP-1 drugs will reshape the eating habits of a nation, investors have traded down the shares of Kraft Heinz Co. KHC-Q, Hershey Co. HSY-N and Coca-Cola Co. KO-N anywhere from 10 per cent to 20 per cent.

In Canada, the most vulnerable names are Restaurant Brands International Inc. QSR-T, the parent company to Tim Hortons and Burger King, as well as restaurant chain MTY Food Group Inc. MTY-T, according to a CIBC Capital Markets report.

Both stocks probably have those pressures already priced in, given the exuberance of the Ozempic effect, the report said. “In an uncertain equity market, however, some investors have sold first and are asking questions later.”

Ozempic craze drives big flows into pharmaceutical, Danish funds

Clearly investors are getting ahead of themselves. As are stock analysts, for that matter.

A recent Bank of America report flagged the risks to casino stocks based on a potential link between obesity and problem gambling. A Jeffries analyst, meanwhile, modelled that United Airlines Holdings Inc. UAL-Q could save US$80-million a year in fuel costs if the average passenger were to drop 10 pounds.

So things have gotten rather silly. And yet, this is how the stock market makes sense of these kinds of disruptions. It is a clearinghouse for investors’ hopes and fears stretching many years into the future.

“I’ve learned to respect inflection points like that,” Mr. Rahim said. “Even though the market may overreact and go to extremes, the turn itself probably signals something important.”

If it weren’t occasionally absurd, then it wouldn’t be the stock market.