Why obesity stocks are struggling in 2025?

Shares of leading GLP-1 drug manufacturers Eli Lilly and Novo Nordisk have underperformed in 2025, with Novo down over 40% and Lilly down 5%, despite robust demand for their obesity treatments. This weakness stems from investor anxieties over future pricing, particularly due to the U.S. Inflation Reduction Act and anticipated competition post-2028, coupled with slowed employer health plan coverage expansion. However, BofA contends that fears of significant price erosion are overblown, citing the companies' market dominance, the absence of true generics until the 2030s, and the potential for a favorable cost-effectiveness review from ICER, which could boost employer reimbursement. BofA maintains a Buy rating on Lilly, highlighting its strong growth prospects despite current sector headwinds.

Analysis

Despite surging demand for their breakthrough GLP-1 obesity treatments, shares of market leaders Eli Lilly and Novo Nordisk have significantly underperformed in 2025, with Lilly's stock down approximately 5% and Novo's down over 40%. This divergence from fundamental demand is primarily driven by investor concerns regarding future pricing power and reimbursement. Key headwinds include the near-term impact of negotiated pricing under the U.S. Inflation Reduction Act, which specifically looms over Novo’s semaglutide, and the anticipated arrival of new competitors after 2028. Compounding these issues is a noted slowdown in coverage expansion by employer health plans. However, Bank of America presents a counter-narrative, arguing that fears of steep price erosion are overstated. Their analysis suggests the current duopoly, with no true generic competition expected until the early 2030s, will allow for rational pricing. Furthermore, BofA points to a potential positive catalyst: a forthcoming review from the drug-cost assessor ICER, which could reverse its previous stance and deem the treatments cost-effective, thereby encouraging broader employer coverage. Reflecting this conviction, BofA maintains a 'Buy' rating and a $900 price objective on Eli Lilly, identifying it as best positioned for growth despite the sector-wide policy risks.

Key Decisions for Investors

• Investors should differentiate between the two market leaders, as analyst commentary and sentiment data suggest Eli Lilly (LLY) is better positioned to navigate sector headwinds compared to Novo Nordisk, which faces more immediate pricing pressure from the Inflation Reduction Act.
• The current share price weakness, driven by regulatory uncertainty, may represent a buying opportunity for long-term investors who believe BofA's thesis that the duopolistic market structure will prevent severe price erosion.
• Closely monitor for updates from the drug-cost assessor ICER, as a potential reversal to a 'cost-effective' rating would be a significant positive catalyst for the entire GLP-1 sector by likely accelerating broader insurance coverage and reimbursement.