Shares of Eli Lilly LLY and Novo Nordisk NVO were up on Tuesday, likely due to a proposal by President Biden that Medicare and Medicaid should cover the cost of obesity treatments. The new proposal, if passed, will significantly expand access for Lilly and Novo Nordisk’s currently marketed weekly injections to treat obesity, Zepbound and Wegovy, respectively. Zepbound is marketed as Mounjaro and Wegovy as Ozempic for type II diabetes. Both Mounjaro and Ozempic are also prescribed by doctors off-label for weight loss.

While LLY’s stock was up 4.6% on Tuesday, NVO rose 1.5%.

Year to date, Lilly’s stock has risen 35.4% and Novo Nordisk has gained 2.6% compared with an increase of 6.3% for the industry.

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Medicare Does Not Cover LLY’s & NVO’s Obesity Drugs Now

Both Zepbound/Mounjaro and Wegovy/Ozempic are witnessing significant demand growth, bringing in huge profits for Lilly and Novo Nordisk. However, these drugs are expensive and can be afforded only by the rich, as they can cost as much as $1,000 for a month’s supply. Also, due to huge demand, both companies have witnessed supply constraints. Under the existing law, Medicare is barred from covering these weight-loss drugs. Medicare and Medicaid cover these drugs only if they are prescribed to treat some disease like diabetes or to reduce cardiovascular risks.

The new proposal by the US Department of Health and Human Services (HHS) will cover these drugs exclusively for treating obesity. However, according to the proposal by HHS, only obese individuals with a body mass index (BMI) of 30 or higher will be eligible for coverage.

Why Should LLY’s & NVO’s Obesity Drugs Get Coverage?

The Biden administration believes that including obesity drugs in Medicare coverage will reduce out-of-pocket costs for the drugs and make them affordable for many obese individuals. It is estimated that approximately 3.4 million more patients in Medicare and around 4 million patients in Medicaid would become eligible for obesity drugs, if this proposal is approved. However, if this proposal gets through, it could significantly increase the government’s healthcare costs.

However, the Biden administration believes the new rule could help reduce multiple obesity-related comorbidities such as diabetes, cardiovascular disease and stroke, which can ultimately reduce billions in healthcare costs for the government.

The proposal is still in the preliminary stage and the Trump administration will have to finalize it before it can come into effect. It is quite likely that President-elect Donald Trump and Robert F. Kennedy Jr., nominated by Trump to head HHS, could oppose the proposal. Kennedy, in the past, has shown his disapproval of obesity drugs.

Other Players in the Booming Obesity Market

Per research conducted by Goldman Sachs, the obesity market in the United States is expected to reach $130 billion by 2030. Both Lilly and Novo Nordisk are expanding their obesity pipeline to maintain their position in the market in the long run. Also, some other companies like Amgen AMGN and Viking Therapeutics VKTX are making rapid progress with the development of their respective obesity candidates, which are in mid-to-late-stage development.

It is expected that the costs of Zepbound and Wegovy will decrease as these new competing products enter the market.

LLY and NVO’s Zacks Rank

Both Lilly and Novo Nordisk have a Zacks Rank #3 (Hold) currently. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Novo Nordisk A/S (NVO) : Free Stock Analysis Report

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