On Friday, The Centers for Medicare & Medicaid Services (CMS) did not finalize a provision to cover obesity drugs like Eli Lilly's LLY and Novo Nordisk’s NVO popular injections, Zepbound and Wegovy, respectively, under its Part D prescription drug coverage. In other words, Medicare will not pay for the cost of these expensive weight-loss medicines.

At present, Medicare does not cover Zepbound and Wegovy if they are solely prescribed for weight loss. However, CMS may consider these proposals at a later date.

In response, shares of Eli Lilly and Novo Nordisk declined 6.5% and 6.8%, respectively, on Friday.

Year to date, while LLY’s stock has declined 4.2%, Novo Nordisk’s stock has plunged 26.4% compared with the industry’s decrease of 4.8%

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Medicare Currently Does Not Pay for Obesity Drugs

The Medicare Part D plans do not cover obesity drugs now as obesity is not classified as a disease, and these medications are perceived to be prescribed more for cosmetic use. Paying for obesity drugs can cost the government billions of dollars. The Biden administration had proposed a rule to allow Medicare to pay for popular GLP-1 drugs as they have shown significant weight loss and metabolic improvements in clinical studies. Advocates of obesity drugs have argued that covering the costly yet effective anti-obesity medications can reduce the government’s longer-term costs of future chronic illnesses associated with obesity.

Please note that Medicare does pay for obesity drugs like Wegovy when it is prescribed for the cardiovascular indication of reducing heart attacks and strokes. It also covers Lilly’s Mounjaro and NVO’s Ozempic, which are indicated for type II diabetes but frequently prescribed off-label for weight loss.

Elon Musk, CEO of Tesla and SpaceX, has also long advocated the widespread use of GLP-1 inhibitors to combat obesity.

However, Robert F. Kennedy Jr., the new head of Health and Human Services, has been skeptical about obesity drugs and has advocated exercise and a healthy diet to manage obesity and type II diabetes.

Pharma Sector Reeling Under Pressure

As it is, pharma stocks are reeling under pressure due to the uncertainty surrounding the impact of Trump’s tariff. Though pharmaceuticals have been exempted from tariffs this time around, they could well be Trump’s target in the next round, considering the President’s goal to shift pharmaceutical production back to the United States, mostly from European and Asian countries.

However, drug production in the United States is costly and will drive up drug prices. It will affect drugmakers’ profit margins. Some countries that export medicines and active pharmaceutical ingredients to the United States may avoid the American market altogether, which can create supply shortages and hurt the global supply chain.

Moreover, potential competition in the weight-loss market is a concern for NVO and LLY.  Several companies like Amgen AMGN and Viking Therapeutics VKTX are also making rapid progress in the development of GLP-1-based candidates in their clinical pipeline.

AMGN and VKTX’s products can pose strong competition to Mounjaro/Zepbound and NVO’s Ozempic/Wegovy in the future.

Amgen plans to conduct a broad phase III program on its dual GIPR/GLP-1 receptor agonist, MariTide, across obesity, obesity-related conditions and type-II diabetes, with the first studies to begin in the first half of 2025. Viking Therapeutics' dual GIPR/GLP-1 receptor agonist, VK2735, is being developed both as oral and subcutaneous formulations for the treatment of obesity.

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This article originally published on Zacks Investment Research (zacks.com).

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