The massive gains from fat loss...
The "Fat Phobia" force was strong
This time one year ago the favorite cocktail party topic of conversation among our friends was how much weight they or someone they know had lost on the new "GLP" wonder-pills. Fast-forward until today and the topic of conversation has changed to how everyone has churned out of using the pill. "It is a wonder drug, but it just was not for me any longer..." seems to be an emerging theme. The exposed stocks have been on a tear & a one-way street but are now starting to show some weakness. We are going tactility short fat phobia. Maybe losing weight is just not that simple and maybe Big Pharma once again oversold something....
Will fat gains lead to equity losses?
The only darling theme to rival AI over the past 2 years is of course the fat loss theme. We think the news-flow will get less bullish from here and more often than not does that lead to a period of weakness. The fact that the stock no longer is going up is a small early sign of potential problem. There are several billion dollars of fast-money MoMo longs in this name.
Source: Refinitiv
Novo too
The European beast also looks ready for a pause. The stock is trading well below the 50 day, but still far from the longer term trend line, right where the 200 day comes in, as well as that gap from Feb...
Source: Refinitiv
Even mega-themes have drawdowns
We have seen bigger drawdowns in various hot "assets" this year. SOX was down around 17% from high to low and the brightest shining star NVDA close to 20% last month. Nothing is impossible in this market. An NVDA style drawdown for LLY would take the stock to 630. Chart shows LLY vs SOX.
Source: Refinitiv
Worrying data
One troubling fact is that about two-thirds of those in the United States who started taking a drug of this class, known as GLP-1 agonists, in 2021 had stopped using them within a year, according to an industry analysis. Another one is that research has shown that when people stop taking GLP-1 many regain a substantial amount of what they lost with the help of the medications.
Not for everyone
"GLP-1 medications will be helpful to/feasible for only a fraction of the 1 billion people globally who have obesity. So, though extremely promising, GLP-1s are not the silver bullet for weight loss that many people make them out to be." (Dr. Fatima Cody Stanford)
Mind the muscle loss
Recent research on GLP-1 drugs for weight loss suggests that these medications lead to reductions in lean body mass, of which 50%+ consists of muscle. Wegovy’s Ph3 STEP 1 found that 40% of weight lost by the GLP-1 drug came from lean mass reduction, while the data from Zepbound’s Ph3 SURMOUNT-1 suggest the similar muscle loss out of the overall weight loss. Cycles of GLP-1 on & off-treatment could lead to a vicious cycle of more and more fat and less and less muscle even with overall weight reduction. (Sanford Bernstein)
Fundamental downside
GS, a previous big bull on the fat loss theme, are neutral rated on LLY shares and the shares have actual absolute downside to their 12-month price target of $740. And it is not a conservative multiple (38x multiple applied to FY2 EPS estimate) that gets you to that target price.
Trading it
We are going tactically short via options....It is never a great idea to long-term short a mega-theme and we do NOT expect the theme to completely roll over and we do NOT expect to be long-term in this trade. We find the LLY June 720/640 put spread as one relatively attractive way to play a potential downside move in the fat theme. Max payoff around 5x the money if LLY has an NVDA style drawdown.
Source: Refinitiv
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