WeightWatchers (WW) is trying to save struggling businesses by betting on a market that threatens their very existence.
The weight-loss company, previously championed by Oprah Winfrey and others, sent its stock price soaring this week after announcing it would produce knock-offs of Novo Nordisk’s (NVO) weight-loss drugs Ozempic and Wegoby. On the news, WW International (aka Weight Watchers) shares soared nearly 40% on Wednesday and rose another 23% to close at $1.96 on Thursday. WW is up 172% from last week.
WeightWatchers’ core business is diet programs, but the company is tapping into the fast-growing weight-loss drug market dominated by pharmaceutical giants Eli Lilly (LLY) and Novo Nordisk (NVO). (This strategy was supported by former CEO Sima Sistani, who recently left the company.)
WeightWatchers first sought to secure a foothold in the big-box pharma space early last year by acquiring Sequence, a telemedicine platform specializing in weight-loss drug management. The acquisition did not improve the company’s revenue, which is expected to decline by 14.5% in 2023 and by another 13% this year.
Weight Watchers’ announcement Tuesday that it plans to offer a combination GLP-1 drug that is cheaper and doesn’t require insurance is another bid to take advantage of the market late in the game.
Federal law allows companies to sell compounded versions of drugs on the U.S. Food and Drug Administration’s shortage list. Regulations allow drugs to be manufactured in FDA-registered facilities, but the compounded drug itself is not FDA-approved. WeightWatchers offers the compound semaglutide, which is the active ingredient in Ozempic and Wegovy.
Here comes the problem. Once Novo Nordisk’s drug is removed from the FDA’s shortage list, Weight Watchers will no longer be able to produce the combined semaglutide drug at scale. Tirzepatide, the active ingredient in Eli Lilly’s Mounjaro and Zepbound, was removed from the list last week, creating a major problem for companies that make compound versions of the drugs.
“Compound interest is not a sustainable long-term business model,” Stephanie Davis, healthcare technology and distribution analyst at Barclays (BARC.L), told Yahoo Finance. Davis is one of four Wall Street analysts covering stocks tracked by Bloomberg. Half of these analysts have an equal weight rating on WW, and Davis is one of the other two analysts recommending the stock be sold.
Meanwhile, Weight Watchers’ expansion into weight loss drugs is at odds with the company’s core business. “GLP-1 will cannibalize the diet industry,” Davis said.
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WeightWatchers did not immediately respond to questions from Yahoo Finance on Thursday.
To illustrate the weaknesses in WeightWatchers’ strategy, Davis pointed to the rapid rises and falls in Him’s & Hers Health (HIMS) stock. The telemedicine company’s stock price soared on news that it would be selling counterfeit Ozempic and Wegovy products. The stock has risen 70% since the May announcement, hitting a closing price of about $24.79 in mid-June. Then, when the FDA removed tirzepatide from its shortage list (a bleak sign for distributors of compounded GLP-1), HIMS found itself in trouble.
On October 2, HIMS stock fell another 10% after the FDA released a letter citing concerns about compounded drugs (which are not reviewed for safety, efficacy, and quality before being marketed).
More problems for WW? Novo Nordisk announced on October 8 a study that found impurities in a compounded version of its drug, raising questions about the safety and efficacy of the compounded semaglutide drug in particular.
Meanwhile, Nathan Feather of Morgan Stanley (MS) thinks it’s not too late for Weight Watchers to turn things around. He said Weight Watchers’ inability to monetize its GLP-1 telemedicine services (which it gained through its acquisition of Sequence) is due to customers’ lack of insurance coverage for the drug and the company’s weaknesses. Rather, he said, it was due to shortcomings in the advertising field. In its core business. WeightWatchers’ new, inexpensive, combined GLP-1 product does not require insurance and may help overcome these issues.
“Given that (WW International’s) sudden (market) share reversal was primarily due to an inability to compete in the advertising market, rather than consumer dissatisfaction with the clinic program, the onset of compounding could have a negative impact on growth. “We think it addresses the main constraints,” Feather said. He said this in a note to investors on Tuesday.
He added that in addition to “investor concerns about the liquidity profile,” “dieting season is fast approaching and execution hurdles are high.”
Feather maintains an equal weight rating on the stock and argues that Weight Watchers’ GLP-1 proposal is only a temporary solution. “If GLP-1 is removed from the shortage list, there could be large-scale cancellations if WW is unable to continue serving customers who use combination drugs,” he said.
Laura Bratton is a reporter for Yahoo Finance.
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