Navigating Market Volatility: Ozempic Impact Weighs on Weight Loss Stock, Morgan Stanley Identifies it as a Top Pick

Investing / Monday, 06 November 2023 23:54

"Strategic Transformation Amidst Challenges: WW International's CEO Sima Sistani Takes On Anti-Obesity Medication Impact Head-On

Facing formidable challenges from game-changing anti-obesity medications, WW International, the parent company of Weight Watchers, witnessed an 11% stock dip on Friday. However, CEO Sima Sistani has been actively addressing this existential crisis. Despite the recent setback, Morgan Stanley has labeled WW International as its top pick among small- and mid-cap internet stocks, citing an 'incredible transformation' over the past year.

Morgan Stanley analyst Lauren Schenk emphasized the company's noteworthy shift in the GLP-1 telehealth space through the acquisition of Sequence, a telehealth platform enabling subscribers' access to medications like Novo Nordisk’s Wegovy and Ozempic. Schenk sees potential catalysts, including the FDA's anticipated action on Eli Lilly's Mounjaro/tirzepatide obesity label expansion, as opportunities for Sequence to monetize existing demand.

While WW reported a decline in third-quarter revenue and adjusted annual sales forecasts, Schenk deems concerns about the drop in average revenue per user as 'overblown,' presenting a buying opportunity. Despite a 30% drop in the past month, WW shares have surged nearly 90% since the year's start. Schenk's optimistic $13 price target implies a potential 78% rally from Friday's close.

WW International is actively stabilizing its core weight loss business by phasing out low-margin consumer products and optimizing marketing spending. Sequence, acquired in April, has attracted 45,000 clinical subscribers by the end of the third quarter, showcasing resilience amid bottlenecks in the supply chain of appetite-suppressing weight loss drugs.

Morgan Stanley anticipates growth acceleration for Sequence as drug shortages subside, particularly with Lilly's tirzepatide expected to gain FDA approval for obesity treatment. Novo Nordisk's efforts to enhance manufacturing capacity and insurance coverage for its drugs are seen as positive developments for WW's Sequence business, which Schenk estimates could benefit around 6 million current or lapsed WW subscribers eligible for obesity medication treatment."

"In conclusion, WW International, facing the challenges posed by revolutionary anti-obesity medications, finds itself at a critical juncture under the leadership of CEO Sima Sistani. Despite an 11% stock decline, the endorsement by Morgan Stanley as the top pick among small- and mid-cap internet stocks reflects confidence in the company's transformative efforts. The strategic acquisition of Sequence, coupled with decisive steps to stabilize the core weight loss business, positions WW for resilience and growth.

Analyst Lauren Schenk's optimistic outlook, emphasizing the overblown concerns about average revenue per user and projecting a potential 78% rally, underscores the potential for a turnaround. With a focus on efficiency, the gradual recognition of value from subscribers acquired in Q3, and promising subscriber growth for Sequence despite supply chain challenges, WW International remains poised for positive momentum.

As the industry eagerly awaits FDA action on obesity treatment, and with positive developments in drug manufacturing and insurance coverage, the trajectory for WW's Sequence business appears promising. The company's commitment to addressing market challenges head-on and adapting to industry dynamics positions it for potential success in navigating the evolving landscape of weight loss solutions and healthcare."