Why Weight-Loss Developer Stocks Tumbled on Tuesday

Makers of weight-loss drugs, the hottest segment of the pharmaceutical market just now, weren't looking so hot on the stock exchange Tuesday. A pronouncement from President Trump about the category drove their share prices down, although not to bargain-basement levels.

The company most associated with obesity treatments, Denmark-based Novo Nordisk (NYSE: NVO), closed the day with a nearly 4% drop in its share price. Two would-be rivals currently hard at work trying to bring such products to market, fellow European drug maker Roche Holdings (OTC: RHHBY) and U.S. company Viking Therapeutics (NASDAQ: VKTX), fell by nearly 3% and 2%, respectively.

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Ordered by the (chief) executive

One of the current initiatives from the busy White House is an effort to drive down drug prices. That seems to be one of its top agenda items for this week; it kicked off Monday afternoon with Trump signing an executive order demanding lower drug prices from manufacturers.

A key stipulation of this mandate is that medicines in this country must be aligned with prices abroad if those prices are lower in a foreign jurisdiction. Another is that pharmaceutical companies must comply with the new rules within 30 days or face potential action from the government.

Image source: Getty Images.

Although legal and pharmaceutical experts believe the order is somewhat vague and open-ended, it does indicate that the administration is determined to at least get the ball rolling on drug discounting.

Monday afternoon, following the signing ceremony for the order, Trump singled out weight-loss drugs for sharp criticism. Citing the example of an unnamed male associate, the president said the man paid $88 for his weight-loss drug in London, while the same medication had cost him $1,300 in New York.

Trump did not identify the drug, but the example is believable because the two massively popular GLP-1 weight-loss treatments approved specifically for obesity by the Food and Drug Administration (FDA) -- Novo Nordisk's Wegovy and Eli Lilly's Zepbound -- can cost patients more than $1,000 for a month's supply.

Trump's executive order on pharmaceutical prices does not explicitly address such drugs. However, with his comments and that of other administration officials, it seems obesity drug makers could be laser-targeted in the very near future.

Reuters quoted a White House official it did not identify as saying that "It would be fair to expect that GLP-1s, given that they hit both of those categories, will be a focus."

"There will be an expectation that those prices should come down, and then if they don't, that we will be looking at our various policy levers that can be used to force those prices down," the official said, apparently without providing more detail.

About to get Trumped?

The lack of detail is likely what kept the stocks of Novo Nordisk, Viking, Roche, and other weight-loss hopefuls from plummeting in a panic sale.

In politics, of course, there is often quite a large gap between what a politician promises and the measures that are ultimately enacted. The drug price executive order is vague all on its own, never mind the president's apparent zeal to go after the companies behind obesity treatments.

That being said, drug price reduction would be a crowd-pleasing win for the administration if it could effectively fill in those gaps by establishing guidelines, rules, and sanctions for non-compliance.

If this effort is successful, I could picture the obesity drug developers suffering disproportionally. That's because lower prices will be more a threat to their futures than to an established pharmaceutical with products outside the weight-loss category (Novo Nordisk or Eli Lilly).

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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk, Roche Holding AG, and Viking Therapeutics. The Motley Fool has a disclosure policy.