Wall Street Update: Obesity Drugs & Russell 2000 Soar

Small cap stocks and select pharmaceutical stocks were among the top gainers on Tuesday 26 November. Investors are seemingly pricing in new policies from both the outgoing Biden Administration and the incoming one under President elect Donald Trump.

Shares of Eli Lilly (LLY) and Novo Nordisk (NOVO) jumped after US President Joe Biden proposed expanding access to anti-obesity medications, such as Novo Nordisk's Wegovy, to benefit the over 7 million people covered by Medicare and Medicaid.

On the other hand, small caps have gained this week in hopes of a more favourable environment for US domestic companies under Trump. These gains helped lift the Russell 2000 index into record-high territory for the first time this year.

Small Cap Optimism Sees Russell 2000 Hit Record

The Russell 2000 small-cap index reached a new all-time intraday high of 2,466.49 on Monday, 25 November, surpassing its previous record set three years ago. The index came just points away from setting a new all time closing high as well.

The gains come as the index breaks out of a 3-years old base, having lagged behind the S&P 500 and Dow Jones Industrial Average which have set multiple new highs already this year.

The index has risen approximately 10% since the 5 November election amidst optimism that smaller, domestically focused companies stand to benefit most from Republican policy priorities, including corporate tax cuts and deregulation.

The Russell 2000 index, which focuses on smaller companies, has been heavily affected in recent years by rising interest rates and concerns over a potential recession. Smaller firms, often more indebted and reliant on the domestic US economy, faced sharper challenges compared to larger companies.

After plummeting by as much as a third from its peak at its lowest point last year, the index has staged a recovery over the past 12 months. This rebound is attributed to an improved economic outlook and the Federal Reserve’s decision to begin cutting interest rates.

Biden Proposes Medicare & Medicaid Coverage of Obesity Drugs

Eli Lilly's shares rose 4.55% on 26 November, while Novo Nordisk's US-listed shares were up 1.5% as the companies with the most prominent obesity drugs. Eli Lilly makes Mounjaro, while Novo Nordisk owns Ozempic and Wegovy.

New GLP-1 class weight loss medications, which have demonstrated an average weight reduction of up to 20% and can aid in preventing type 2 diabetes, come with a high price tag of up to $1,000 per month without insurance coverage.

As it stands, Medicare covers the use of these drugs for conditions like diabetes but not for those specifically aimed at treating obesity. The Biden administration has proposed expanding coverage to cover these, too, greatly increasing the possible customer base for the drug companies.

There is, however, a question mark as to whether the proposal gets taken up by the new Republican government, especially in light of Robert Kennedy Jr’s pick as Head of Health and Human Services. Kennedy has previously opposed weight loss drugs and touted healthy eating and fitness as the preferable way for Americans to fight obesity. (Source: Washington Post)

Conclusion

Obesity drugmakers rallied on Biden’s Medicare expansion proposal, while small caps hit record highs on hopes of tax cuts and deregulation. However, risks loom: political hurdles for drug policy changes and economic uncertainty for small caps could challenge the current optimism.