Eli Lilly's next breakthrough: "Weight loss drug" opens up the large market of "Obstructive Sleep Apnea (OSA)".

Lilly's star "weight-loss drug" Zepbound, known for its powerful weight-loss effects, has been in high demand for a long time, driving Lilly's stock price to soar. By the end of this month, Lilly will face the next challenge - the results of the Phase III clinical trial for obstructive sleep apnea (OSA).

Morgan Stanley believes that Lilly's weight-loss drug Tirzepatide (brand name Zepbound) in the treatment of obstructive sleep apnea (OSA) in the Phase III clinical trial (SURMOUNT-OSA) is expected to announce significant positive results this month or next. This will further support the "spillover effect" of Tirzepatide beyond the weight loss field and promote medical insurance coverage, continuing to widen the moat. Morgan Stanley reiterates its "overweight" rating on Lilly:

We expect Zepbound (a once-weekly GLP-1-GIP injection) to show a reduction of at least 50% in the Apnea-Hypopnea Index (AHI) from baseline in the SURMOUNT-OSA trial, which is considered clinically meaningful.

The success of this drug not only further proves the effectiveness of GLP-1 drugs in treating comorbidities related to obesity (such as sleep apnea) but also helps expand its medical insurance coverage in the United States. Based on our previous conversation with an academic sleep doctor, we believe this result will be considered clinically significant.

Lilly stated in the Q4 2023 earnings conference call that there is currently no clear clinical significance threshold for sleep apnea, but they expect to see an absolute percentage improvement in AHI and hope to see patients transition to a lighter disease category (such as from moderate to mild). Overall, they are optimistic about the trial.

Given the differences in baseline characteristics and trial design, we expect the Zepbound group to achieve a weight loss of about 15-18% in SURMOUNT-OSA, compared to a weight loss of 15-21% in the SURMOUNT-1 obesity trial.

Morgan Stanley analysts predict that if the SURMOUNT-OSA trial is successful (i.e., a significant decrease in AHI), Lilly's stock price could rise by about 1%-3%. Conversely, if the trial does not achieve significance, Lilly's stock price could drop by more than 5%.

Shams Afzal, portfolio manager at Carnegie Investment Counsel, believes that from treating heart failure to sleep apnea, Lilly's weight-loss therapy is expected to open up new markets, which could be a driving force for Lilly to reach the trillion-dollar mark:

"Lilly has truly become a unicorn in the biopharmaceutical field and is poised to touch a trillion dollars in the future."

The correlation between OSA and obesity, and the massive population size

According to Morgan Stanley, overweight/obesity is the most important reversible risk factor for obstructive sleep apnea (OSA). Research data shows a strong correlation between weight gain and the occurrence of OSA, and weight loss can lead to overall improvement in OSA: Morgan Stanley's report revealed that in Wisconsin, 41% of adult OSA cases (including 58% of moderate to severe cases) are attributed to overweight or obesity. Another study found that 70% of OSA patients are obese, while conversely, 50% of individuals with a Body Mass Index (BMI) >40 have an Apnea-Hypopnea Index (AHI) >10 for OSA (Gleeson & McNicholas, 2022).

There is evidence suggesting that weight loss can lead to overall improvement in OSA, and weight loss surgery has been proven to have a positive impact on obesity-related OSA. On the other hand, OSA itself is a factor in obesity, as it can lead to rapid weight gain, exacerbating OSA and creating a vicious cycle.

According to Morgan Stanley, in the United States, there are approximately 31 million mild OSA patients, around 14 million moderate patients, and about 8 million severe patients. Research funded by ResMed estimates that globally, around 936 million adults aged 30-69 suffer from sleep apnea (AHI≥5).

OSA patients are classified as mild, moderate, or severe based on the number of AHI events per hour (mild defined as AHI 5-15, moderate 15-30, severe 30+). A study of 67,000 patients estimated that about 58% have mild sleep apnea, around 27% have moderate, and about 15% have severe. Similarly, a ResMed-funded study shows that around 57% have mild OSA. We provide a detailed breakdown by severity, indicating that in the United States, there are approximately 31 million mild OSA patients, around 14 million moderate patients, and about 8 million severe patients.

Another study published by the American Academy of Sleep Medicine (AASM) in 2016 estimated that the prevalence of OSA (AHI≥5) in the United States is 29 million, of which only about 6 million are diagnosed. If the diagnosis rate increases, Zepbound may have a greater opportunity in the U.S. OSA population. As a reference, according to AASM, about 25% of undiagnosed OSA patients have Type 2 Diabetes (T2D).

These numbers are higher than our previous estimates, which indicated that out of approximately 108 million obese individuals in the United States, 10 million have OSA (without T2D).

Morgan Stanley believes that positive SURMOUNT-OSA data will continue to help Lilly demonstrate to doctors the broad benefits of GLP-1 drugs beyond weight loss, driving commercial medical insurance coverage in the United States:

Lilly has previously discussed that they consider this particularly important for the U.S. employer market, where currently only about 2/3 (approximately 40 million out of 60 million) of obese adults covered by commercial medical insurance in the U.S. are selected by the employer for coverage. We also see this as a way to penetrate the U.S. Medicare population (mainly covering people aged 65 and older as well as some disabled individuals) who currently lack insurance coverage for obesity treatment drugs.

Morgan Stanley predicts that based on the design of the SURMOUNT-OSA trial, analysis of previous GLP-1 drug research results, and comparison with the placebo group in the SCALE study, there is reason to expect significant reductions in AHI and weight loss in the Zepbound group:

In the SURMOUNT-OSA trial, the weight loss in the Zepbound (tirzepatide) group may range from 15-18%, with an average AHI reduction of about 50%-60% from baseline, indicating a high likelihood of positive results in the study.

In the SCALE study of Saxenda, the subset of patients with weight loss of over 15% showed a decrease in AHI of 25-30 events per hour, providing a benchmark for SURMOUNT-OSA. Considering that the average expected weight loss in SURMOUNT-OSA is at least 15%, it is reasonable to expect an absolute AHI reduction of at least 25 events per hour, or about a 50% decrease from baseline.

Assuming that the performance of the placebo group in SURMOUNT-OSA is similar to that of the placebo group in the SCALE study (with a 12% decrease in AHI), then the SURMOUNT-OSA trial should be able to achieve highly statistically significant results.