WeightWatchers stock rallies 170%! But new compounded GLP-1 drug is ‘not a sustainable long-term business model.’

WeightWatchers (WW) is trying to save its ailing business by betting on a market that threatens its very existence.

The weight-loss company, previously championed by the likes of Oprah Winfrey, saw its stock spike this week after announcing that it will make copycats of Novo Nordisk’s (NVO) Ozempic and Wegovy weight-loss drugs. WW International (i.e. WeightWatchers) stock jumped nearly 40% Wednesday following the news, and the stock climbed an additional 23% Thursday to close at $1.96. WW is up 172% from last week.

Though WeightWatchers’ core business is its dieting program, the company has attempted to get in on the booming weight-loss drug market dominated by pharmaceutical giants Eli Lilly (LLY) and Novo Nordisk (NVO). (The strategy was championed by its former CEO Sima Sistani, who recently departed the company.)

WeightWatchers first attempted to secure a foothold in the weighty drug space early last year with its acquisition of Sequence, a telehealth platform specializing in weight-loss medication management. The acquisition has failed to improve the company’s revenue, which fell 14.5% in 2023 and is expected to decline another 13% this year.

WeightWatchers’ announcement Tuesday that it will offer compounded GLP-1 drugs — which are cheaper and don’t require insurance — is another shot at capitalizing on the market late in the game.

Federal laws allow companies to sell compounded versions of drugs on the US Food and Drug Administration’s shortage list. Regulations allow the drugs to be made at FDA-registered facilities, but the compounded medications themselves are not FDA-approved. WeightWatchers will offer a compounded semaglutide, the active ingredient in Ozempic and Wegovy.

Here’s the rub: Once the Novo Nordisk drugs are removed from the FDA’s shortage list, WeightWatchers will no longer be able to produce compounded semaglutide drugs at scale. Tirzepatide, the active ingredient in Eli Lilly’s Mounjaro and Zepbound, was removed from the list last week, posing a massive problem for companies making compounded versions of the drug.

“Compounding is not a sustainable long-term business model,” Barclays (BARC.L) healthcare technology and distribution analyst Stephanie Davis told Yahoo Finance. Davis is one of four Wall Street analysts covering the stock tracked by Bloomberg. Half of those analysts have Equal Weight ratings on WW, and Davis is one of the other two analysts who recommend selling the stock.

Meanwhile, WeightWatchers’ expansion in the weight-loss drug space contradicts its core business. “GLP-1s are going to cannibalize the diet industry,” Davis said.

Story continues

WeightWatchers did not immediately respond to questions from Yahoo Finance on Thursday.

To illustrate the weakness of WeightWatchers’ strategy, Davis pointed to the rapid boom and bust of Hims & Hers Health (HIMS) stock. Shares of the telehealth company surged after news that it would sell Ozempic and Wegovy copycats. The stock climbed 70% from the time of the announcement in May to a closing high of around $24.79 in mid-June. Then, when the FDA removed tirzepatide from its shortage list — a gloomy sign for sellers of compounded GLP-1s — HIMS tanked.

HIMS shares dropped another 10% on Oct. 2 when the FDA published a letter citing concerns over compounded drugs — which are not reviewed for safety, effectiveness, or quality before they’re marketed.

More trouble for WW? Novo Nordisk on Oct. 8 published a study that found impurities in compounded versions of its drug — raising questions about the safety and efficacy of compounded semaglutide medications in particular.

Morgan Stanley’s (MS) Nathan Feather, on the other hand, believes that it’s not too late for WeightWatchers to turn things around. He said WeightWatchers’ failures to successfully monetize its GLP-1 telehealth offering — something it gained through its purchase of Sequence — has been due to its clients’ lack of insurance coverage for the drugs and the company’s shortcomings in the advertising space, rather than weakness in its core business. WeightWatchers’ new, cheaper compound GLP-1 offering, which don’t require insurance, could help overcome those issues.

“Given the sudden [market] share reversal [for WW International] was primarily due to the inability to compete in ad markets rather than consumer dissatisfaction with the Clinic program, we believe the launch of compounding addresses the primary constraint to growth,” Feather said in a note to investors Tuesday.

He added: “The bar for execution is high with diet season rapidly approaching” in addition to “investor concerns on the liquidity profile.”

Feather maintains his Equal Weight rating on the stock, contending that WeightWatchers’ GLP-1 offering is only a temporary solution. “As GLP-1s are removed from the shortage list, this could lead to large-scale churn events if WW is unable to continue servicing clients using compounded medication,” he said.

Laura Bratton is a reporter for Yahoo Finance.

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance