WW International is steering hard in a recent direction, hoping to show the growing interest in obesity medications to its advantage. On paper, the brand new strategy might be the reply to its problems, but significant execution risks remain. Shares of the Weight Watchers parent are up nearly 50% on Tuesday after the corporate announced plans to amass Sequence, a telehealth platform that gives its subscribers with access to GLP-1 medications equivalent to Wegovy and Ozempic. Before this pop, WW shares were down greater than 57% over the past yr, and it’s no surprise. The corporate’s sales have been in a gentle multiyear decline after an try and de-emphasize weight reduction and concentrate on wellness failed miserably. WW 1Y mountain The parent of Weight Watchers has seen its market value shrink as sales have dropped for several years. With a recent CEO, Sima Sistani, on the helm, the corporate has returned to its weight-loss roots, but the thrill around weight-loss medications is a transparent threat to the corporate. Sequence’s acquisition will give WW a foothold within the clinical weight reduction space, but the corporate has a whole lot of lost ground to make up. Obesity drugs have been a game changer Initially created as a treatment for Type 2 diabetes, semaglutide is sold by Novo Nordisk under the brand names Ozempic, Wegovy and Rybelsus. The drug mimics the incretin hormone glucagon-like peptide-1 within the body to make patients feel full and lower blood sugar. Patients report a lack of cravings, which might help them concentrate on improving eating habits and reducing weight. With the drug’s help, patients can lose a mean of 15% of their body weight, studies show. One other drug, Eli Lilly’s Mounjaro, adds a second incretin hormone to the combination and has been shown to be much more successful with weight reduction. In a clinical trial, some patients lost greater than 20% of their initial starting weight. The Food and Drug Administration is anticipated to approve it for treating weight reduction by the top of this yr and at the least one analyst has predicted it could reach $100 billion in sales by 2035. Consumer concentrate on these medications has caused shortages of the medication and should even account for a number of the weakness Weight Watchers has seen in its own food regimen business. “Acquisition of Sequence looks like an ideal move for WW, nevertheless it highlights the danger Big Pharma poses to the behavioral approach to weight management,” Alex Fuhrman, an analyst at Craig-Hallum Capital, wrote in a research note. WW didn’t offer an earnings forecast for this yr, but Fuhrman lowered his estimates to account for weak trends the corporate has seen at first of this yr. The primary quarter, which incorporates a time when many consumers launch efforts to shed extra pounds with the start of a recent yr, could see a 21% drop in revenue to about $235 million and an adjusted operating lack of $10 million to $15 million, down from a profit of $9 million a yr ago, the corporate said. Subscriber counts could fall in the teenagers range, WW said. WW is intentionally pulling back on marketing spending because it waits to launch recent products within the back half of the yr, it said. That may help its cost structure, because it already has a major amount of debt, which can grow because it acquires Sequence. The deal, which is anticipated to shut within the second quarter, has a net purchase price of $106 million, and is anticipated so as to add to WW’s earnings by the fourth quarter. “With net debt representing greater than 11x our revised 2023 EBITDA estimate and interest expense set to rise significantly in 2024 when hedges expire, we remain cautious on the shares and maintain our Hold rating and $4 price goal,” Fuhrman wrote in a research note. The Sequence opportunity Sequence launched in 2021 and recently became money flow positive. It has largely grown by word of mouth, said UBS analyst Michael Lasser. “As of last month, it had 24,000 subscribers that pay $99 per thirty days,” Lasser wrote in a research note. “It’s on pace to have a $25mm revenue run-rate.” The monthly fee gives subscribers access to board-certified clinicians, registered dietitians, fitness coaches and a care coordinator. Lasser predicts that if WW were to convert 10% of its Weight Watchers’ membership base to turn into Sequence members for at the least 10 months, the corporate could add $400 million to its revenue. That is on top of the $1.04 billion in sales Lasser is predicting for WW this yr. “Still, the consumers that will join for Sequence would want to find a way to afford the medication,” Lasser said. “These subscribers would likely need support from their insurance. These are big ‘ifs.’ Within the interim, WW might want to turn-around its core membership trends and integrating a brand recent element of its offering that’s in contrast to its legacy model won’t make that turn-around any easier.” Wegovy has a listing price of $1,349 for a pack of 4 injector pens. While Medicare is prohibited from paying for weight-loss medications, at the least 80% of business insurance firms can pay a portion of that cost, in line with Novo Nordisk. Nonetheless, winning coverage can often require patients to get pre-authorization. That’s where a telehealth platform equivalent to Sequence may be useful. It is also price noting that many consumers who’ve been successful on the GLP-1 medications have found that they regain a few of their weight once they stop taking the medications. This trend could provide a possibility for the core Weight Watchers brand and its concentrate on behavior modification. An ‘existential risk’ All in all, Lasser said the acquisition is a major change for WW and it poses a “sizable” risk. “This can be a business that has been disrupted over the past several years. It’s now attempting to take big steps to course correct. We predict it’s going to take time to see if this motion really produces a change in the corporate’s fortunes,” Lasser said. Morgan Stanley analyst Lauren Schenk said WW’s strategy shift is an “acknowledgement of a key competitive threat that might change the dynamics of the WW’s business meaningfully additional time.” Schenk noted that the FDA has said that weight management medications should only be prescribed alongside behavioral lifestyle changes. If patients are held to this standard, it could help drive subscriber growth. “Nonetheless, if that simply stays only a advice, and never a mandate, and consumers increasingly turn to GLP-1s before other weight reduction options, it’s possible it could drive an existential risk to WW’s business,” she said. With an equal-weight rating, Schenk’s base case for WW stock gives it a $3 price goal. That scenario assumes Weight Watchers continues to see membership erosion, while cost controls help minimize margin compression. Nonetheless, she warns the stock could fall as little as 50 cents whether it is unable to speed up its growth and wishes to spend more heavily on marketing. In a bull case, Schenk predicts the stock rises as high as $13. That scenario hinges on the corporate reviving subscriber growth through innovation. — CNBC’s Michael Bloom contributed to this report.