Hypocretin/orexin (HCRT) and melanin concentrating hormone (MCH) neuropeptides are exclusively produced by the lateral hypothalamus and play important roles in sleep, metabolism, reward, and motivation. Loss of HCRT (ligands or receptors) causes the sleep disorder narcolepsy with cataplexy in humans and in animal models. How these neuropeptides are produced and involved in diverse functions remain unknown. Here, we developed methods to sort and purify HCRT and MCH neurons from the mouse late embryonic hypothalamus. RNA sequencing revealed key factors of fate determination for HCRT (Peg3, Ahr1, Six6, Nr2f2, and Prrx1) and MCH (Lmx1, Gbx2, and Peg3) neurons. Loss of Peg3 in mice significantly reduces HCRT and MCH cell numbers, while knock-down of a Peg3 ortholog in zebrafish completely abolishes their expression, resulting in a 2-fold increase in sleep amount. We also found that loss of HCRT neurons in Hcrt-ataxin-3 mice results in a specific 50% decrease in another orexigenic neuropeptide, QRFP, that might explain the metabolic syndrome in narcolepsy. The transcriptome results were used to develop protocols for the production of HCRT and MCH neurons from induced pluripotent stem cells and ascorbic acid was found necessary for HCRT and BMP7 for MCH cell differentiation. Our results provide a platform to understand the development and expression of HCRT and MCH and their multiple functions in health and disease.