Obesity is a growing global health concern, with the prevalence nearly tripling since 1975. Traditional interventions like diets and exercise have struggled to curb the epidemic, but a new class of drugs, GLP-1 agonists, shows promise. Developed by pharmaceutical giants Eli Lilly and Novo Nordisk, these drugs are proving effective in combating obesity by reducing appetite and increasing satiety.
In this newsletter, we analyse the second order effects of declining obesity rates, what may limit uptake by patients, and how the market may be providing long-term opportunities in certain sector.
Obesity has long been a primary catalyst for various health-related complications. Over the past several decades, this disease has been on the rise, underpinned by the increasing caloric content and ubiquity of food. According to the World Health Organization (WHO), the global prevalence of obesity has surged nearly threefold since 1975.
Whole industries have emerged in a pursuit to curb (or exploit) rising obesity rates. Fad diets, weight-loss pills, new exercise regimes have all failed to stop the epidemic. However, a new class of drugs has emerged, demonstrating a promising impact. Developed by pharmaceutical companies Eli Lilly and Novo Nordisk, these drugs belong to the class of GLP-1 agonists.
GLP-1 medication mimics the actions of glucagon-like peptide 1 (GLP-1), a naturally occurring hormone that helps to regulate blood sugar and appetite. Historically, GLP-1 medications have been used to treat type 2 diabetes. They work by increasing insulin secretion and decreasing glucagon secretion, which helps to lower blood sugar levels.
GLP-1s have now also been shown to be effective for the treatment of obesity. They work by reducing appetite and increasing satiety, which indirectly leads to weight loss.
The clinical evidence published thus far is telling. Eli Lilly conducted a 72-week clinical trial for its drug Mounjaro, with the placebo adjusted data showing that the mean weight lost by participants was 18% of their body weight. Novo Nordisk conducted a similar study, with participants losing 14% of their body weight while taking their drug Wegovy.
These drugs have provided a palatable outlet for individuals struggling with the disease. The only prior treatment with similar efficacy levels was bariatric surgery (gastric bypass). The procedure, however, has seen limited uptake due to eligibility limits of the patients and fears surrounding surgery.
Given the high efficacy and ease of use, GLP-1 demand is surging. The drug’s market for obesity has already reached ~$8 billion in 2023, driven largely by Novo Nordisk’s legacy product Ozempic, however, it will soon be surpassed by the newer generation – Mounjaro and Wegovy.
Morningstar estimates that Novo Nordisk and Eli Lilly will maintain roughly 75% share of this market in the long run, driven by Wegovy and Mounjaro but also pipeline drugs like Novo’s cagrisema and Lilly’s retatrutide (oral forms of GLP-1s). Pipeline programs at Amgen and Pfizer could also begin to chip away at price to gain share beyond 2026.
The total obesity GLP-1 market is expected to peak at $65 billion in 2031, compounding at 30% per year.
Second Order Effects of GLP-1s
Morgan Stanley Research estimates that 7% of the US population could be taking GLP-1 drugs by 2035. If GLP-1s have a 30% penetration rate in the obese population, the obesity rate in the United States would be lower than it was in 1997. Considering these projections, the ripple effects on industries beyond the pharmaceutical sector will be substantial. From initial studies, it appears that the two sectors most exposed are the food and beverage industry, along with adjacent healthcare sub-sectors.
A study conducted by Morgan Stanley shed light on how GLP-1 drug users tend to make significant changes in their dietary habits, notably reducing their consumption of foods high in sugar and fat. Their research suggests that the collective consumption of carbonated soft drinks, baked goods, and salty snacks may decline by up to 3% by 2035.
Several companies have already reported noticeable shifts in the behaviours of individuals using these drugs. Walmart, for instance, recently announced a “slight pullback in overall basket size” due to the influence of GLP-1 drugs on diminishing food-shopping demands.
The S&P Food & Beverage Select Industry Index has declined 12% over the past three months. Hershey is down 19%, while Coca-Cola and PepsiCo have shed 9% and 13%, respectively.
Walmart’s comments were the first to capture headlines, however, the topic is being discussed widely. References to “GLP-1” in earnings call transcripts this quarter have more than tripled year-over-year.
The healthcare sector is poised for the largest transformation given that there are 236 obesity-related health conditions. The Centre for Disease Control estimates the annual medical costs to treat obesity are close to $500 billion per year. Type-2 diabetes risk is increased by 243% in people with obesity, heart disease by 69%, high blood pressure by 113% and high cholesterol by 74%.
The development of these drugs will undoubtedly have an impact on certain patient pools, which may benefit certain businesses such as healthcare insurers, while also hindering different healthcare product and service providers.
Like the Food & Beverage sector, medical device companies have seen their share prices decline in the wake of GLP-1 uptake. The iShares Medical Device ETF has fallen 13% over three months. Insulet , which makes insulin pumps, is down more than 50%, while Dexcom , a manufacturer of glucose monitors, has fallen 29%.
Gartner Hype Cycle
Given the economic impact of declining obesity rates, the market has been quick to price in shifting growth assumptions. We believe, however, like the AI boom experienced earlier in the year, it is too early to judge the true impact of these weight loss drugs.
A useful framework to keep in mind when dealing with technological discoveries is the Gartner Hype Cycle. It is a five-phase model that illustrates how a technology’s popularity and expectations evolve over time.
Stage 1, referred to as the “technology trigger,” marks the inception of a potential technological breakthrough. Early concept theories and media interest ignite growth extrapolations and hype. Initial thoughts about the future are generally impacted more by emotion than facts and data.
Signs of this initial stage’s exuberance became evident as analysts began publishing speculative reports, suggesting that processed-food companies might shift their focus to selling carrot sticks and airlines could reduce fuel consumption due to lighter passenger loads.
We believe the GLP-1 discovery still resides in Stage 1, albeit inching closer to Stage 2 – “the peak of inflated expectations.”
The share prices of Eli Lilly and Novo Nordisk have increased 50% and 70% in the year-to-date, respectively. The two drugmakers have added $339 billion in market capitalisation this year, a sum greater than the value of all but 18 companies in the S&P 500.
There is no doubt that these drugs will be a massive boost to their profits, however, gauging the magnitude is difficult. There is still much that isn’t well understood about GLP-1 drugs including the long-term effects of taking them.
Many insurance companies cover Ozempic and Mounjaro for diabetes, the purpose for which the Food and Drug Administration approved them, but not for weight loss. With list prices ranging from more than $900 to $1,300 a month, the drugs can be difficult for many patients to afford.
The drugs also come with side effects that can be unpleasant, such as nausea and diarrhoea, with an average of 24% of patients in clinical trials complaining of gastrointestinal problems.
Current forecasts suggest that once prescribed, obese individuals will need to take GLP-1 drugs for the medium to long-term. However, that may not be the case.
A study run by Prime Therapeutics, a pharmacy benefits manager, analysed pharmacy and medical claims data for 4 255 people with commercial health plans. All patients received new prescriptions of GLP-1 agonists between January and December 2021, and had a diagnosis of obesity, prediabetes, or a BMI of 30 or higher. For the study, Prime Therapeutics removed patients with type 2 diabetes to focus on obesity treatment.
Overall, only 32% of the patients were still taking the medicine for weight loss a year after their initial prescription. All the patients had insurance coverage for GLP-1 drugs, and the results did not differ materially based which of the drugs was prescribed. This real-world data suggests a substantial drop in adherence compared to what was reported in clinical trials by Novo and Lilly.
High costs, side-effects, and poor adherence are what may drive the GLP-1 cycle into stage 3 – “trough of disillusionment”. In this phase interest wanes as expectations and implementations fail to deliver. Previous reactive discounting by the market eventually reverts to the levels determined by economic reality.
Opportunities
In all the hype and shifts in market sentiment, material mispricings are bound to emerge. Two areas where we believe the market has potentially overreacted is in orthopaedic device and dialysis providers.
Orthopaedic device manufacturers have seen their share prices fall on estimates that a quarter of all surgical replacements of knees could be avoided if patients weren’t overweight. Taking this data point at face value would naturally dent growth assumptions. However, when all the data is considered, it appears there is more to the story.
Many large institutions set BMI guidelines for procedure eligibility. If a patient has a BMI greater than 40, they are denied the operation due to post operation complication concerns. Therefore, treating obesity prior to surgery may expand the addressable patient population for large joint procedures. In addition, obesity is a contributor to osteoarthritis, which cannot be cured even if patients lose weight in the future.
Similarly, share prices of dialysis providers, DaVita, and Fresenius Medical Care, declined on news that a kidney-related trial of Novo Nordisk’s Ozempic slowed the progression of kidney disease in patients with chronic kidney disease and diabetes. These results suggest the new obesity drugs may slow the incidence rate of patients needing dialysis in the long run.
Again, there is counter evidence. At its analyst day in April, Fresenius Medical Care highlighted that these new drugs could help more chronic kidney patients survive to dialysis, and those people may be healthier and receive dialysis treatments for longer. Moreover, new dialysis patients often face a steep mortality rate, but as these new drugs slow disease progression, the patients that transition to dialysis may be healthier and monitored more closely by doctors, which could help them manage that transition to dialysis better.
Conclusion
The emergence of GLP-1 drugs represents a promising development in the battle against obesity. These drugs have already made a substantial impact on the pharmaceutical market, with Eli Lilly and Novo Nordisk leading the way. Their potential to reduce obesity rates has far-reaching implications, not only for the healthcare sector but for other industries as well. While early enthusiasm has boosted the stocks of these drugmakers, questions about long-term effects and affordability may moderate growth expectations over time. Nonetheless, the market’s reaction affords opportunities to take advantage of share price weakness in companies that may not be as impacted as expected.