investment insights
Can GLP-1 weight loss drugs live up to the hype?
Key takeaways
- GLP-1 drugs could be the biggest pharmaceutical products in modern history. For drugs companies, they combine a huge potential market with long-term use and hence recurring revenues
- The high cost of these drugs looks likely to continue until competition arrives around 2027; we expect this to limit their uptake to under 10% of obese US adults by 2030
- Currently only two pharmaceutical companies have approved GLP-1 weight loss drugs; rivals only have candidate drugs in mid-stage testing
- The sell-off in medical device and big food and drinks companies on GLP-1 concerns may have gone too far in our view.
The buzz over artificial intelligence (AI) has captivated investors this year, but a war on fat has not been far behind. GLP-1 weight loss drugs have big implications for public health, pharmaceutical and medical technology companies, as well as knock-on impacts on the consumer sector.
There is little doubt that GLP-1 drugs – including brand names Wegovy, Ozempic, Mounjaro and Zepbound – are game-changing treatments. Designed initially to stimulate insulin production for type 2 diabetics, the drugs mimic the action of the GLP-1 gut hormone released after eating. Studies then found they cause 15-20% weight loss by reducing appetite and slowing digestion. Their use by celebrities took off, and their potential to tackle the fast-rising obesity epidemic became clear.
More than one in four US adults and 1 in 10 globally is already obese, leading to a higher risk of many conditions: diabetes, heart disease, stroke, some cancers, poor mobility and mental health. Until recently, obesity was seen more as a lifestyle than a medical condition. But this is changing, in part due to its heavy toll on the public purse: 2.5% of global GDP by 2035 estimates the World Obesity Federation, equivalent to the impact of Covid-19 in 2020.
The hype is real
Investors are right to be enthusiastic: GLP-1 drugs could be some of the biggest pharmaceutical products ever. In previous decades, statins, cancer immunotherapies, then Covid vaccines have all boosted sales. But the market for GLP-1’s could be larger, faster: USD 70-100 billion in annual sales by 2030 we estimate. Previously, there were no really effective weight loss drugs, with bariatric surgery the main option.
GLP-1s combine two important elements for pharmaceutical companies: a vast potential market and unmet need, with lifetime use (and hence recurring revenues) needed to be effective. Currently, only two firms have approved GLP-1 weight loss treatments. We expect this duopoly to continue until around 2027, allowing them to keep prices high: an estimated USD 10,000-16,000 per patient per year in the US, although competition between the two companies could see some modest downward pressure.
Recent trial results for leading obesity drug Wegovy also found it cuts the risk of heart attack, stroke, and heart-related deaths by 20% in obese or overweight people with heart disease. This should boost prescriptions and health insurer coverage of the drugs and suggests GLP-1s may become a mainstay in cardiovascular treatment, another huge market. Trials are looking to see if they can help other conditions, from polycystic ovary syndrome to alcohol misuse and dementia. Their use in obesity is being extended to new markets and younger populations. The first oral GLP-1 drugs may hit the market in 2025, increasing their appeal for those put off by weekly injections.
Stomach-reducing potential, eye-watering cost
The big discussion today is not GLP-1’s efficacy, but their cost – and hence barriers to their uptake. Covering the drugs for obesity – which it does not currently do – at today’s prices would put a huge strain on US federal health insurer Medicare’s finances, note health economists, even with a li
mited uptake. Doctors in the UK can prescribe them for obesity but only for a year. Our market modelling assumes a comparatively small rise in the drugs’ penetration by 2030, to just 8% of obese US adults.
Other factors may temper market optimism. The drugs’ long-term side effects are unknown. Previous weight loss drugs have hit problems, from amphetamines and ‘fen-phen’ to Sanofi’s Acomplia, which was abandoned in 2008 after concerns over increased suicide risk. The European Medicines Agency is also reviewing data on the risk of suicidal thoughts for patients on GLP-1s, which should conclude this month. Yet after several years of use for diabetes, few serious issues have arisen with GLP-1s, with most limited to nausea, vomiting and diarrhoea – although the dosage is slightly higher for Wegovy (the version prescribed for obesity) than for Ozempic (for diabetes). For rival GLP-1 drugs Mounjaro (diabetes) and Zepbound (obesity) there is essentially no difference.
Supply constraints are a bigger issue. Ramping up production of injectable drugs is hard, and limited supply of Wegovy is being prioritised for existing patients rather than new ones.
Priced for perfection
For investors, the biggest reality check is likely the price of the companies that sell them. The only two firms with approved GLP-1 obesity drugs trade at 40- and 100-times earnings, versus mid-teens for their peers. Unused to modelling such stellar growth, pharmaceutical analysts have shifted to valuing these companies on price/earnings to growth ratios, on which they do not look so misaligned. The multi-year opportunity perhaps lends itself better to a valuation based on the sum of future cashflows, rather than a single year’s earnings. Longer-term, the promise of GLP-1s could boost the whole pharmaceutical sector. But for now, it is hard to judge the potential at rival firms. Their drug candidates are only in early clinical trials, where on average, they have just a 15% chance of reaching the market.
The sky’s the limit
Speculation over the potential impact of GLP-1s has spread quickly across equity sectors: will thinner passengers cut airlines’ fuel bills? Will diet apps be consigned to history? Two events in October 2023 sparked a sell-off in the shares of consumer goods and medical device companies. The first was a comment from Walmart’s US chief executive that chief executive’s that GLP-1 users were buying less food. Bosses of large food and drink companies rushed to say they had seen no impact. The second was a maker of bariatric surgery robots saying that growth rates for US procedures had slowed.
The sell-off in medical devices has been overdone in our view. Specialist makers of sleep apnoea devices and fatty liver drugs closely linked with obesity may suffer. But more diversified firms, including makers of glucose-monitoring systems and replacement joints, still face a large and growing market, especially given the small proportion of obese patients projected to be on such drugs by 2030. Many insurers only cover them short-term, and many patients stop taking them after a year, in which case, most of the weight tends to pile back on.
We also think a ‘worst case’ scenario for GLP-1s may now be priced into some consumer staples firms. Any change in consumption patterns is difficult to predict at this stage, and companies may have ample time to reshape product portfolios. Many, especially in Europe, have already pivoted towards healthier snacking and sports nutrition.
Of course, defensive sectors like healthcare and consumer goods have been hurt in 2023 by a surprisingly resilient US economy and by the competitive yields available on many bonds. Of the two equity sectors, we favour consumer goods, where we see scope for a volume and margin recovery in 2024.
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