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"A festive christmas lunch with a table laden with food, but the guests all recoiling from it and not eating anything. Make it in the style of a NYT cartoon" - DALL-E 3
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On the Horizon #6: Obesity Drugs - Capitalising on Moderation
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Just as AI has shouldered all other themes aside in the tech world, the healthcare sector has had their own 'ChatGPT moment' in the form of obesity drugs (technically described as GLP-1 receptor agonists) - a potential panacea for one of the greatest challenges facing healthcare systems.
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Eli Lilly and Novo Nordisk have showed incredible outperformance versus peers, driven by the promise of obesity drugs. The pharma sub-sector has been one of the worst performing sub-sectors in the S&P YTD
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Source: Bloomberg; Green Ash Partners
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The two companies have added a combined $660 billion in market cap over the last three years - a +58% larger gain than the COVID vaccine frontrunners at the height of the pandemic
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Source: Bloomberg; Green Ash Partners
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The problem of obesity has been a topic of public discourse in the West for decades, but is fast becoming a global issue, as food becomes increasingly abundant and billions are steadily lifted out of poverty.
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Per capita food supply globally has been steadily rising, as technology drives continual improvements to productivity and an increasing proportion of the Earth's surface is dedicated to agriculture
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Source: Food and Agriculture Organisation of the United Nations (FAO); Green Ash Partners
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The % of the global population that is either overweight or obese is forecast to rise from 38% in 2020 to 51% by 2035. More worrying, children (aged 5-19) are the fastest growing demographic, with child obesity expected to double from 9% to 19% over this period
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The daily calorie intake of an average American has risen +22% since 1970 - this has been entirely driven by carbohydrates, added fats and added sugars
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Source: USDA; Green Ash Partners
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Obesity contributes to a long list of chronic diseases that are expensive to manage and impact both the quality of life and longevity of those afflicted. 90% of type 2 diabetics have a BMI above 25, and studies have shown obesity is responsible for 4-8% of all cancers (and excess body fat results in an approximately 17% increased risk of cancer-specific mortality).
Along with associated conditions, obesity is a major contributor to rising healthcare costs as well as exerting a drag on economic productivity. Nowhere is this more acute than in the US, where healthcare spending accounts for 18% of GDP (versus a G7 average of 9%) and 42% of the population in classed as obese (according to the CDC).
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Healthcare spending in the US has been rising as a % of GDP
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* 2020 omitted due to COVID spike
Source: United States; CMS (Office of the Actuary); Green Ash Partners
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Individual healthcare spending in the US is 2.7x higher for those with an obesity diagnosis
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The economic impact of obesity is forecast to double to $4.3 trillion by 2035
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Source: "Economic impacts of overweight and obesity: current and future estimates for 161 countries" - Okunogbe A, Nugent R, Spencer G, et al BMJ Global Health 2022;7:e009773; Green Ash Partners |
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What is a GLP-1 Receptor Agonist?
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GLP stands for glucagon-like peptide, and GLP-1 drugs are a class of medication designed to mimic hormones called incretins. These are released by the body when eating to stimulate the excretion of insulin and to slow the movement of food from the stomach to the intestine, which reduces appetite. They have been used to treat type 2 diabetes for nearly two decades - the first GLP-1 receptor agonist, Eli Lilly and Amylin's exenatide (brand names Byetta and Bydureon), was approved by the FDA in 2005. Several more have come to the market since then, but it wasn't until 2015 that the FDA approved the first GLP-1 agonist for weight loss (liraglutide, brand name Saxenda).
While liraglutide was shown to be effective for weight loss (-5-10% reduction over 22 weeks), it failed to hit the mainstream. Successors like Novo Nordisk's semaglutide (brand names Ozempic/Wegovy) have much longer half lives, allowing for weekly, rather than daily, injections. This greatly broadens the appeal to patients and improves adherence. We will soon see the first oral GLP-1 drugs approved, further expanding the addressable market.
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Research into GLP-1 drugs took off with the approval of semaglutide in 2017. A key difference between the latest GLP-1 drugs like semaglutide and tirzepatide is they are injected weekly rather than daily like liraglutide
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Source: National Library of Medicine; Green Ash Partners
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Looking ahead a few years, the field is getting increasingly crowded, with large, diversified pharma companies and smaller pure-play biotechs both joining the fray with their own candidates.
Several 'next-gen' drugs such as Eli Lilly's tirzepatide (brand names Mounjaro/Zepbound) are dual agonists, targeting glucose-dependent insulinotropic polypeptides as well as the GLP-1 receptor (GIP/GLP-1). These have the potential to have greater efficacy, tolerability, and possibly additional cardiovascular or other benefits (studies ongoing). There are now triple agonists in development, such as Eli Lilly's Retatrutide, which also targets glucagon receptors.
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While approved obesity drugs are currently a duopoly controlled by Novo Nordisk and Eli LIlly, there is a gold rush underway, with many new candidates in clinical trials
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Source: Company reports; Green Ash Partners. List is not exhaustive
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Data releases this year have shown powerful 4 week weight loss effects for newer drugs in the pipeline - Amgen's AMG-133 candidate is more effective than an 800 calorie diet or bariatric surgery(!)
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Source: Stifel, Company reports; Green Ash Partners
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Over this longer time horizon, dual and tri-agonists such as tirzepatide, retatrutide and AMG-133 stand out as the most effective for weight loss
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Source: Sanford Bernstein, Company reports, journals and clinical releases
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Headline weight loss figures are important, but there are more dimensions to obesity drugs which will determine the success of new entrants to the market. These include considerations such as:
- Side effects - the GLP-1 class of drugs are characterised by nausea and gastrointestinal symptoms, the mitigation of which improve patient adherence to prescriptions and reduce discontinuations. Different formulations may suit different cohorts of people
- Lean muscle mass is also lost as part of the overall weight loss. Different GLP-1 agonists seem to have varying effects on muscle mass. Some studies suggest that newer agents like tirzepatide may have less of a negative impact on muscle than older drugs like liraglutide
- Oral delivery - some potential patients may be more likely to adhere to daily pills rather than weekly injections
- Similarly, compounds with longer half-lives have the advantage of less frequent dosing, improving adherence - hypertension medicine to protect against cardiovascular and kidney disease only requires taking a daily pill. Yet, after one year, almost 50% of patients discontinue use. (Sanford Bernstein)
- Permanence - is weight loss maintained after discontinuing use?
- Other benefits - there is early research showing this type of drug may improve cardiovascular health and be used to treat nonalcoholic fatty liver disease (NASH), chronic kidney disease (CKD), and possibly even Alzheimer's
- Cost - currently approved options are expensive, especially in the US
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A $100 Billion Market Opportunity?
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Given the scale problem obesity poses to healthcare systems and the proportion of the population that could benefit from weight reduction, the total addressable market for this class of drugs is huge. Numerous sell side analysts put the market size at $100 billion in the 2030s - this amounts to 40% of total revenues for the whole S&P Pharmaceuticals, Biotechnology & Life Sciences sub-index in 2023.
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Median analyst forecasts for currently approved obesity drugs from Novo Nordisk and Eli Lilly imply a $60BN market by 2030
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Source: Bloomberg; Green Ash Partners
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In the US alone, back-of-envelope math can produce very large numbers. As per CDC, around 140 million Americans are obese (42% of the population), and any estimate depends on what proportion turn to GLP-1s to manage weight - as a comparable, a quarter of adult Americans have taken a prescription cholesterol-lowering medication (such as statins) in the last 30 days.
So then it becomes about insurance coverage and/or desire to self-pay. US insurers are just coming around to the idea of including weight loss drugs in standard coverage, even though they are currently very expensive (~$500/per month after rebates/discounts). For self-pay costs are even higher, at $1,000 per month, or more. Just 10% of eligible Americans paying $6,000 per annum would equate to an $84 billion US domestic market. |
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Weight loss drugs are far cheaper outside of the US
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Given the number of new GLP-1 candidates in the pipeline, we don't view current US pricing as sustainable when looking out to 2030. However, lower prices will likely broaden inclusion in health insurance policies and drive higher rates of self-pay. A recent survey by STAT found 22% of adult Americans would consider spending up to $100/month on weight loss drugs. This compares to just 2.5% willing to pay $1,000+ a month. 56 million Americans paying $1,200 per year still represents a $68 billion market.
Consumer-driven interest in a medication is quite unusual - in the same STAT survey, 45% of respondents declared themselves very or somewhat familiar with GLP-1 drugs. This familiarity has been bolstered by the pharma companies themselves - over the summer NBC News reported 4,000 ads for Ozempic or Wegovy running across Instagram and Facebook - 5x more than for Viagra, the other popular choice for online marketing. |
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It isn't just the US - interest in Ozempic is a global phenomenon
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If we are heading for a future where large swathes of the population are on weight loss drugs, there are interesting implications for other sectors. The most obvious, of course, is for the food and beverage industry, which has spent decades using marketing and R&D to drive up calorie consumption. It is still early days, but survey data do seem to show changes in food preferences and consumption for those on GLP-1 drugs. Sugar/carb-heavy and processed snack foods see the largest reductions.
“We definitely do see a slight change compared to the total population, we do see a slight pullback in overall basket...just less units, slightly less calories.” - Walmart CEO, October 2023
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Survey data suggest material changes to GLP-1 users' consumption habits
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Source: Numerator; Green Ash Partners. YoY comparison versus 12 weeks ending 17/09/23
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Hedge funds leapt on the idea of GLP winners vs. GLP losers following remarks like these from key figures in retail, and the topic became an active discussion point on earnings calls last quarter. Enthusiasm peaked in October, after a +57% rally in the GS GLP Exposed vs. GLP At Risk baskets over the preceding three months. Much of this move has unwound since.
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Source: Bloomberg; Green Ash Partners
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Source: [GSPUGLLP Index] Bloomberg; Green Ash Partners
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Several analysts have tried to quantify the reduction of calorie consumption that might occur as a consequence of ubiquitous GLP-1 usage. Morgan Stanley estimate a calorie reduction of as much as -20-30% per day. If this were observed by >20% of the population it would definitely show up in food company earnings, however the path to this level of adoption will be gradual, over a period of several years. Impacted companies will have ample time to adapt to evolving customer preferences, and for this reason we aren't attracted to this as an investment theme. Other areas on watch are medical devices companies (glucose monitors) and surgical companies (bariatric surgery). There are also studies underway examining whether GLP-1 discourages other types of excess, such as alcohol/tobacco addiction or even gambling. So far data was been fairly weak in these areas, however as these drugs are more widely adopted there will be more data to help evaluate these hypothesises.
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It's clear that GLP-1 drugs are going to have a big impact on healthcare and society in the coming years. What is less clear is the forward outlook for investment in this theme. Summing all cumulative sales figures from our earlier chart showing Ozempic, Wegovy and Mounjaro sales from 2023-2030 amounts to $389 billion - about 59% of the market cap added by Novo Nordisk and Eli Lilly over the last three years. Even before applying a discount rate or factoring in loss of exclusivity on their patents in the 2030s, it is hard to see their meteoric trajectory sustained in the coming year or two. Of course as the largest weights in their respective sector indices, they are a must-own for most diversified managers (akin to Apple or Microsoft in the S&P 500), and they will enjoy several years of bumper revenues while new entrants navigate their way through the FDA approval process.
But it is amongst the smaller, pure-play biotechs that the most leverage to the theme can be found, as should any of these <$2 billion market cap companies succeed in developing an effective and differentiated alternative to existing options, they could be worth many multiples of their current value.
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