Weightloss drugs: from trimming waistlines to boosting bottom lines

The economic impact of GLP-1 medicines remains uncertain. In theory, people taking the medicines ought to be healthier, thus more productive, and live longer. If enough people are taking the medicines – some projections have it at 15 million adults by 2030 in the US alone – factor in that more than 750 million people globally are living with diabetes and obesity, and there could be a significant bump to global GDP.

However, the impact will only be game changing  in an environment where working age people remain the biggest group taking the medicines and people can take the medicine for long periods of time, of which cost is a factor. Changes in productivity driven by technology like artificial intelligence may also come into play.

The benefit and burden of weight-loss drugs

We have to weigh up several factors when it comes to the economic benefit and burden of these medicines. The incumbents – Eli Lilly and Novo Nordisk  – are making the economic value argument: despite the list price at ~$900 per month, the savings from fewer hospital visits, lower long-term care needs, fewer other morbidities such as stroke and chronic kidney disease, and increased overall health of these patients, will far outweigh the upfront cost.

The single biggest factor in the impact of these medicines will be the durability of efficacy. The class is still investigating long-term (four to 10 years) effects, and the results will impact their enduring utility and economic impact. And that will, in addition to emergent competition, determine the ultimate cost of the medicines to the healthcare system and extent of insurance coverage once the bargaining powers have been delineated.

Eli Lilly and Novo Nordisk market dominance set to continue

Despite uncertainties on the macroeconomic impact, we can see real economic profits accrue to certain companies. Eli Lilly and Novo Nordisk have run hard as the anointed winners in that market. Shares of Novo Nordisk, Europe’s largest company by market cap, are up more than 27% since the start of 2024. Stock in its key competitor Eli Lilly shot up by 59% in 2023, making it the world’s largest pharmaceutical company.

It may be tempting to think that the train has left the station with those two stocks. However, only around 1.5 million patients in the US are on these medicines, implying a penetration rate of approximately 10%.

The rate-limiting step has been supply and as these bottlenecks get unlocked, we see penetration rising and these two companies profiting even more. Further, these two are also leading the race to next generation products and therefore, we do not see competition making a dent into their combined market share this side of 2030.

Finally, we think Novo and Lilly remain the best plays on GLP-1s because of several barriers to entry and success – supply is limited by fill-and-finish capacity, so a new player, even with a better medicine, cannot quickly ramp up supply as the global capacity is limited and it takes several years to build it up.

Identifying ‘picks and shovel’ companies

An interesting area of investment opportunities lies with the ‘picks and shovel’ companies. Contract research organisations (CRO) manufacture medicines on behalf of big pharmaceutical companies. They are agnostic to the product with the best data or the most popularity. If innovation is high, and the pipeline hopper is full, their outlook is bright.

The best known CROs most geared to GLP-1s include West Pharmaceuticals, Lindus, Lonza, Sartorius and Catalent. Catalent is the subject of an acquisition by Novo Holdings which wants to future-proof supply for Novo Nordisk.

Examining the ripple effect in other industries

Another ongoing debate is the impact on sectors outside of pharmaceuticals. Initially, the market took the broad-brush approach that there will be less need for operations to correct the effects of obesity and diabetes.

The argument was that lower weight puts less pressure on hips and knees, and ought to lead to lower replacement procedures. The same was assumed for bariatric surgery, continuous glucose monitoring, kidney dialysis et cetera.

Beyond healthcare, it was thought the satiety effects of GLP-1s would reduce snacking which would impact Nestle, Unilever, Mondelez and other consumer goods companies that sell unhealthy snacks.

Recent evidence suggests that GLP-1s will not replace but more probably augment current interventions. This is because of a synergistic effect (see chart below):

Source: Dexcom, 7 March 2023

Further, it is not clear that most people will take these medicines for prolonged periods of time due to the cost and side effects. So a plausible scenario is intermittent use of GLP-1s to keep weight under control with people still taking a holistic approach to managing all the complications of diabetes and obesity.

Finally, many of these nasty complications, such as high blood pressure and kidney damage develop over many years, if not decades, and so people who are already diabetic and/or obese, will require current interventions as the damage is already done, so to speak.

Industries evolving to find synergies

We see the medical technology, fast food and packaged food industries innovating to harness the synergistic benefits, incorporating data insights e.g. snack curation, and in portion-controlled snacks. But that will still be a small proportion of their total addressable markets.

If there are 750 million adults potentially taking the GLP-1 medicines, that leaves around 5 billion adults who are not and will still be customers of Hershey, PepsiCo, Walmart et cetera.

Mondelez, though maybe biased, see any impact at 0.5% to 1% on volumes ten years from now.

Tread carefully on unchartered territory

We are still in the early innings of the GLP-1 revolution. There remain many unknowns: from long-term utility of the medicines to potential new innovations to a raised standard of care and insurance coverage.

Question marks also hang over penetration rates, long-term pricing and cost to healthcare systems and supply dynamics.

And what of the impact on productivity? What will people who become healthier and live longer choose to do with their ‘extra’ health and life?

Not to forget the impacts on medical technology companies and sectors outside of healthcare, and so on.

It is because we are still in the early stages that we think there is plenty of runway for the incumbents, Novo Nordisk and Eli Lilly, to continue to perform very well. Aligned to that, we do not see any need to take risks trying to guess the many unknowns outlined above, certainly not enough to put money behind those projections.