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Game-Changing Obesity Drugs


The hype around artificial intelligence (AI) has caught the attention of investors lately, but there's another hot topic making waves: the fight against obesity. The GLP-1 obesity drug is affecting everything from public health to pharmaceutical and medical tech companies, and even the consumer sector. In this article, we will break down the significance of GLP-1 in the fight against obesity and explore its potential to reshape various industries.


What is GLP-1?


GLP-1 is a natural hormone released to the gut and brain after meals, plays a crucial role in managing blood sugar levels by prompting the pancreas to release insulin when sugar levels spike. Simply put, it helps lower blood sugar levels, also suppresses appetite and reduces calorie intake. GLP-1 agonists have been a class of medications used to treat type 2 diabetes (T2D) since 2010.


But What’s New?


These drugs were originally intended to stimulate insulin production, reduce blood sugar levels and serve as an effective treatment for type-2 diabetes; however, weight loss came as a serendipitous side effect and is now becoming what GLP-1s are best known for. And there is growing evidence that these drugs can also have other positive outcomes, such as a reduction in cardiovascular events – for instance, heart attacks and strokes.


Research indicates that these drugs can lead to significant weight loss, with studies showing reductions ranging from 10% to 20%. Additionally, they might cut down on food intake by as much as half and steer patients away from highly processed foods and snacks. What's more, there are reports from patients suggesting a decrease in alcohol, drug, and tobacco consumption. This could be because GLP-1 drugs weaken the brain's link between stimuli and the pleasurable sensations associated with them.


The growing strength of this data led to the first approval of a semaglutide (a type of GLP-1 receptor agonist) by the US regulator FDA specifically for the purpose of weight loss. Given the potential size of the market for such drugs, both in the US and globally, it is clear why their introduction has caused such excitement in the market.


What’s the market for obesity drugs?


According to J.P. Morgan Research, the GLP-1 category is projected to surpass $100 billion by 2030, with both diabetes and obesity driving this growth equally. Currently, about 10-12% of Type 2 diabetes (T2D) patients in the U.S. are using GLP-1s. By 2030, it's estimated that the total number of GLP-1 users in the U.S. could reach around 30 million, roughly accounting for 9% of the population. In the GLP-1 landscape, two major players dominate: Eli Lilly, based in the U.S., and Novo Nordisk, based in Denmark. Analysts anticipate that the obesity market will primarily be controlled by these two companies, forming a duopoly, while newer players may only capture a modest market share.


What are the impacts on different industries?


This has led to interesting reading on the potential impact of widespread use of this medication across multiple industries:


Healthcare

Morgan Stanley: In healthcare, GLP-1 drug manufacturers are reaping immediate rewards, but they don't meet our quality criteria for investment due to reliance on patent protection and vulnerability to generic competition post-patent expiry. However, the impact on life science and healthcare equipment providers is more relevant for our portfolios. We believe the market's negative reaction to some diabetes-related products may be exaggerated. Patients will still require monitoring and medication. Companies involved in glucose monitoring and clinical trials stand to benefit. Additionally, suppliers of technology and pharmaceutical services could profit from providing sterile injectables for GLP-1 drugs, with potential ripple effects in laboratory equipment and bioscience reagents sales through increased research and development spending in healthcare.


JP Morgan: The growing popularity of GLP-1s could transform how obesity is viewed and managed. We believe this marks the beginning of a paradigm shift in the way that obesity is treated. In terms of Medtech, despite the recent fall in medtech share prices, we do not see an imminent threat to devices such as insulin pumps and continuous glucose monitors (CGMs) as they will be vital to track progress and determine if GLP-1s are actually working. Overall, the outlook is still positive for the medtech industry. “With medtech now trading at a slight discount to the S&P 500 vs. a 15–25% historical premium, we think a reasonable amount of GLP-1 risk is already priced in."


Consumer

Morgan Stanley: Some analysts suggest GLP-1 drugs could reduce calorie intake by 15% to 20%, potentially leading to a 1% to 3% decrease in the nation's calorie consumption by 2030 if 25 to 50 million Americans take the drug. This could challenge growth rates in the U.S. food, beverage, and tobacco industries. The market has reacted, with the sub-sector down 9.9% year-to-date. In our portfolio, we avoid food manufacturers due to their low-growth nature. While a soft beverage manufacturer we hold may seem vulnerable, its focus on no- or low-calorie drinks and international sales mitigates risks. There's a potential risk to tobacco and alcohol, but evidence of GLP-1 drugs affecting consumption in these categories is lacking.


Jefferies (Food & Beverage): Longer-term outlooks indicate that restaurants and certain food products face heightened vulnerability. This is expected to affect certain beverage companies, particularly in the alcohol sector. Downstream effects may include negative implications for packaging companies and food retailers as volume trends for specific products plateau or decline. Agriculture-related firms, such as those in farm equipment, may encounter challenges due to shifting demand dynamics. Additionally, while some consumers may offset drug costs to some extent, their relatively high prices could discourage larger purchases, notably in categories like furniture and travel expenses.


Jefferies (Apparel & Beauty): Our analysts identify potential tailwinds for apparel retailers, especially those offering athletic wear, as consumers seek to refresh their closets. Likewise, health and wellness products may experience increased demand. Additionally, beauty companies could benefit as more consumers aim to address facial changes.


JP Morgan: GLP-1s could have a significant impact on food and beverage consumption. The advent of GLP-1 use for appetite suppression has been a key factor in the median larger-cap U.S. food producers underperforming the S&P 500 by nearly 40% year to date. Overall, we think that if GLP-1s start to make a meaningful difference in consumption patterns, grocers will be hurt less than packaged food companies.


Financial

Jefferies: In the financial sector, while improved health may potentially reduce premiums for insurance companies, any gains could be outweighed by delayed mortality, resulting in higher investment returns overall.


JP Morgan: We estimate current coverage of GLP-1s at only around 40% due to the high costs involved, but this will likely reach the 80% range by the end of the decade, driven by a series of outcomes studies that we expect will show broad health benefits from losing weight.

GLP-1s could have a negative impact on life insurers that cover longevity risk through products because longer life spans would translate to more benefits paid in the future.

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