Wegovy - throwing its weight around

As sales of a new class of weight-loss drugs soar, could wider adoption lighten the burden on the healthcare sector while trimming the profits of consumer stocks?

From healthcare companies to consumer stocks, the providers of everything from knee implants to dialysis treatment, and crisps to beer, have been grilled about the potential impact of new diet drugs on their revenues. The trend began last October when John Furner, head of US operations at retailing giant Walmart, said the firm was seeing signs that people taking appetite suppressants, categorised as ‘GLP-1 agonists’, were buying slightly less food. Share prices of drinks and snack makers, including PepsiCo and Mondelez, pulled back on the news. (Bloomberg, October 2023)  

Speculation about the impact of diet drugs reached almost farcical levels with finance firm Jeffries musing that airlines could save millions on jet fuel if passengers weighed less. Fuel accounts for about 25% of carrier’s costs. Take United Airlines – if the average passenger lost 10 pounds, Jeffries calculated the airline would save $80 million a year, equating to 2% of earnings. (Bloomberg, September 2023).

Now, it’s a bit of a mouthful but the ‘glucagon-like peptide 1 receptor agonists’ (GLP-1) were initially developed for Type 2 diabetes. They mimic a hormone, GLP-1, that’s released after eating and works in the brain to reduce appetite and cravings. The hormone also promotes the release of insulin which lowers blood sugar. The drugs began to be used as obesity treatments after patients with diabetes lost weight.
 

Blockbuster shots

Sales of the injectable GLP-1 agonist Wegovy have propelled the shares of its Danish maker, Novo Nordisk, four-fold higher in as many years, making it the most valuable company in Europe (Bloomberg, May 2024). With social media influencers popularising Novo’s drug on TikTok, shortages developed, notwithstanding the $1400 a month price tag in the US. Eli Lilly’s competitor product, the $1,060 a month Zepbound, was approved by the US Federal Drug Administration (FDA) late last year. Lilly – now the largest pharmaceutical company in the world – is making substantial investments to boost production (Financial Times, May 2024).

Given ample margins in a market forecast to reach $100bn by Goldman Sachs, competition will increase further. There are now more than 50 anti-obesity drugs in clinical development from about forty companies (Bloomberg, May 2024). Both Lilly and Novo have more convenient oral versions in development, while others like Pfizer, AstraZeneca and Amgen are further behind.

Insurance providers have been reluctant to cover the high cost of obesity medication, but pharmaceutical companies often give insurers discounts in exchange for favourable coverage, especially when there’s competition from a similar treatment. According to the Centers for Disease Control and Prevention in the US, 40% of American adults are obese and the condition is estimated to cost the healthcare system over $170bn a year. In clinical trials, Wegovy and Zepbound, led to an average weight loss of up to 22% (Eli Lilly, 2022), so paying up to help in losing the pounds may save money in the end. In March, Wegovy became the first weight loss medication to be approved to help prevent life-threatening cardiovascular events, including heart attack and stroke, in overweight or obese adults. According to Eurostat, as of May 2023, 17% of European adults were considered obese, and the GLP-1 agonists have been approved in several markets at a considerably lower price and restricted supply levels.
 

Chewing over the issues 

Obesity places more stress on people’s knees and has contributed to knee osteoarthritis. Does less weight mean less need for joint replacements?  The share prices of medical-technology stocks dipped on concerns that procedure volumes could drop but this prognosis requires further analysis. Roughly 10% of knee procedures can’t be performed because people are too overweight, as noted by Bank of America. The GLP-1s could bring patients down into the category where they can be safely operated on. Osteoarthritis is a progressive disease and while weight loss could ease knee pain, the drugs won’t reverse the damage, so surgery may simply be delayed.

Side effects from the new diet drugs include nausea and diarrhoea, which may limit their long-term use. Studies have also shown that patients lose muscle as well as fat, which is far from ideal, particularly as people age. Since drugs in this category have been used for nearly 20 years to treat diabetes, their safety profile is considered relatively well-established. The medications haven’t been monitored long-term in patients taking them purely for weight loss. Wegovy lists a potential risk of thyroid cancer in its safety information and patients may experience inflammation of the pancreas or kidney injury. GLP’1s slow gastric emptying, and the US FDA has applied a warning label to account for reports of blocked intestines in some users¹.

Studies have found that patients who stop taking Wegovy regain most of their lost weight¹. Unfortunately, that’s the drawback of almost every weight treatment. Analysts at Bank of America don’t expect patients to remain on appetite suppressants continually. They see six to nine months of use during which weight drops by 15% to 20%, followed by a period off the drug during which weight is regained, and then patients on back on the drug. A form of yo-yo dieting.

Barclay’s estimates that widespread use of obesity drugs could lead to a sales volume reduction of up to 1% for food companies – not an enormous impact – while alcohol producers could suffer up to 3% volume declines. Interestingly, research on rats with alcohol use disorder showed it decreased their desire for alcohol (Financial Times, October 2023). 

Management at PepsiCo has said the impact of GLP-1s is ‘negligible’ so far. Over the years, consumer companies have proven adept at responding to new diet trends, from low fat, low carb, and low salt, to keto, paleo, and carnivore. Bruno Monteyne, consumer products analyst at Bernstein, believes that while these drugs could cause consumers to eat less of the high-fat and high-sugar foods they crave, they could also help people live longer, which would equate to more purchases over time. ‘A happy, healthy consumer is a good thing for consumer companies' (Financial Times, October 2023).

Diversity for healthy returns

The Davy Global Fundamentals Fund holds several high-quality healthcare and consumer stocks, like medical technology company Stryker and food and beverage giant Nestlé. When selecting these investments. We look for companies with a track record of market insight and innovation – firms that are positioned to benefit from sustainable growth trends.  

We believe that many stocks overreacted to concerns about GLP-1s. If we set aside the high cost and side effects of these drugs and allow for much broader use, the impact on sales and earnings is expected to be limited. Stryker’s orthopaedic implants and surgical equipment business will likely continue to benefit from aging populations, more active lifestyles, and rising levels of wealth in emerging markets.

Nestlé generates almost half of its sales from coffee and pet food, while confectionery accounts for less than 10% of revenue. Ever the innovator, Nestle is launching Vital Pursuit, a new line of foods intended to be a companion for GLP-1 weight-loss medication users. These portion-controlled products are high in muscle-building protein, fibre, and essential nutrients like calcium and iron. And when it comes to indulgence, even the most abstemious, may have a break, have a KitKat.

If you would like to discuss anything covered in this article, please contact your Davy adviser.