26 Jul 2024
Ground-breaking anti-obesity drugs look set to be transformational for millions of individuals worldwide. Walter Scott investment managers Lindsay Scott and Max Skorniakov, and investment analyst Dr Oriana Beaumont investigate the potential consequences of anti-obesity drugs.
In September 2023, the previously low-key Danish healthcare company Novo Nordisk became Europe’s most valuable company by market capitalisation. Novo may have been founded all the way back in 1923 but 2023 was the year the company and its GLP-1 (glucagon-like peptide 1 receptor agonists) treatments, Ozempic and Wegovy, became household names.
Meanwhile, Eli Lilly’s GLP-1 treatments have also taken a lead in this market. Its Mounjaro and Zepbound might not yet have the same name recognition, but Eli Lilly’s financial performance and its share price have followed a similar trajectory over the past year.
Together, Novo and Lilly have a virtual duopoly on GLP-1s, and the importance of these treatments cannot be underestimated. It isn’t only the size of this market – by 2030 obesity will affect an estimated one billion people worldwide1 – but also the public health benefits.
Separating the wishful thinking from the realistic potential
Much has been made of initial evidence, mainly from self-reported surveys, that GLP-1s might dampen the desire to drink alcohol and reduce cravings for sweet and salty snacks, highly processed foods and carbonated drinks.
But, as Walter Scott investment analyst Dr Oriana Beaumont observes, answering these questions with any degree of confidence or legitimacy is difficult. “While we have trial data to show that these treatments work, studies of the resultant side-effects are less robust at this stage,” she says. “Not only are most of the current studies small in size but we just don’t yet have data on real-world patient groups.”
No more bariatric surgery or knee replacements?
For medical device companies, it has been widely surmised that these new treatments will in time severely reduce, if not eliminate, the need for certain surgical procedures and medical interventions linked to obesity.
Intuitive Surgical, a leader in robotic surgery, has faced questions on the outlook for bariatric surgery. The conclusion that such procedures might decline in prevalence seems a reasonable one, but the context and market size is important.
As Walter Scott investment manager Lindsay Scott points out, “it is estimated that only 1-2%2 of patients eligible for bariatric surgery actually go ahead”. Fellow investment manager Max Skorniakov adds: “It should also be remembered that bariatric surgery is currently estimated to be only about 4-5% of Intuitive’s total global procedures.”
Medical device company Stryker has been hit by claims that these drugs will mean a decline in knee replacements, and therefore a collapse in demand for its knee implants. But as Skorniakov explains: “You often need to lose weight to get a knee replacement so these treatments might actually increase the potential audience for Stryker.”
ResMed is another medical device company that has come in for scrutiny, given that around 75% of its revenues come from devices and masks that treat obstructive sleep apnoea, a condition commonly linked to obesity. But ResMed has presented data3 showing that patients prescribed obesity drugs are more, not less, likely to initiate positive airway therapy treatment.
Possible effects on food and beverage companies
The possibility that these treatments might dampen consumers’ desire for certain foods, drinks and possibly behaviors is of course potentially, hugely significant. But it is far too early to jump to the end conclusion, as many have, heralding the end of fast food and fizzy drinks.
Diageo has been on the receiving end of scrutiny as more extreme voices declare the long-term demise of its markets. The team at Walter Scott disagrees, noting Diageo’s strategy has already moved the company from mass-market, mass-consumed alcoholic drinks to more premium products.
Scott says: “A strategy that encourages consumers to drink less but drink better is now very much in place at the company, a strategy that should also counter any possible GLP-1 impact, where indications are not a desire to not drink at all, there’s just less interest in drinking a lot.”
For many commentators, making a positive case for Nestlé, seems more difficult. But, with only 15% of global revenues coming from either centre-of-plate or snacking products, the Swiss multinational considers any potential revenue loss to be limited.
In fact, in its third-quarter results call in November 2023, CEO Mark Schneider stated: “For the time that patients spend on these drugs, and after, we are already developing a number of companion products. The goal will be to address the risk of malnutrition and the loss of lean muscle mass while on the GLP-1 therapy and to avoid or limit weight rebound after the therapy4.”
In attempting to address the global obesity epidemic, Novo and Lilly’s GLP-1 treatments have provoked publicity and understandable hope unlike anything that has been seen before. We at Walter Scott are keeping a close eye on developments and think the potential is unquestionable.
Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.
1World Obesity ‘One billion people globally estimated to be living with obesity by 2030’
2National Library of Medicine ‘Reasons for underutilization of bariatric surgery: the role of insurance benefit design’
3ResMed Q1 2024 earnings call transcript.
4Nestlé 2023 nine-month sales conference call transcript.