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What's the skinny on Ozempic?

People are talking about, and taking, drugs such as Ozempic to shed pounds. What does it all mean for waistlines and bottom lines?

As a Portfolio Manager at CWB Wealth, Saket leads the U.S. Equity Team, managing capital allocation in the U.S. portfolio and researching U.S. equities
  • What’s feeding the trend?
  • Taking a balanced view of the benefits
  • Investing prudently

It’s that time of year again, when we celebrate togetherness and cherish friends and loved ones – often breaking all dietary rules when we do so. For some, the solution is to turn to drugs like Ozempic and Wegovy, that help with obesity and weight loss. This trend is having a sizeable effect on both fitness and finance.

Known as GLP-1 agonists, these drugs have been in use for treating diabetes since 2005 and recently became all the rage as a preferred weight management tool. Demand for the drug’s latter use has risen to such a point that there are now shortages, which impacts those with diabetes and significant health issues stemming from obesity.

In August 2023, Novo Nordisk, the Danish pharmaceutical company, published results of its five-year-long study involving 17,604 patients on Semaglutide (the active ingredient in Ozempic and Wegovy) and a placebo. The results were not only beneficial in weight loss and obesity, but also exhibited benefits such as reducing the risk of heart attack, stroke, and cardiovascular death. Results from many other studies evaluating the impact of these drugs on other critical and chronic conditions, such as kidney failure and arthritis, are expected over the next twelve months.

 

What’s feeding the trend?

The rise in popularity for these drugs has a couple of implications outside of the very serious impact on those who need access to the drug for health reasons and can no longer get it. First, the sheer burden of obesity and associated disorders across societies and nations is enormous. Roughly 750 million people suffer from obesity globally, and that figure is expected to reach 1 billion by 2030. Associated with more than 200 health complications, from osteoarthritis to kidney disease, obesity is responsible for 5% of all deaths according to the World Health Organization (WHO). So, anything that can offer respite from such a condition is nothing but miraculous, though the long-term benefits, and possible effects, won’t be known for a while.

Second, the stock market reaction has been phenomenal. From the start of 2023 there’s been a USD $600 billion swing in market cap when you consider a lift of USD $340 billion for the GLP-1 makers, and a USD $258 billion drop in value for sectors being disrupted (see figure 1). Though short term, this performance divergence suggests the market has passed its verdict in favour of GLP-1 manufacturers. 

 

Figure 1: GLP manufacturers' performance YTD vs. sectors debated as being disrupted
GLP manufacturers' performance YTD vs sectors debated as being disrupted
Source: Bloomberg, Morgan Stanley Research

Whether the market has reacted too early is yet to be seen. While it’s apparent how medical device and other pharma companies may be negatively affected if people are less obese and healthier, the negative impact on companies in sectors such as food retail, fast food and beverages is less clear.

As always, the devil lies in the detail. Semaglutide, affects areas in the brain that regulate appetite while also prompting the stomach to empty more slowly, making people on the medication feel fuller faster and for longer. This implies less consumption of food, directly impacting companies in these sectors.

Taking a balanced view of the benefits

Results of these research trials suggest there is tremendous upside for GLP-1 producers and consumers alike. With further innovation, such as once-a-month dosage and greater weight loss with fewer side effects (currently there can be many), companies will lower the hurdles for adoption and adherence and consumers will continue losing weight.

But there’s also a compelling bearish argument here. Overcoming human behavioral challenges such as adherence (i.e., taking the medication regularly) could prove daunting. Historical evidence suggests only 40-60% adherence in critical diseases such as hypertension and diabetes. The high price of these drugs and lack of widespread coverage by insurance providers further complicates the matter, as affordability is an important gating factor.

Investing prudently

Such debates and divergence usually happen when outcomes are not linear and easily predictable. While there’s no doubt in our minds there will be winners and losers in this tug of war, we’re cognizant of the wide range of outcomes and unknowns that we’re dealing with.

Sticking to our investment process and the underlying fundamentals allows us to act rationally when markets react with euphoria or doom. Rather than trying to predict the winners and losers, we choose to prudently participate in the trend through companies such as McKesson (MCK), the largest drug distributor in the U.S. and a firm which clearly benefits from greater use of GLP1 drugs. If the demand for these drugs turns out to be a fad for weight loss, we believe that MCK can still grow sustainably at mid-single digits, and its valuation offers reasonable margin of safety.

Adhering to our investment process and buying high-quality businesses like McKesson has allowed us to successfully navigate evolving and uncertain environments, such as the one that prevails right now in the GLP-1 world. As stewards of capital for our clients, we take utmost care in evaluating the risks to compound their capital. It’s this approach, and the trust that we and our clients have in our process, that helps us appreciate the many joys of life with loved ones, regardless of what one chooses to indulge in during the holidays.  

Sources: Morgan Stanley, CWB Wealth

 

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