By Cornelius Zeeman & Janco du Toit,
Fairtree Portfolio Manager & Equity Analyst
“More die in the United States of too much food than of too little.”
― John Kenneth Galbraith
Obesity has become a global pandemic. This is due to our changing external environment. Technological advancement and our community structure have resulted in reduced physical activity, with inexpensive calorie dense food becoming the status quo. These ingredients created the perfect recipe for weight gain across the world.
Graph 1: Prevalence of overweight and obese individuals among adults by income group
Source: BCA Research
Obesity – A Growing Health Imperative.
42% of the US population (142 million people) are currently classified as being obese. 37 million people are diagnosed with diabetes, of which 35 million are Type 2.
Lower BMI is associated with improvements in a host of health-related issues, including lower HBA1c (blood sugar) levels, reduced blood pressure and lower cholesterol. A reduction in these health issues will result in less pressure on the healthcare system and improved longevity.
Graph 2: Increased BMI associated with decreased life expectancy
Source: Novo Nordisk; Adapted from Prospective Studies Collaboration. Body-mass index and cause-specific mortality in 900,000 adults: collaborative analyses of 57 prospective studies. Lancet. 2009;373(9669):1083–1096.
Pharmaceutical Intervention in Weight Loss: How GLP-1 Can Help.
Weight loss can be addressed in three ways:
- Behavioural changes related to consumption and physical activity.
- Surgical intervention in the form of bariatric surgery.
- Pharmaceutical intervention.
Pharmaceutical intervention for weight loss has been around for quite some time. However, the weight loss efficacy and tolerability have not been sufficient to enable large-scale adoption. That has recently changed with the introduction of glucagon-like peptide, more commonly referred to as GLP-1.
GLP-1 drugs were originally developed for individuals with Type 2 diabetes (non-genetic and lifestyle-related diabetes). In short, insulin and glucagon regulate blood glucose levels needed for normal bodily function. When your body does not properly regulate blood glucose, adequate cell uptake is inhibited, and excess energy gets stored in the form of adipose tissue (fat).
Weight is the primary risk factor for pre-diabetes. Individuals living with obesity are 7-12 times more likely to develop type 2 diabetes. Most of the biological adaptations that cause type 2 diabetes are progressed symptoms of obesity. Treating obesity with GLP-1 agonist, therefore, averts some of the downstream complications. It is analogous to doing car repair and maintenance before something big breaks.
Success During Trial Studies.
GLP-1 agonists have been the most efficacious approach to weight loss to date. These medications come primarily in injectable form, but the oral alternatives are currently in the final stages of clinical trials. Physicians have only recently started to prescribe these medications off-label to patients who are overweight or obese. Graph 3 below exhibits the unadjusted weight loss amount in kilograms from baseline for the respective GLP-1 drugs for periods ranging from 26 weeks to 72 weeks since the intervention was started.
The obesity GLP-1 drug alternative contains the same active molecule as the type 2 diabetes drug but has a different label. For example, Ozempic and Wegovy are produced by Novo Nordisk, but are prescribed for different indications under different brand names.
Graph 3: Weight loss (kg) in T2D (Type 2 Diabetes) and Obesity
Source: Morgan Stanley Research (7 August 2023)
This pharmacological intervention causes hormonal changes that result in temporary physiological adaptation. Once individuals go off these drugs, your baseline levels reset, and you regain most of the weight that was lost. The same goes for the behavioural changes.
The use of GLP-1 medication would thus have to become chronic for the benefits to remain.
Graph 4: Weight loss and regain from baseline during treatment and off treatment phase
Source: Novo Nordisk; WILEY (18 April 2022)
These molecules target appetite-suppressing hormones but also have glycaemic, cardio protective, and anti-inflammatory benefits.
The cardiovascular benefit emerged very rapidly after the intervention was started, suggesting potential drivers beyond that of weight loss. Additionally, the cardiovascular benefit was consistent across BMI ranges, supporting that the benefits are beyond only weight loss.
Consumption and Behavioural Changes.
The primary method of intervention is through behavioural change. These changes cause suppressed appetite and increased satiety. Consumer surveys found that individuals consume ~29% fewer calories daily than before on these medications. If we use caloric intake as a proxy for consumption and assume that one in four American obese individuals go on these drugs (consuming 30% fewer calories daily), then this could potentially result in a 3% consumption headwind for the US.
Graph 5: Average number of daily calories before/after starting drug
Source: Morgan Stanley, (7 August 2023)
The behavioural changes are, however, not uniform. There are categories within the overall consumption basket that benefit, as can be seen with the net consumption change in Graph 6 below. Fruits and vegetables, as well as poultry and fish, are some of the categories that are expected to experience the greatest benefit from the use of these drugs.
Graph 6: Change in food category consumptions since starting drug (among those who consume category)
Source: Morgan Stanley, (7 August 2023)
Morgan Stanley analysed panel data across ~150K shoppers to get a sense of the spending habits among people living with and without obesity. Consumption patterns differ between people who have obesity and to those who don’t; obese individuals have a clear preference for calorie-dense snacking categories. Graph 7 below shows that buy rates for obese shoppers are 13% higher at Hershey’s (U.S confectionary company) than those who don’t. They also spend ~14.9% less at Bellring Brands (a US nutrition company). Food producers that have greater exposure to these categories are at greater risk of a reduction in their sales if more individuals go on these drugs.
Graph 7: Percent Difference in Buy Rate Between Shoppers with Obesity and without Obesity by Food Company
Source: Morgan Stanley, (21 November 2023)
Investors realise that these behavioural changes drive real consumption changes. UBS has constructed indexes that reflect baskets of companies that are affected from consumption changes (from GLP-1 adoption). Companies that are expected to benefit are grouped as “GLP-1 winners” and those expected to be disadvantaged are grouped as “GLP-1 food losers”.
In graph 8 below, one can clearly see the divergence in performance between the respective participants. Bellring that benefits from the consumption change has outperformed year to date, in contrast, Hershey’s that is expected to be disadvantaged from the consumption change, has underperformed.
Graph 8: Rebased Year-to-Date Share Price Performance – Food Manufacturers
Source: Fairtree; Bloomberg
Insurance Coverage.
The US healthcare system does not classify obesity as a chronic disease, it is therefore not covered by government-funded medical insurance programs (Medicare and Medicaid). These drugs come at an exceedingly high cost (>$1000 per month), so the reduction in the cost burden related to improved health outcomes must exceed the current cost of the drug for it to be considered feasible.
The director of the US Congressional Budget Office released a blog post a few weeks back on the potential budget impact of Medicare coverage for anti-obesity medications. He mentioned that at current prices they don’t have enough evidence to suggest that the reduction of obesity related comorbidities would be less than the cost savings of the drug.
As such, large pharmaceutical companies are doing additional clinical studies aimed at showing improvements to related comorbidities as a means of ensuring reimbursement.
Conclusion.
Pharmaceutical and medical interventions will undoubtedly have an impact on how society operates. GLP-1’s has become the new buzz word, matching the hype around AI. Eli Lilly (+53%) and Novo Nordisk (+53%) share price rallies till end of October are evidence of it. These drugs look very promising and will have widespread investment impact on various industries and companies beyond just these two pharma companies.
Disclaimer:
Fairtree Asset Management (Pty) Ltd is an authorised financial services provider (FSP 25917). Collective Investment Schemes in Securities (CIS) should be considered as medium to long-term investments. The value may go up as well as down and past performance is not necessarily a guide to future performance. CISs are traded at the ruling price and can engage in scrip lending and borrowing. A schedule of fees, charges and maximum commissions is available on request from the Manager. A CIS may be closed to new investors in order for it to be managed more efficiently in accordance with its mandate. Performance has been calculated using net NAV to NAV numbers with income reinvested. There is no guarantee in respect of capital or returns in a portfolio. Prescient Management Company (RF) (Pty) Ltd is registered and approved under the Collective Investment Schemes Control Act (No.45 of 2002). For any additional information such as fund prices.
