There are growing hopes that GLP-1 agonist drugs could have a transformative impact, not just on U.S. health, but beyond. However, markets may be getting ahead of themselves.
Obesity is a real challenge for both healthcare and the economy. This is particularly true in the U.S., where more than 40% of the population meets the clinical definition of obese. These numbers are trending upwards,1 and a report by “World Obesity” says if this trajectory continues the cost of obesity will reach $4.32 trillion annually by 2035. That amounts to nearly 3% of global GDP, comparable to the impact of COVID-19.2
Enter glucagon-like peptide 1 (“GLP-1”) agonists, a class of Type 2 diabetes drugs that improve blood sugar control and have also been shown to cause significant weight loss. GLP-1s belong to a family of hormones called incretins because they enhance the secretion of insulin after food is ingested into the body. Additionally, GLP-1 agonists slow down stomach emptying and increase satiety after eating.
Presently, there are seven GLP-1 drugs approved for use in treating diabetes, three of which have also been approved by the FDA for weight loss. Other GLP-1s are currently being used off-label for the purpose and there are at least five new drugs in various stages of clinical development intended for slimming.
Widespread adoption of weight-loss drugs in the U.S. could certainly have implications for many businesses. The question is if and when this will happen. Until more people take GLP-1s we can only speculate. Some observers are bullish: analysts forecast that sales on drugs for obesity could reach $100 billion by 2030.3 Morgan Stanley estimates that 24 million people, or 7% of the U.S. population, may be taking GLP-1s by 2035.4
We are monitoring long-term implications stemming from increased GLP-1 usage, but, in the short term, we expect limited uptake of these drugs. Unpleasant side effects could prove an obstacle in some cases, as could their high cost and inconsistent insurance coverage.
Wegovy, a GLP-1 drug marketed specifically for weight loss, currently has a list price of more than $16,000 per year.5 Moreover, insurance coverage remains inconsistent, making the drugs unaffordable for many potential users. This is likely to remain the case in the short term, though over time the drugs will likely become more accessible as competition drives prices down and more generics come to market. Insurance companies may also come under increased pressure to expand coverage to include GLP-1 drugs, given the links between obesity and various health conditions.
Risk on the horizon
Such uncertainty often leads to mispricing in the market, with investors either failing to account for the risk on the horizon or panicking and overreacting to it. We have already seen examples of this happening, for example with ResMed (RMD), a medical device company focused on treating, diagnosing and managing respiratory disorders. Obesity is a significant cause of respiratory sleep disorders and there is evidence that GLP-1s may lead to improved cardiovascular health and improved sleep apnea. This is a potential issue for RMD.
In August 2023, a still-unpublished study by Novo Nordisk (NVO) found that Wegovy delivered a statistically significant 20% reduction in major adverse cardiovascular events for overweight people for up to five years . This suggests increased GLP-1 use could undermine sales for RMD’s products. We didn’t think RMD’s valuation properly reflected this risk. Jensen’s Quality Value investment team began reducing its position in August 2023 and had fully liquidated the position by October.
An effective appetite suppressant certainly looks like bad news for food and beverage companies. We agree the sector will likely be impacted, at least on the margin, if GLP-1s prove successful as a weight loss treatment and uptake is strong.”
In other cases, we believe markets may have overreacted to the hype around GLP-1s. Pepsi (PEP) exemplifies this trend. On July 26, 2023, its share price stood at $191.60 but by Oct. 12 it had slipped more than 17%, with much of the press coverage at the time attributing this to concerns about the impact of GLP-1s. Other food and beverage companies in our strategies also saw declines, though they were less dramatic. Starbucks (SBUX) fell 10% over the same period, while Nestlé (NESN) slid 7%.
An effective appetite suppressant certainly looks like bad news for food and beverage companies. We agree the sector will likely be impacted, at least on the margin, if GLP-1s prove successful as a weight loss treatment and uptake is strong. What is less clear is when — or even if — this will happen. We are closely monitoring developments but are reluctant to act prematurely with stocks that, in our opinion, traditionally serve as ballast for high-quality portfolios, providing valuable diversification benefits when the markets sell off.
Discussing Q3 earnings on Oct. 10, Pepsi CEO Ramon Laguarta addressed the GLP-1 issue directly, predicting its impact on sales would be “negligible.” We agree, though we will continue to monitor the situation and could reconsider our commitment to snack and beverage companies if GLP-1 use becomes widespread.
In the meantime, there are still many unknowns. Even if GLP-1 use does increase, it is not clear what proportion of snack and beverage sales are made to people with obesity — or how their habits will change while taking GLP-1s. Early indications suggest patients may stop using GLP-1s once their weight loss plateaus, typically after around 12-18 months.6 However, studies suggest that patients stopping treatment are likely to rapidly regain weight that was lost while under treatment.7 This phenomenon could create unpredictable demand patterns for food and beverage companies as GLP-1 drugs become more widely available.
That being said, we believe the recent Pepsi investor panic appears extreme. Nestlé looks even better positioned. It recently announced that it is developing “companion products” to assist people trying to lose weight. Confectionery and ice cream sales represent less than 20% of Nestlé’s total sales, while its contribution to overall profit is even lower, given Nestlé’s focus on higher margin businesses like coffee, pet food and nutrition products. The risk of GLP-1 looks far greater for pure snack and beverage players like Mars.
Geographical diversification also helps. GLP-1 growth is likely to be concentrated in the U.S. for the foreseeable future, where more people will be able to afford the drugs. Even if U.S. sales decline significantly, the impact on companies like Nestlé and Pepsi would be mitigated by their strong international sales, especially in emerging markets, where GLP-1 drugs will likely take longest to penetrate.
Better for health than for healthcare
While a slimmer population would be great news for public health, we expect the financial effect on healthcare companies to be muted in the short term due to the slow rate of uptake. Even if GLP-1 use does grow on the trajectory some are predicting, the impact will be mixed.
Pfizer (PFE) has a GLP-1 drug in mid-stage development and could be a beneficiary if the drug is approved and successfully commercialized. UnitedHealth Group (UNH) could also be a beneficiary of higher drug prescription volume via their pharmacy benefit management business. Should GLP-1 usage result in a widespread reduction in obesity and healthcare utilization, Stryker (SYK) could see headwinds in the long term due to lower need for orthopedic procedures , but even this is debatable. In a recent call with investors, Stryker CEO Kevin Lobo argued that GLP-1s could actually boost demand. He argued that in the short term that the company, a producer of joint implants and other surgical devices, can treat patients who might have been turned away for being too overweight for certain procedures, while in the long term it could benefit from a general increase in activity levels.8
The bottom line
In the short term, we expect the influence of GLP-1 on many businesses to be limited. Any change to long-term behavior from GLP-1s will take time to materialize, given inconsistent insurance coverage and high costs for consumers. Until we see mature data about side effects and dropout rate, we will be cautious in our response.
That said, it is worth paying attention to developments in coming months — particularly changes to the prescription and dropout rates. We will continue to monitor the potential impact on stocks across various industries if use of the drug increases and pay close attention to mid-term guidance from the most exposed sectors.
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The company discussions in this article are solely intended to illustrate the application of our investment approach and are not intended as investment recommendations or an indication that that our investment decisions have been or will be profitable.
Past performance is no guarantee of future results. The information contained herein represents management’s current expectation of how Jensen’s investment strategies will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the strategy and accounts invested in the strategy to deviate from stated investment objectives, guidelines and conclusions stated herein.
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