Obesity: A global health crisis in transformation?

The over 2000% increase in the prescription of GLP-1 (glucagon-like-peptide-1) molecules since 2019 from Novo Nordisk and Eli Lilly has significantly impacted the investment cases in many MedTech and Biotech companies, including some in which we are currently invested. Some stocks, particularly those treating the consequences of obesity (high blood pressure, heart diseases, NASH etc.) have suddenly fallen out of favor. 

A sizeable issue… 

Over 2 billion people are overweight or obese. Obesity leads to more than 200 chronic and deadly health complications and is a leading cause of reduced life expectancy. Despite being preventable, it is the most neglected public health problem. The economic cost of obesity is currently $2 trillion today and could increase tenfold in the next decades if nothing is done. 

… with no good options. 

Bariatric surgery has been the gold standard for weight loss, with weight reductions in the range of 15% to 35%. Drug alternatives typically result in only 5-10% weight loss, and most have been removed from the market due to safety concerns. 

Innovative Interventions are now on the market. 

The obesity treatment industry has recently experienced a significant shift. 

In 2017, the FDA approved a new class of drugs, GLP-1 Receptor Agonists, for people with diabetes. In addition to managing blood glucose levels, these patients unexpectedly lost weight (around 15%).

Novo Nordisk received approval for its GLP-1 drug (Ozempic/Wegovy) for treating obesity in 2021. These drugs promise efficacy comparable to bariatric surgery, and Eli Lilly’s drug Mounjaro has confirmed the results. 

At the beginning of August 2023, Novo Nordisk released results from a Phase 3 trial (the Select trial) showing that Wegovy reduced the risk of adverse cardiovascular events by 20%, well above analysts’ expectations of between 10% to 15%. 

Supply, not demand, is the current problem. 

Supplies of GLP-1, which are currently self-injected, are not expected to meet the immense market demand until at least mid-2025, if not later. A transition to a pill version (if approved) would increase compliance and uptake by the patients, but also require 10x to 50x more active ingredients, likely exacerbating the shortage. 

The consequences to the Pharma/Medtech industry are not so straightforward. 

With obesity linked to numerous health issues, including type 2 diabetes, liver disorders, cardiovascular diseases and many more, concerns began to arise with the exceptional Sentinel trial results published at the beginning of August 2023 about the potential decrease in the total addressable market of many treatments, drugs, etc. 

While we are very bullish (and have been for the last few quarters) on GLP-1 drugs, we also believe that investors have overreacted by sharply selling off many of the stocks of companies treating obesity, cardiovascular diseases, monitoring glucose, etc. As an example, our Bionics thematic is currently trading at 1.1X PE/G vs. 1.7X PE/G at the end of July 2023, despite the exceptional visibility we have in the portfolio’s earnings constituents. 

Also worth to keep in mind is that the weight reduction triggered by GLP-1 does not solve the current chronic diseases for obese patients, as their increased risk of cardiovascular events is only partially mitigated by losing weight. 

Another factor is that compliance with the GLP-1 treatment is an issue; around half of the patients drop out after the first year. And finally, some forms of obesity have a hereditary component that GLP-1 does not mitigate. Over 1,000 genes or gene combinations have been identified that may increase the risk of weight gain. 

A once in a lifetime investment opportunity?

Our main conclusion is that companies in the cardiovascular, obesity-related space (ranging from glucose-monitoring devices to companies targeting NASH, etc.) will continue to grow rapidly even if GLP-1 drugs were to reduce the total addressable market by few percentage points.  

While the headline risk is likely to persist for some time, historically low valuations and strong future cash flows generated by pure players companies which we hold in our Bionics portfolio will likely play in favor of a re-rating of the overall sector and represents an excellent investment opportunity for opportunistic as well long-term investors.