BACK TO THE BOUTIQUE INVESTOR BLOG Ozempic and Wegovy: The Investment Side Effects Brian Tolles PORTFOLIO MANAGER, ANALYST Jackson Square believes the impacts of GLP-1s like Ozempic and Wegovy will spread beyond the healthcare industry over the next decade, creating investment pitfalls and opportunities. Over the last 12 months, Ozempic and Wegovy have become household names. Headlines and social media trumpet the drugs’ weight loss and cardiovascular benefits, while new studies are exploring applications ranging from Alzheimer’s to addiction. These and other GLP-1 receptor antagonists have seen widespread adoption, and anticipated future sales have driven rallies in the prices of the drugs’ manufacturers and companies within their supply chains. However, the investment story does not end there. As companies develop oral versions and patent expirations push down prices, usage will likely expand. More than 42% of Americans are obese. Though most countries are slimmer than the United States, the problem is global and growing. Europe last reported a 17% obesity rate in 2019 and Chinese researchers estimate 1 in 7 adults are obese, with 1 in 5 likely by 2030. Given the media and market attention on Eli Lilly (LLY) and Novo Nordisk (NVO) stock, it is important to remember the future will bring a plethora of these drugs at low cost and low barriers to access. Biosimilars, domestic Chinese competitors, and oral versions are all on the horizon. Instead of attempting to do the impossible in predicting the future precisely, let us project what would happen if 10% of American adults took a GLP-1 by 2033. This hypothetical is meant to be provocative, and it might seem like a staggering number. However, it is not without precedent. 28% of Americans over 40 years old currently take a statin to reduce cholesterol levels. Without even considering its more “off-label” usage, is it far-fetched to believe that 25% of the 42% of Americans who qualify for GLP-1 treatment might take a widely available, generic oral medication? Obesity in Adults, Globally by Country Income Cohort 1975-2016 Source: WHO, Global Health Observatory (2022). Estimated prevalence of obesity, based on general population surveys and statistical modeling. Who Loses in This Scenario? GLP-1s work by mimicking hormones our bodies release when we eat. This causes our brains to believe we are eating more than we actually are. In a Morgan Stanley patient survey (n=300), patients reduced calorie intake by 20-30%. This points to a potential reduction in total American caloric intake of about 2.5%. While this may not sound like much, there is a catch. Patients reported disproportionate cutbacks in sugary and fatty foods, in addition to alcohol. This suggests staples companies and restaurant chains levered to unhealthy foods may see 0.5% annualized basis point headwinds to growth per year over the next decade, or even higher if this impacts family members’ consumption. Operating deleverage would result in up to 10% lower earnings in 2033 than pre-GLP-1 forecasts, and likely a modestly lower multiple given the lower growth trajectory. Companies like Pepsi, Mondelez, and Domino’s are at risk but have not seen a commensurate hit to their equity prices. On the other hand, the market seems confident that the impending wave of adoption will significantly reduce type 2 diabetes in the U.S. Dexcom and Insulet, the two most prominent pure-play diabetes device companies, had their equities decline by over 20% in the last few weeks. Though their businesses are heavily weighted toward type 1 diabetes patients today—a genetic disease that GLP-1s do not prevent—the equities’ lofty multiples are predicated on long-term penetration of the type 2 market. It is difficult to forecast the impact of GLP-1s on this market, as we do not yet know how much preventive use reduces the odds of developing type 2 diabetes (though we likely will eventually). However, we do know that around 10% of the U.S. population has type 2 diabetes, and about 90% of type 2 diabetics are overweight, a nearly completely overlapping Venn diagram. While GLP-1s are unlikely to reduce the number of diabetics soon, the market is a forecasting machine, and recent forecasts expected approximately 20 million more diabetics in the U.S. alone by 2035, totaling 55 million. Even if only one-quarter of GLP-1 patients do not develop type 2 diabetes, this would mean about 8 million fewer diabetics or a 15% reduction in the type 2 market. Given the high incremental margins of Dexcom and Insulet, this could reduce earnings from type 2 patients by 30%. While this analysis is overly simplistic and relies on several approximations, it demonstrates the market’s response is driven by real long-term concerns. Recently, Dexcom has pushed back on this bear case by publishing data from Optum insurance claims showing that adoption of continuous glucose monitors increased after patients began GLP-1 treatment. In our opinion, investors are likely to remain highly reactive to incremental datasets published by companies and healthcare researchers, which help quantify the impacts of treatment. Though there have been no trials yet, there are anecdotal indications that GLP-1s may help curb other addictive behaviors. To the extent that this proves to be the case, investors will need to look out for impacts across all the sources of our dopamine hits, from alcohol and gambling to compulsive shopping. Are There Any Unexpected Beneficiaries? So far, the beneficiaries are mostly limited to the direct value chain sitting beneath LLY and NVO, namely manufacturers and distributors. We have seen extensive sell-side research sizing the earnings impact of every additional million patients and will not rehash this work. Unusually for a major evolution in consumer behavior, the direct impact of these drugs is less consumption, which makes for a shorter list of immediate winners. One surprising result of the medications is patients report exercising more. Potential beneficiaries could include gyms or athleisure companies. This is a long way off and likely more difficult to detect in growth rates given more cross-currents such as fashion cycles and consumer confidence than healthcare peers. Likewise, early survey data indicates a possible shift to healthier calories, but it is largely self-reported and too early to know if it is offset by reduced calorie intake. 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