Anti-obesity drugs can shrink more than patients

Inspire Medical Systems

20/09/2023 12:33

(The authors are Reuters Breakingviews columnists.  The
opinions expressed are their own.)
    By Aimee Donnellan and Robert Cyran
       LONDON/NEW YORK, Sept 20 (Reuters Breakingviews) -
S tarry-eyed venture capitalists love to talk about how promising
startups might capture a chunk of a giant total addressable
market (TAM). This concept can also work in reverse, though. New
anti-obesity drugs have the potential to transform public
health, while obliterating demand for products and services from
the medical, food and fitness industries. Think of them as total
unaddressable markets (TUM).
    Drugs developed by Novo Nordisk  NOVOb.CO  and Eli Lilly
 LLY.N  appear to be the first truly effective diet treatments.
They work by targeting receptors in the brain that reduce
appetite and help people feel fuller for longer. Originally
developed to tackle diabetes, they’re gaining traction as
treatments for obesity. In one clinical trial, patients taking
Eli Lilly’s soon-to-be-launched weight-loss drug lost about 50
pounds (23 kg). The benefits for public health are potentially
huge. In August, Novo said Wegovy, its obesity drug, reduced the
incidence of serious cardiovascular events like strokes and
heart attacks by 20% in overweight patients who have a history
of heart disease but don’t have diabetes.
    Sales are already soaring. Last year, Novo sold nearly $2.5
billion worth of Wegovy and Ozempic, its treatment for people
with diabetes. Analysts expect that figure to balloon to $16
billion by 2027, according to forecasts compiled by Visible
Alpha. Demand for the medicines, collectively known as GLP-1
drugs, far exceeds what manufacturers can currently produce. Yet
excitement has lifted Novo’s market capitalisation to $420
billion, making it Europe’s most valuable company. Lilly, whose
diabetes treatment is called Mounjaro, has seen its market value
nearly double to more than $500 billion in under 18 months.
    Such a dramatic revolution in public health will also
produce losers, though. The drugs are designed to suppress
appetite, mimicking a gut hormone which is released after
eating. During trials, patients showed reduced appetite and even
an aversion towards food generally. This has the potential to
affect giant groups such as Switzerland’s Nestlé  NESN.S ,
Cadbury and Oreo maker Mondelez International  MDLZ.O , and
Kraft Heinz  KHC.O . These companies dominate a global market
for snacks which is currently worth more than half a trillion
dollars in revenue per year and is expected by Fortune Business
Insights to expand to nearly $840 billion by 2029. Fast food
groups like McDonald’s  MCD.N , Burger King and KFC owner Yum
Brands  YUM.N  could also face shrinking or shifting demand.
    The potential impact on the medical industry could be even
bigger. Over 40% of Americans are obese according to the Centers
for Disease Control and Prevention, and that number has
increased by nearly 40% over two decades. Obese people are more
likely to suffer from cardiovascular disease, various cancers,
arthritis and dementia. In 2016 the Milken Institute estimated
the medical costs associated with obesity in the United States
at nearly $500 billion a year. A 2021 study published in the BMJ
projected that costs from reduced health and higher absenteeism
worldwide would rise 50% by 2060.
    The adoption of anti-obesity drugs remains hard to gauge. At
a cost of about $1,000 per month it’s unclear whether insurers
and public health authorities will fund widespread treatment.
Side effects can also be harsh. Only about a third of those who
started taking the drugs for obesity were still doing so a year
later, according to one analysis.
    Any destructive impact is therefore likely to be gradual.
Even so, investors are beginning to fret. Breakingviews scanned
transcripts of corporate earnings calls, presentations and other
events tracked by LSEG for mentions of Wegovy, Ozempic and
Mounjaro – excluding those hosted by Novo and Lilly. In 2022
there were 18 such events. So far this year, at least one of the
drugs has been mentioned 71 times.
    Among the potential losers are firms like ResMed  RMD.N  and
Inspire Medical Systems  INSP.N , which make products that treat
sleep apnea, a condition where patients intermittently stop
breathing while asleep. Around 70% of sufferers are obese. On a
call with investors in August, ResMed CEO Michael Farrell said
he thought weight-loss drugs wouldn’t have a major impact on the
company’s future sales because the treatment is harsh and its
cost would discourage many patients from taking it long term,
while awareness of the effects of obesity could push patients
towards apnea treatment. Even so, ResMed’s stock has since lost
about a third of its value.
    Meanwhile, companies selling joint replacements such as
Zimmer Biomet  ZBH.N  and Smith+Nephew  SN.L  could see their
$25 billion and $11 billion values slimmed. These two firms earn
about two-thirds and 30% of their revenue, respectively, from
hip and knee implants. One study estimated about a quarter of
surgical cases involving knees could be avoided if patients
weren’t overweight. Rival weight management treatments also look
vulnerable. Since June 2021, when Novo Nordisk’s first obesity
drug gained regulatory approval, shares of WW International
 WW.O , formerly Weight Watchers, have collapsed about 70%,
despite the company unveiling a plan to distribute weight-loss
drugs.
    Economic destruction could spread further afield, too.
Anecdotal reports and trials on animals suggest GLP-1 drugs may
also dampen urges beyond snacking, including consuming alcohol,
nicotine and possibly engaging in other addictive behaviors like
gambling.
    These changes may have limited impact or affect only a small
number of users. But any reduction in addictions could have big
effects. The gambling and alcohol industries tend to display
so-called Pareto distributions, where a few users provide most
of the profit. In England, for example, 4% of drinkers account
for 23% of the industry’s revenue, according to a study in the
journal Addiction. And the top 20% most engaged gamblers using
an online casino operated by the Canadian government made up 92%
of revenue and 90% of losses.
    Widespread adoption of GLP-1 drugs could also produce
corporate winners as consumers divert cash previously spent on
food and medical care. Plastic surgeons may benefit if patients
seek nips and tucks following weight loss. Dating services like
Match and Grindr  GRND.N  may attract newly confident users.
Fashion brands and sporting goods groups could get a lift from
people seeking new wardrobes or embracing athletic pursuits. Yet
even as Novo, Lilly and others see their addressable markets
expand, some companies will see theirs shrink. For investors,
the TUM may be just as important as the TAM.
    Follow @aimeedonnellan and @rob_cyran on X

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Obesity drug mentions in global earnings calls over 5 years    https://tmsnrt.rs/3ZjW28M
WW International share price since Wegovy U.S. approval    https://tmsnrt.rs/3LnUvZl
Obesity drug makers’ valuations have taken off    https://tmsnrt.rs/454KmIo
    ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
 (Editing by Peter Thal Larsen, Sharon Lam and Oliver Taslic)
 ((For previous columns by the authors, Reuters customers can
click on  DONNELLAN/  and  CYRAN/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | Aimee.Donnellan@thomsonreuters.com; Reuters Messaging:
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robert.cyran@thomsonreuters.com; Reuters Messaging:
robert.cyran.thomsonreuters.com@reuters.net))