The new, highly effective weight-loss and diabetes drug glucagon-like peptide-1 (GLP-1) has dominated headlines lately, and perhaps this is for a good reason. The crossover of healthcare, pharmaceuticals, and financial markets has become a topic of interest with the recent rise in the usage of weight loss drugs.
GLP-1 drugs were originally designed to control type 2 diabetes by stimulating the body to create more insulin, which helps lower blood sugar levels. The results showed these drugs are very effective in treating type 2 diabetes.
A common side effect of taking GLP-1 is a loss of appetite. Recent studies showed taking this drug while treating diabetes leads to weight loss of 10 to 15 pounds. Those taking the drug for weight loss are reporting 30-plus pounds of weight loss!
Given the vast financial opportunity, GLP-1 drugs started to be marketed as weight loss drugs and an effective treatment against obesity, which led their popularity to skyrocket. According to Morgan Stanley Research, the market for obesity drugs is expected to reach $77 billion by 2030. The ripple effects could potentially decrease global food consumption and have a sizable impact on supply chains.
The major pharmaceutical players are Eli Lilly (Mounjaro) and Novo Nordisk (Wegovy and Ozempic). The drugs have been the focal point of interest as they have become hot commodities as the new way to lose weight. With this, many individual stocks and sectors have experienced whipsaw levels of volatility as markets try to process the long-term impacts on several facets of the global economy.
While the impact on the food industry could be large, the net effect on the stock market will likely be negligible.
IMPACT
It’s no surprise that sales have escalated, given how many people are using these drugs for weight loss treatment. In the second quarter, sales of Ozempic rose more than 50% from a year ago ($2.1 billion to $3.2 billion), while Wegovy sales rose 30% from 2022 (to $1.1 billion).
In turn, many Wall Street firms labeled them with a buy rating earlier this year—and correctly so, as Eli Lilly is +74% and Novo Nordisk is +60% since August of 2023!
Total GLP-1 users in the U.S. are estimated to reach 30 million (~9% of the population) and constitute a $100 billion market by 2030.
While nothing is certain, food consumption seems likely to decline over the coming years. J.P. Morgan research has found that current GLP-1 users purchased ~8% less food, including soft drinks and snacks, and overall food intake could decrease by -3% in the U.S. by 2030. Those are some eye-popping estimates.
While drug stocks such as Ely Lilly and Novo Nordisk have benefited tremendously, a long list of companies in the food and beverage sector has suffered. The stock prices for companies such as Kraft, Conagra, and Mondelez have declined over the past seven months. The Food and Beverage ETF (FTXG) has declined ~7.93% since August.
While this decline matters if you own those individual stocks and sectors, it hasn’t had much of an impact on the S&P 500, which is ~+29% since August. Why, you may ask? The power of diversification strikes yet again. While the S&P 500 holds ~12% in Health Care and ~6% in Consumer Staples, below are the percentage weights for each stock within the index:
Mondelez: 0.24%
Kraft Heinz: 0.07%
Conagra: 0.04%
In the end, the net impact of each stock’s performance on the S&P 500’s performance is negligible. The main focus should be on global economic growth.
Ripple Effects
While we won’t know the true impact on the food-and-beverage industry for years to come, their recent sharp declines in stock price have alarmed many. Some of this alarm is clearly an overreaction, but remember: Markets aren’t always rational in the short term!
Other sectors are likely to be impacted over the coming years. While it’s too early to tell to what extent, this is something to keep our eyes on.
According to Alexandria DiFeliceantonio, a neuroscientist at Virginia Tech: “Studies have found that in animals and people, GLP-1 drugs reduce the release of dopamine in this region [the part of the brain that controls motivation] when you eat something sweet and fatty or when you consume alcohol.” Some early studies have shown patients taking these GLP-1 drugs have had less urge to consume alcohol, smoke cigarettes, and gamble. While this could have a huge impact on these industries, more research needs to take place to confirm the validity of these early studies.
The insurance industry will adapt several times as the changes become more concrete. Both life and health insurance could see positive impacts from the increased usage in GLP-1 drugs. While it may initially lead to increased costs for the health insurance industry, the long-term prognosis appears positive as a healthier (less obese) population is likely to drive down long-term costs.
Life insurers would benefit from delayed mortality, allowing them to earn more investment income on their reserves. This would also likely help disability insurers, as their claims would likely decline over time. This would likely lead to a decrease in our premium payments over the coming years, which would be a win-win.
The fitness industry stands firmly in the crosshairs. While fitness stocks have barely declined from the initial headlines, the worry is if people lose weight from GLP-1 drugs, the “need” for gyms would diminish for millions! While it’s certainly possible for some, the counterargument is that the change will actually INCREASE the popularity of fitness centers.
The reasoning behind this premise is people will invest further in their appearance and wellness after seeing the initial impact of weight loss from these drugs. Said another way, this may give people the kick start they need to go to the gym.
In addition, the data appears to show that GLP-1 users’ gym usage changes are a second-derivative effect compared with the first-derivative effect of food intake, which could lead to a much smaller impact on the fitness valuation landscape.
Perhaps the most interesting thing I came across was the potential impact on the airline industry. The thesis is that if enough overweight adults lost weight taking these drugs, the weight savings could equate to ~1,790 pounds per flight! This, in turn, could result in ~$80 million in savings in annual fuel costs, which should reduce the amount we pay for tickets!
What’s Next
Before jumping to conclusions, we need more data and time. GLP-1 drugs have several potential side effects besides loss of appetite. It could be that many stop taking the drug due to the side effects and that the overall market becomes less than expected.
In addition, many U.S. insurance companies are scaling back on GLP-1 coverage due to the high costs involved. Currently, Medicare doesn’t cover drugs prescribed for weight loss, but it covers a drug like Ozempic, an FDA-approved diabetes drug that unintentionally became popular for weight loss.
It will be interesting to see what changes, if any, are made to what Medicare covers. It’s one thing when there are a few million users, but it’s a different story when talking about 20-30 million! This additional cost will initially be met with pushback from the insurance industry.
In the end, maintaining a diversified portfolio means you don’t have to worry about how this all plays out. Diversification is what ensures your portfolio from being severely impacted by a few stocks or sectors that may underperform over the coming years.
Stay the course …