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Breakthroughs in the effectiveness of a class of medicines designed to treat diabetes have become the most talked about drug developments in recent memory, mainly because of their extraordinary impact on obesity.
The drugs work by stimulating a neural response that sends a message saying you’re no longer hungry. They also stimulate insulin production, which lowers the risk of hypoglycemia in type 2 diabetics. The extra insulin slows digestion, which makes people feel fuller, longer. They eat less and lose weight.
For investors, the excitement is as much about the easy weight loss as how these medications help diabetics. Without ever hopping on a treadmill, patients shed up to 15 per cent of their body weight in about a year with implications for overall health and wellness.
Celebrity endorsements have put the drug trade name at the top of trending social media searches. Elon Musk tweeted about using Wegovy, which Danish drugmaker Novo Nordisk A/S NVO-N markets for weight loss.
At this year’s Academy Awards, host Jimmy Kimmel opened his monologue with a joke on Ozempic. It’s a similar Novo Nordisk drug approved for diabetes, although often used off-label for weight loss.
But the market potential is no joke. The National Institute of Diabetes and Digestive and Kidney Diseases estimates that about one in three American adults (30.7 per cent) are overweight and more than two in five (42.4 per cent) are obese.
“Are these drugs really a big deal?” asks Paul MacDonald, chief investment officer at Harvest Portfolios Group Inc. in Oakville Ont. “Unequivocally, yes. A very big deal. The systemic cost of obesity is huge, including such things as heart disease. So, the benefit of finding a way to reduce it is massive.”
Jeff Elliott, lead global equity portfolio manager for health care at BMO Global Asset Management (BMO GAM) in Toronto, notes there’s a straight line between losing weight and better health outcomes. The ability for such a large number of people to do that leads to an opportunity for investors.
“There are many people who want to lose weight the easy way,” says Mr. Elliott, who has a PhD in molecular biology and biochemistry. “So, the commercial draw on this is huge.”
The big players in the market
Eli Lilly & Co. LLY-N and Novo Nordisk are the leaders, both of which market once-weekly injectables with similar weight-loss characteristics. Investors have rewarded both. Eli Lilly’s stock is up 24 per cent year-to-date while Novo Nordisk’s is up 19 per cent.
Eli Lilly’s weight loss drug, marketed as Mounjaro, is approved for use in Canada, but not yet available. A recent Eli Lilly trial of a new molecule called retatrutide, which acts on three receptors, is even more promising. It increased weight loss in one year to 24 per cent.
But Pfizer Inc. PFE-N is an illustration of the risks involved in chasing the potential of these sorts of developments. Chief executive officer Albert Bourla told analysts recently that an obesity pill could one day be a US$10-billion-a-year product for Pfizer. He estimated the overall market for these drugs could hit US$90-billion globally by 2030.
But Pfizer’s shares sold off sharply in late June when it abandoned a once-a-day obesity pill because of concerns about liver safety. It continues to develop a twice-daily pill with a different formulation. The stock is down 30 per cent year-to-date.
Amgen Inc. AMGN-Q sees promise in an experimental weight loss drug, but is in the early trial stages.
Harvest Portfolios and BMO GAM are placing bets on these drugs. Mr. MacDonald manages Harvest Healthcare Leaders Income ETF HHL-T, which holds Eli Lilly, Pfizer and Amgen. BMO GAM recently launched BMO Global Health Care Fund BGHC-NE, which holds Eli Lilly and Novo Nordisk. Mr. Elliott leads a team managing the fund.
The drawbacks of using the drugs
The drugs have proved safe, but patients must continue taking them to keep the weight off. The first hurdle is overcoming the intense nausea that comes with the injections. Mr. Elliott says this eases over time, but other side effects include ongoing gastrointestinal upset.
They’re also expensive, costing between US$1,000 and US$1,500 a month in the U.S. They’re cheaper here, costing about $250 a month with provincial approvals and drug plan coverage varying. In Ontario, OHIP covers Ozempic, but not Mounjaro and Wegovy.
An unknown is what U.S. insurers will do. They may pay for diabetic use, but not weight loss. The sense is that coverage will grow because employees want the drugs and in a tight labour market, employers see it as a perk.
So, what should investors do?
“If you look at the stocks, clearly the market believes that Novo Nordisk and Eli Lilly are the ones to look at,” Mr. Elliott says. “They have the market and best pipelines.”
He notes that high expectations have been built into share prices and competition will only intensify. The ultimate winners have yet to be decided.
“In drug development, things have potential until they don’t,” he says. “Things can look good in Phase 1 [trials] and may not make it out of Phase 3.”
Both analysts see a basket of stocks as the best way to capture the theme.
“My take is always to diversify,” Mr. MacDonald says. “Maybe Amgen’s science works really well. Maybe Pfizer’s oral dose is a game changer because it’s easier to make and distribute.”
A diversified basket helps reduce some of the sensitivity around how the science unfolds, he adds.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
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