The new drugs, made by Novo Nordisk in Denmark and Eli Lilly in the US, were designed to tackle obesity and diabetes. These are major problems for Western societies.
Obesity was officially declared an epidemic in 1997 by the World Health Organization (WHO), but has continued to accelerate. In 2022, 43% of the world’s population was overweight and 16% obese.
This has put an astonishing strain on health systems. Treating the consequences of obesity is estimated to cost the NHS £6.5bn per year (source: Department of Health and Social Care). It is implicated in heart disease, cancer, strokes, and – perhaps most visibly – diabetes, which affects around 4.4 million people in the UK (source: Diabetes UK).
Against that backdrop, companies that treat the problem should have a pretty astonishing pathway of growth. Novo Nordisk is expecting sales to grow at a rate of 19-27% this year.
The company’s share price is up by around three times over the past three years in response to the success of the drug. In recent history, that sort of growth has only been matched by the technology stocks.
It has been a popular holding with many fund managers. It is the largest holding in the BlackRock European Dynamic Fund, for example, with manager Giles Rothbarth recognising its potential for long-term growth. It is also the largest holding for the Janus Henderson European Focus Fund.
Nevertheless, there are risks to the long-term growth of these ‘wonder’ drugs. They come with unpleasant side effects for some people, including – apparently – Boris Johnson.
A range of pharmaceutical and biotechnology companies are striving to come up with competitor products that don’t need to be injected and have fewer nasty consequences. However, for the time being, their pathway of growth looks set.
Broader consequences
Investors have also been looking at the other potential consequences of the widespread use of these drugs. In particular, they have worried that companies that rely on the healthy appetite of humanity may suffer if people don’t want to eat or drink as much.
After these drugs were launched, many of the consumer companies sold off in the expectation of weaker demand for their products. Comments from Walmart’s founder that Wegovy was hurting sales seemed to confirm this view.
There are also concerns that the drugs may suppress people’s ‘want’ instinct more generally. Users report less inclination to gamble, to drink alcohol, to take drugs.
These are plenty of companies that rely on these instincts to make profits. To date, it has done little to dent the share prices of listed gambling companies, with the world’s largest – Flutter – seeing a share price rise of 19.7% over the past year alone. However, it is worth watching whether it has any longer-term impact.
In the event, the impact on consumer brands has proved minimal. Companies such as Coca-Cola and McDonald’s have continued to deliver good earnings, with plenty of people still willing to buy their products.
Some fund managers have taken advantage of the mispricing this created. David Coombs, manager of the Rathbone Strategic Growth Portfolio, is still a holder of Coca-Cola, for example, saying it should be a beneficiary of people drinking less alcohol and has leant into the need for healthier diets: “Coca Cola continue to innovate, offering beverages with reduced added sugar, and more brands with nutrition and wellness benefits.”
The weight-loss drugs also created some disruption among medical device makers. The assumption was that devices used to treat heart disease, or glucose monitors for diabetes, might become increasingly obsolete in a brave new world of thinness and great health.
This was always unlikely. Deane Donnigan, specialist healthcare manager at Polar Capital, said: “Dexcom, a maker of continuous glucose monitors, was caught in the downtrend but rebounded as a result of excellent execution from the company, which consistently beat consensus estimates in their quarterly earnings.”
This shows how these big themes can create distortion and mispricing in the market that skilled fund managers can exploit. The weight-loss drugs are undoubtedly a major breakthrough, but it is unlikely to happen as quickly, or be as wide-reaching, as the early excitement suggests.
A similar phenomenon was witnessed during the internet bubble in the late 1990s – the internet did prove revolutionary, but not as quickly or in quite the same way as initially expected. A revolutionary product is not necessarily the same as a revolutionary investment.
Darius McDermott is managing director of FundCalibre and Chelsea Financial Services
