Equity Perspective: Our take on the GLP-1 drug phenomenon

Special Commentary

March 18, 2024

What Happened 

Glucagon-Like-Peptide (GLP-1) drugs continue to drive substantial investor interest within the healthcare sector. This is due to their superior efficacy in treating obesity versus prior therapies. Additionally, many physicians believe the application of GLP-1 therapies could potentially expand well beyond type-2 diabetes and weight loss over the coming years. Eli Lilly and Co. (LLY) and Novo Nordisk (NVO) remain the exclusive manufacturers of approved GLP-1 therapies, although multiple other companies are working to develop effective alternatives.

While elevated out-of-pocket costs currently restrict more widescale GLP-1 adoption (particularly for obesity treatment), acceptance among insurers is slowly improving. Scientific studies confirming the long-term benefits of elevated weight loss would help expand insurance coverage over time. Aside from costs, acute side effects are a risk to widespread adoption of this class of drugs and must be considered when investing in companies with GLP-1 product exposure. For now, markets will remain reliant on science, physicians, and global health administrators for added guidance around long-term risks.

Our Take

Many physicians believe the application of GLP-1 therapies could expand well beyond diabetes and weight loss. More specifically, heart disease, liver disease, and sleep apnea are areas analysts believe could be addressed in future patient trials. In 2023, the landmark SELECT (semaglutide) cardiovascular outcome trial from NVO showed a 20% reduction in major adverse cardiac events in adults with obesity. The discovery of new applications for GLP-1 therapies likely means an expanded addressable market, and potentially greater coverage by insurers.

The transition to oral formulations may also be a catalyst for GLP-1 drugs. Currently, the majority of GLP-1 therapies are administered weekly via injectable dosage. Injectables currently provide certain advantages in efficacy and compliance but are not ideal for patients averse to needles. Oral formulations are generally less expensive to manufacture, comparatively easier to scale production, and may be less difficult for certain patients to use.  

Product development and regulatory approval remain primary barriers to entry. Current GLP-1 production capacity constraints are significant and have led to limited product availability in many areas. With new facilities often taking years to begin production, GLP-1 manufacturers have recently looked to expand production capacity through acquisition. In February 2024, NVO announced its purchase of three manufacturing sites in Italy, Belgium, and the US (Indiana) for $11B.  

Comparatively acute long-term GLP-1 side effects are a risk to broader adoption of these drugs. This could adversely impact the shares of companies involved as growth expectations would not be met. According to the National Institute of Health (NIH), the most common side effects of GLP-1 agonists are gastrointestinal symptoms (mainly nausea), muscle loss, and some injection site reactions. Additionally, the NIH states that these drugs are generally prescribed for indefinite use, as stopping dosage may lead to higher glucose levels and added weight gain. There are also substantial questions around GLP-1 therapies and compounding pharmacies, which effectively manufacture their own drugs. In many cases, the origin of active ingredients used may be unknown. It should be noted that GLP-1 therapies produced by compounding pharmacies are not FDA approved. For now, markets will remain reliant on science, physicians, and global health administrators for added guidance around long-term risks.  

Beyond the potential physical side effects of GLP-1 drugs, costs are a major barrier to product adoption. Approved therapies generally cost upwards of $1,000-$2,000 per month, often paid out-of-pocket by patients. Insurance coverage remains mixed, with certain insurers covering GLP-1s for diabetes, but not weight loss. Additionally, certain states may refuse coverage for employees taking newer GLP-1 therapies, opting instead for less expensive (and less effective) alternatives like the now generic Orlistat.  

While the exorbitant cost for new GLP-1 therapies continues to restrict more widescale adoption (particularly for obesity), we believe this will continue to improve slowly. A major insurer recently announced a joint agreement with both Eli Lilly and Novo Nordisk, effectively limiting GLP-1 spending increases to 15% annually. In turn, expanded coverage to patients with obesity will be provided, thereby guaranteeing access to approved medications at a substantially lower price point. Over time, we believe insurers will provide improved coverage for obesity treatments, as the longer-term benefits from reduced weight loss become more apparent over larger populations. Additionally, we believe the potential exists for more substantial long-term cost reductions- not just for patients and private insurers, but also governments and health systems worldwide.

Bottom line

We believe the substantial investor interest in GLP-1 therapies is currently warranted. These drugs have the potential to revolutionize obesity-related disorders and scientists believe their approved use could eventually extend into numerous other areas of treatment. Near-term, we expect elevated consumer demand and constrained production capacity will keep a premium on both pricing and product availability. Additionally, the introduction of more effective oral GLP-1 formulations could provide access to new patients and markets. Increased long-term global adoption will likely be some function of product efficacy, availability, and future cost reductions for both patients and insurers.

We reiterate that physicians continue to learn more about the potential long-term risks associated with using these therapies. Stock-specific risks for companies with GLP-1 exposure include the potential for more acute long-term side effects and negative regulatory developments for therapies pending approval. Additionally, we note that elevated valuations for select companies with exposure may suggest above-average risk potential relative to historical levels.

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