Identifying potential long-term winners from the new generation of weight-loss drugs

This year, markets have been focused on potential for technologies such as artificial intelligence and robotics to replace workers, enhance productivity and boost economic growth. While this is an exciting prospect, another trend we’re monitoring closely is the emergence of a new generation of weight-loss drugs and their potential to enhance productivity by improving the health of the population.

In a former life as a clinician in the NHS, I saw first-hand the tremendous burden of diabetes, obesity and associated illnesses on individuals’ health and healthcare systems more widely.

In the UK, it is estimated that the direct cost of treating obesity and obesity-related illnesses is approximately £6.5bn per year, while the total cost of obesity to the UK economy may be around 3% of GDP.^{1, 2}

A new generation of treatments

‘GLP-1 mimetic’ class medications have been used in the treatment of diabetes for more than a decade and have increasingly been prescribed ‘off-label’ for weight management. However, new medications within this class are now available for the treatment of obesity, regardless of a patient’s diabetes status.

Reportedly better tolerated and more effective than previous treatments, they have transformed the treatment landscape for obesity. Trial data suggests that some of these medications can enable 15%+ reductions in body weight, in the first year of treatment.³ These are the kind of results previously limited to expensive and potentially risky bariatric surgery.

As asset allocators, an important question for us to ask is who benefits from this technology and what are the second-order effects? The most obvious beneficiaries are the drug companies that design and manufacture these medications and which, despite record levels of investment, are struggling to meet patient demand. Unsurprisingly, we’ve seen impressive share price returns from these firms over recent years.⁴

In our view, labour markets are another key long-term beneficiary from this new technology, as a widely distributed and effective treatment for obesity should support healthier and more productive workforces and reduce the number of people unable to work due to obesity.

The potential magnitude of this positive impact on labour supply depends on the country in question, but in some cases it could be significant. Countries that struggle with high existing levels of obesity, but which also have the means to pay for cutting-edge medications, seem best placed to benefit in the short to medium term.

The US, where survey data indicates obesity rates may finally be plateauing or even declining after a multi-decade upward trend, is a prime example. We estimate that today there are 200,000-500,000 additional full-time workers in the US labour force because of these drugs who would not have been part of the workforce had these drugs not existed.

Industry analysts are forecasting that the distribution of GLP-1s targeting weight loss will increase rapidly over the next five years. Therefore, we expect the benefits of these medications to be a small but material tailwind for US labour supply and economic growth well into the next decade.

Other developed-markets that are well placed to benefit from GLP-1s include the UK, Australia, Canada and the Gulf states, where obesity prevalences are relatively high and medication demand relatively inelastic. Many of these economies are already struggling with the demographic headwind of an ageing population, and these medications should provide a much-needed boost to labour supply.

The burden of obesity is not limited to developed markets, with obesity rates ticking upwards in many emerging market countries. The price of GLP-1 medications means their benefits are largely restricted to the wealthiest countries. However, this should change as drug patents expire and competition heats up, resulting in still more effective medications being made available to patients at a lower cost.

It is easy to get caught up in the excitement surrounding these medications and their implications for population health. Although, at the individual level it’s important to remember that GLP-1s don’t work for everyone, with a small proportion of patient’s being ‘non-responders’ for reasons not fully understood. It’s also not yet clear how permanent weight loss from these medications is and the extent to which some patients may need to take them over the long term.

Regardless of their shortcomings, our view is that these drugs are a powerful weapon in combating the obesity epidemic and the potential benefits from this technology are numerous. This includes tens of billions in revenue for the pharmaceutical sector, millions more people able to work and reduced demand on overstretched healthcare services. Collectively, this is supportive for developed-market economic growth, while also helping to alleviate inflationary pressures.

 

Sources

1. Government plans to tackle obesity in England – Department of Health and Social Care Media Centre

2. Unhealthy Numbers: The Rising Cost of Obesity in the UK

3. Triple-Hormone-Receptor Agonist Retatrutide for Obesity - A Phase 2 Trial | New England Journal of Medicine

4. Bloomberg, five-year total return of the two leading GLP-1 manufacturers relative to MSCI ACWI