Exploring the Investment Potential of GLP-1 Obesity Drugs: A Healthcare Revolution
Jan 31, 2024
Steve Davenport, Clement Miller
Unlock the transformative power of GLP-1 based obesity drugs with your guides, Clem Miller and Steve Davenport, as we navigate their remarkable impact on healthcare and investment landscapes alike. Prepare to be enlightened on the dual benefits these treatments offer for diabetes and obesity, and the industry titans leading the charge—Novo Nordisk and Eli Lilly. We've dissected the science, sifted through financial forecasts, and even charted the course for potential investors looking to capitalize on this medical revolution.
The conversation doesn't stop at the pharmacy counter; we delve into the complex web of obesity, genetics, and the monumental societal shifts these drugs could instigate. We also unpack the intricate dance between health and financial wellness, offering actionable insights for investing in pharmaceutical stalwarts and rising stars. Tune in and arm yourself with the acumen to navigate both the health advances reshaping our future and the financial opportunities they present.
Unlock the transformative power of GLP-1 based obesity drugs with your guides, Clem Miller and Steve Davenport, as we navigate their remarkable impact on healthcare and investment landscapes alike. Prepare to be enlightened on the dual benefits these treatments offer for diabetes and obesity, and the industry titans leading the charge—Novo Nordisk and Eli Lilly. We've dissected the science, sifted through financial forecasts, and even charted the course for potential investors looking to capitalize on this medical revolution.
The conversation doesn't stop at the pharmacy counter; we delve into the complex web of obesity, genetics, and the monumental societal shifts these drugs could instigate. We also unpack the intricate dance between health and financial wellness, offering actionable insights for investing in pharmaceutical stalwarts and rising stars. Tune in and arm yourself with the acumen to navigate both the health advances reshaping our future and the financial opportunities they present.
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Clem Miller:
Welcome everybody to Skeptics Guide to Investing. I'm Clem Miller and I have here Steve Davenport and today we're going to talk about obesity drugs and how they affect us. Steve and I will dig into the media and market response to these medical developments. Steve.
Steve Davenprt:
Well, Clem, there's a lot to capture here and I think it helps at the beginning if we start to define some of the terms. I think a lot of people are questioning what does it mean when they talk about GLP1. Those letters of the acronym are glucagon, like peptide 1, and it's a version of the drugs that these companies have developed for people with diabetes. And glucagon is a signal the body sends to say that it's full or satiated and to kind of say we don't need to eat anymore. So when we're hungry and the body needs nutrition or energy, we have one system, but glucagon is an item in our small intestines that sends a message in terms of whether we are full and we need to stop eating. There's two main uses for these drugs. I'll call them obesity drugs, but they're really diabetes and obesity medicine. One is really to people who have typed your diabetes, who really need help in terms of how do they manage their sugar, and the other is if a person is going to be a potential diabetic and they need medicine to help them try to manage their weight. So when we look at this, there's really three different common ways to think about obesity. There's intervention can be the form of lowering your weight through diet and exercise, through a pharmacological solution or through surgery. So we're really talking about that middle one, the pharmacological solution.
Steve Davenprt:
There's two main players. Everybody talks about Novo Nordisk and Lilly from the US. These two companies control over 80% of the market for these drugs. Right now it's about 4 billion. They anticipate by 2032 to be upwards of close to 170 billion. That's why there's so much excitement with these drugs the two main participants. Novo Nordisk has two drugs, one for diabetes and one for obesity. They are Ozempic and Wegovy. So Lilly similarly has two drugs. One is Mounjaro, m-o-u-n-g-a-a-r-o and Zepbound for obesity. So each of those in the marketplace and it's a very complicated biological element but really is about the future and growth and earnings. So it's a very exciting story right now. And what's going on in healthcare?
Clem Miller:
My reaction is that couldn't they come up with better names for these things? They're just a little confusing Ozempic, wegovy, mounjaro and Zepbound.
Steve Davenprt:
Oh, well, maybe that's what you get into. Clem, you can get into the naming.
Clem Miller:
So Steve did all of it. I mean, this is something that, at least for Nova Nordisk and Lilly and their stock price surges and so on, it all seems to have come to market consciousness in 2023. But did it really start in 2023, or did it originate much earlier?
Steve Davenprt:
Well, what's really interesting is both of these companies have been involved since the 1920s in the use of insulin to help with diabetes. So these were two of the companies that originally came up with the injectable form of insulin to help people manage their sugar. Previously, there was a drug from Nova Nordisk that had about a 5% weight reduction result and at a 5% weight reduction result, putting up with the side effects really wasn't generating a lot of interest. These drugs are showing 15% to 20% weight reduction. They're starting to get some real excitement because 15% to 20% of an individual when you look at how we define overweight and obese, I think that people realize, hey, I could go from being one into another category and improve my health outcomes with a 15 or 20%, but I can't improve it with just a 5% impact.
Steve Davenprt:
In 2021, the FDA approved this semi-glutide as a solution for obesity.
Steve Davenprt:
So previously they had been developing these drugs for diabetes and when it got approved in 2021 for the additional risk of obesity, that really was an exciting development for the people at Lilly and Nova Nordisk. So I think that when you're thinking about how companies react and how much interest there is, it's about following the money and when they had the diabetes as one solution that they were building these for, and then you can double that with the obesity. That really makes these drugs have a much more compelling case. Currently, the cost is about $7,000 per year for these. We expect by 2030 that their costs will go down to about $3,000. So right now there's having trouble producing these and the amounts they need to. Like Viagra, these drugs have a history of tremendous growth and opportunities, but then they worry about when they go off patent. They're going to go away as they're very easy to replicate. Viagra is a very simple compound. These are much more complicated compounds, so it's going to be much harder to people to profit on the generics because they're going to be much harder to produce.
Clem Miller:
So, Steve, how do we invest in this space? Do we invest in Nova Nordisk and Lilly? How do we invest here?
Steve Davenprt:
Here are the main competitors on their main point. Lilly has Zepb ound, which, as I'm going to put it as number one, but it's really 1A and 1B between it and Nova Nordisk. They have a slightly higher weight loss and slightly less side effects. Nova Nordisk has more time in the market and is currently the largest company in Europe, so people are pretty excited. One thing to consider there's about 70% of the population that's considered overweight or obese in the US. That number is 50% in Europe. So when I gave you those numbers of 170 billion that assumed an 11% of the addressable market in the US and 6% in Europe and when you think about that 170 billion we think that 11 and 6 is going to be the ultimate percentage used I think that number could be much higher. So I think that this the excitement that you have had I thought originally when I started, before I started researching this topic, that it wasn't worth all of the, that this was another AI or SPAC or stock issue, but it really isn't. There is a potential here for a lot of impact.
Steve Davenprt:
The other companies that are in this space that are doing things that haven't yet kind of developed the size and breadth that Nova and Lilly . Pfizer's testing a brand which should be taken in a pill form versus the other two are both injectables and their studies are going to be finished by the end of 2024. Amgen is testing a version of a once a month injection versus a once weekly. And then Roche has recently bought a company called Carmot, which has several drug trials now, and so they're not developing on their own, they're buying the technology, but there is a feeling that those Karma drugs could be competitive in this space. So competition is fierce. Everybody's looking for that goal at the end of the rainbow and these all, all these companies have resources and partnerships and they're going to be competitive and I think that's good for the consumer.
Clem Miller:
I would agree. You think right now these are investable.
Steve Davenprt:
Yes, I think there is investment opportunities, but I think, like everything else, it needs to be analyzed and understood. So, literally, it was up 60% and 23%. Currently trades as a two-star stock, which is slightly overvalued. On Morningstar, that's about 131% of fair value, so its PE is about 50 times earnings. The typical stock I don't think is that high. Novo Nordisk was up 50% and 23,.
Steve Davenprt:
Again a two-star stock because it's overvalued about 129% of fair value and it's at 30 times PE. Pfizer is still a three-star stock and there is uncertainty about how this trial is going to get resolved and ultimately you have to take some risk if you want to get returns. So here you're talking about trial risk, but you're only paying about 18 times earnings. Amgen is a four-star stock, meaning that it's undervalued, it's about 60% of fair value and it's trading around 14 times. Roche is a four-star stock, also undervalued, also around the 60% of fair value, and it's about 12 times. So, like most things, clem, it's not that clear and not that easy, but I think there's opportunities if you want to take one of those bottom three and I think there's less uncertainty in terms of the thing that I think is most interesting about this space is it's changed. These two companies and these companies have lots of other drugs, lots of other things in the pipeline, but now everybody is talking about Lilian Novo only on obesity and diabetes.
Clem Miller:
Yeah, so I like buying individual stocks and I like buying leaders. I've got significant percentages of my own portfolio in both Lily and Nova Nordisk. I've avoided Pfizer because, frankly, they're actually retreating in the wake of having had some very good earnings with respect to the COVID drugs. So I like digging into individual names, but prices at consideration. You mentioned that Lily and Nova Nordisk have high prices. That doesn't particularly bother me, and the reason it doesn't is because I look at PE on an overall portfolio basis, and so I've got much cheaper stocks in my portfolio than Lily and Nova, and so I feel like I can afford to pay for them, especially with their growth, which is reflected in their peg ratios. So, steve, what do you say to that?
Steve Davenprt:
I think that you are not a typical investor Clem and I think that the average person on the street and who might be in a position where they're trying to think about I'm on this, I'm using Wefgovy, or I'm on this and I'm using Zepbound and I find it's tremendous and they might want to own the stock. I think that they need to buy it in the right proportion and they need to think about its PE in terms of what's their time frame. If they're thinking they're going to get another 50% this year, I'm not sure that's the case because of all the other things the company has and all the other drugs having less of a multiple, and this does right now. But you know, what do you think about them compared to the average health care sector? Would you want to buy the spider instead of buying the individual names here?
Clem Miller:
No, and of course by spider you mean the health care ETF. No, I you know I don't. I don't buy sectors, because within a sector you can have a variety of companies, both bad and good. You know the spec, the sector ETFs they're weighed most heavily to those companies that are already big and that's not necessarily a good thing. You know is is. You know, in semiconductors, is Intel better than some of the others? No, it's not. And you know is, is Johnson and Johnson, you know, better than some of the others in the health care sector. Is United Health, which is also in the health care sector, is that better than some of the others? I would say no, and so I don't invest in in the sector ETFs because you know size is not necessarily the best and that's how easy to understand what it might be hard for a person to choose and it might be a no, it's a solution.
Steve Davenprt:
I'm not saying it's the optimal solution, but yeah, I can see where somebody could say I can't. I can't tell which blue tide is a better blue tide. So I mean, it's like a lot of knowledge that goes into selecting an individual stock and I I just I wonder sometimes whether health as an industry, no just like technology as an industry you you know that we're gonna have more health issues as we see the aging in America or other countries.
Clem Miller:
So I? If? If somebody were to say to me I can only invest in sector ETFs, then definitely health care and technology and Communications Would be at the top of my list, followed by what about industrials? No, I don't think I wouldn't. I'm Not a fan of the carbon. Well, no, it's not just that, it's just I like to have sustainable Growth in my portfolio, and when you're talking about energy and materials, you're subject to, you know, you're exposed to the vagaries of commodity prices and I don't want my portfolio exposed to the vagaries of commodity prices. I want, you know, I want nice, stable growers, preferably Inexpensive yeah.
Steve Davenprt:
So these drugs are also great, yeah, garnering interests because of their effect on other parts of the body. So there's been a study that says they reduce health, heart health In incidents by 20%. They also help with addiction, because when the signal says you're satiator, you're full or you're satisfied, people are finding that they lower the Urge for cigarettes and alcohol. There's also some studies showing that it helps with Alzheimer's. So I think, just like you know, a hair product ended up having some impact on blood flow, that in by agro, and I think there's a lot of things that could come out of this. And it's a very exciting space to think that you could be taking something for Obesity. And it's also helping with your heart, yeah, not only reducing your weight, but also Lowering the incidence of an event.
Clem Miller:
So you know, I like these thoughts about, you know, sort of unexpected benefits, which sort of leads to another Concept, which is what about other areas, other drug solutions and other areas that these are related to?
Steve Davenprt:
Select. I think the Interesting thing about these drugs is we're starting to be aware Self-control may not be the reason for people's health issues. Right, there are biological elements of our DNA which can make the signals in our bodies hurt our best efforts. It has been too long that people believed being overweight was a choice, when in a lot of cases it's the genes we're born with. We don't have a choice of that.
Steve Davenprt:
So when I think of medication, I think this could lead to many areas where we nudge people. It doesn't solve the problem of their weight, but it puts them in a position where they have more control and they might perform better in terms of, once I get to a certain size and I see I'm at that size and I enjoy being at that size I take up some of the other elements that will make me stay there. So I think it's similar to the idea of a nudge. We talked about 401ks. When we sign people up for them, they don't tend to cancel. Maybe this is there's a whole bunch of efforts around cigarettes, alcohol, other things that if we can nudge people in the right way, I mean it could really transform how our Medicare and other national programs affect our health. So I think it really has a huge potential.
Clem Miller:
So I guess what you're saying is that there could be major benefits in terms of improving behavioral outcomes, basically social outcomes as well, but it's going to require probably some public policy help as well, which leads me to sort of the next logical question is how does insurance cover all this?
Steve Davenprt:
Well, that's a great point. I don't think we can really put a value on some of those factors right. When you look at a person's developing diabetes at 60 or 70 versus developing at 40, the impact in the community is very hard to say. We've got a large percentage of population not getting healthcare. So if they're not in the system and yet they're going to be served by the hospitals in the area, how do we get at those people when the expense of this drug is so high? So I think that it's really going to need us to look at these things and really calculate the results, and there just hasn't been enough analysis done.
Steve Davenprt:
What happens after the drug stops? People then do tend to put weight back on, but they don't tend to go 100% back. So it does jumpstart people to a better place and they keep the weight off. But I think that when you look at the impacts on the health of your heart blood pressure and cancer incidences they're all aided by a better body mass index, so BMI. So I think that as a country, if we could improve our BMI, I can't imagine how that would ripple through the system and impact Medicare and Medicaid. So I think there is excitement and I think it will continue and the competition is. What I think is interesting is that everybody is in trying to make up a solution and whether it's oral or whether it's monthly or whatever it is, people are working very hard for solutions that could really impact the health of our whole country. So I'm excited about it.
Clem Miller:
So here's a question from our mailbag, which I think you've already partially answered Do you think the obesity drug excitement is a fad, or is it the future?
Steve Davenprt:
I believe it is the future. I think that it's a combination of a lot of things. We mapped the human genome several years ago and now we're starting to apply AI and better computing power to this human genome problem and looking at the different areas of our DNA that get impacted. I think that's going to lead to more discoveries and more success for health solutions. And this is not the end. It's the beginning and, in my opinion, I see a lot more here than I see in the AI space, just in terms of real lives impacted right away.
Clem Miller:
Well, something like health requires a lot of data analysis, and that's what AI is for right Data analysis. It's not just working trying to analyze big data so that you can draw some conclusions. That's what it's all about, and so I think there's an enormous intersection between AI and healthcare.
Steve Davenprt:
Sure. So if I want to summarize, I'd say your health matters for your financial wellness. Both your physical and your mental health directly impact how you can earn money, how you feel about money and how you get results going forward. So I would say, you know. First, understand how this might affect your health. Second, look at what your insurance will cover and talk to your doctor about whether this is something that you should think about. I think investments should be for the long term. So, on weakness, I would think about some of the leaders, the lily or the nobo, or own both. And then, in a secondary level, I think about whether some of the companies that are in development but are at much better multiples could also, you know, transform into a good holding for you, like a Roche, like a Pfizer, like an Amgen. Do you have anything else to add, glenn?
Clem Miller:
No, I think we've covered this in great detail and I hope we, you know we helped everybody understand a bit more about this, about these two companies and about the whole weight loss drug industry, I'm sure.
Steve Davenprt:
I want to add in the future.
Clem Miller:
What is a GLP? Let me look back. No Glucotide.
Steve Davenprt:
Glucogon like peptide.
Clem Miller:
You know, it doesn't really matter what it's called. What matters is what it does and that you can make money from it.
Steve Davenprt:
Correct, but I think that if you want to be at the cocktail party and sound sophisticated, you could say I really like the new GLP drugs. People will think wow, that Clem. I thought he was an investment guy. He sounds like a bio guy. All right, everybody, Thank you, Thank you.