Breakthrough Weight-Loss Drugs: Are They Overhyped?

Ask a doctor how to lose weight, and the most likely response would probably be “diet and exercise.” The prospect of having to slim down vexes many people. Progress is usually slow, and it often requires lifestyle changes. Weight can return quickly if workouts or diets pause, a common occurrence around the winter holidays.

In many ways, GLP-1 medications seem like miracle drugs, almost out of science fiction — a way to lose weight by taking a shot or, maybe someday soon, merely swallowing a pill.

GLP-1s, short for glucagon-like peptide 1 agonists, were first developed nearly 20 years ago to treat diabetes. Now, they’re known for how well they can treat obesity and upend the stock market.

Several companies that develop devices or treatments for obesity-related ailments have seen stock price declines as news surfaces demonstrating GLP-1s’ ability to help people shed pounds and reduce other serious health risks associated with being overweight.

GLP-1s have reshaped the stock market in a way comparable to the upending impact of artificial intelligence (AI) in early 2023. But instead of lifting a large basket of stocks as AI did, investors turned away from companies without GLP-1 offerings, particularly those that develop products or treatments for obesity-related ailments. This punishment may not be warranted.

We believe it’s too soon to assess the long-term impact of GLP-1 drugs. Still, we suspect the market may have overreacted to GLP-1 developments based on the assumption that their use would soon become widespread and lasting. We doubt that knee replacements will become obsolete or that the need for diabetes treatments will diminish despite weight loss aided by GLP-1s.

We also believe the market may have overlooked several obstacles to treating obesity with GLP-1s, such as cost, insurance coverage and patients’ adherence to the drugs.

At the same time, we believe the market’s behavior toward high-quality companies in these sectors has left these stocks trading at attractive valuations for value investors.

What Are GLP-1 Medications, and How Well Do They Work?

GLP-1 drugs draw their origins from research decades ago into Gila monster saliva.¹ Scientists noticed that a hormone in the reptile’s saliva affected how cells metabolized sugar. They learned that the hormone behaved like the human hormone GLP-1, which causes the body to produce insulin after you eat. The GLP-1 hormone lets the brain know that you have had enough to eat.²

People with diabetes don’t produce enough insulin on their own, costing their bodies the ability to convert blood sugar into energy.

Amylin Pharmaceuticals and Eli Lilly developed exenatide, a drug that imitated the GLP-1 hormone and triggered insulin production after eating.³ Known commercially as Byetta^®, the Food and Drug Administration (FDA) approved the treatment for diabetes in 2005. But it requires twice-a-day injections, limiting its popularity.

From there, drug makers improved GLP-1s regarding their effectiveness and how patients took them. In 2021, Novo Nordisk received FDA approval to use Wegovy^® to treat obesity. Another Novo Nordisk GLP-1, Ozempic^®, is approved to treat diabetes, but doctors can prescribe its “off-label” (unapproved) use for weight loss.⁴

Studies Demonstrate Efficacy of GLP-1 Drugs

The drugs tend to deliver on their promise to help people lose weight.

One study showed adults taking Wegovy^® lost an average of 14.9% of their weight, while Eli Lilly’s drug Mounjaro^® helped adults reduce their weight by an average of 21%.⁵

These latest treatments represent long-sought improvements in weight-loss therapies. Past attempts at weight-loss drugs going back to the late 1800s proved troublesome for their severe side effects, ranging from heart valve problems to suicidal thoughts.⁶

A pair of recent studies underscored the effectiveness of Novo Nordisk’s GLP-1 treatments. The SELECT study showed a 20% reduction in major adverse cardiovascular events in obese adults taking Ozempic^®.⁷

The FLOW study showed that Novo Nordisk GLP-1 treatments stalled the progression of chronic kidney disease and ended a year early because its interim results gave strong enough indications of its effectiveness.⁸

Obesity Drugs’ Impact on Health Care Stocks

Novo Nordisk has enjoyed the GLP-1 ride. Shares of the Denmark-based pharmaceutical company were up 78.4% over the last year as of November 17. Company shares jumped 17.2% on August 8, the same day the SELECT study went public.

But it’s been a different story for medical device firms. Shares of companies that develop devices and therapies for conditions related to obesity appear to reflect assumptions that GLP-1s will severely damage their business models. This includes companies that develop treatments for diabetes, kidney dialysis, sleep apnea and joint replacement.

Take Zimmer Biomet, for example. After hitting a 52-week high this past summer, shares of this orthopedic medical device company steadily declined after news of positive GLP-1 studies. It appeared that the market assumed people who lose weight wouldn’t need joint replacements.

Zimmer has tried to address GLP-1s’ impact on its business. In October, for example, the company said obesity can contribute to osteoarthritis, a degenerative disease that may result in the need for a joint procedure even after weight loss.⁹

Zimmer said the estimated 10% of patients too obese for knee or hip replacements could pursue obesity treatments to help achieve weights at which they could safely seek these procedures. That would widen the range of patients using Zimmer products.¹⁰

Zimmer also argued that weight-loss drugs aren’t new, with some 660,000 people taking them annually, according to the U.S. Government Accountability Office. Yet, obesity rates haven’t slowed, while joint replacements have increased year over year.¹¹

Demand for Diabetes and Obesity-Related Treatments Should Stay High

Executives from Insulet, a provider of insulin pumps, have raised similar arguments as Zimmer’s. During a September conference, CEO James Hollingshead said GLP-1s are a “great innovation,” but he didn’t think they would soon impact Insulet’s market.

Citing 100 million people with prediabetes whose conditions would likely progress toward full-blown disease, he asserted the business opportunity for Insulet products remains. “Once you’re on the train, you’re on the train,” Hollingshead said.¹²

His argument dovetails with a broader view among some equity research analysts who think a lot more people will need treatments for health issues related to obesity or diabetes than there will be people taking GLP-1s for the next several years.

A Wells Fargo Securities analysis predicts that about 4.2 million people will use GLP-1 treatments for obesity by 2030, which works out to barely more than 3% of the forecasted population with obesity in that year.¹³

In our view, this suggests plenty of patients will still need products and services from companies like Insulet years into the future.

Still, Insulet’s stock is down nearly 41.2% over the last year as of November 11.

Abbott Laboratories CEO Robert Ford, whose company makes continuous glucose monitors, has also pushed back on the assumption that these drugs would be widely used in the coming years.

During an October earnings call, Ford discussed projections that show 10-15 million people would take these weight-loss drugs in the next five years.

“That’s a real small fraction of the size of these medical device markets that we’re talking about, right?” Ford said, adding that a half-billion people have diabetes and another half-billion have cardiovascular disease while allowing overlap between the two.¹⁴

Cost, Insurance Coverage Barriers to Obesity Drug Uptake

Even as hype spreads about the effectiveness of GLP-1s, assuming its widespread use any time soon may be premature.

For one thing, the insurance picture on GLP-1 drugs remains blurry. The list price on the latest GLP-1s ranges from $936 for a month’s worth of Ozempic^® to $1,349 for Wegovy^®.¹⁵ That’s a lot for most people to pay out of pocket, so many would turn to insurance if they had coverage.

Novo Nordisk estimates that 45 million Americans can access Wegovy^®, 30 million of whom come from the commercial insurance market and the rest from Medicaid.¹⁶

A survey of private employers issued in October found that 81% of respondents thought that their employees would be interested in GLP-1 drugs but that only 25% covered them in 2023, with more saying they planned to offer coverage in 2024.¹⁷

But Andrew Philip Witty, CEO of UnitedHealth Group, said during an October 13 earnings call that he hears client concerns about the cost.

“And we recognize the need, and nothing would make us happier, honestly, to be able to lean forward and see more and more folks take advantage of these sorts of opportunities,” Witty said. “But ultimately, it has to be affordable. And what we’re hearing from our clients is they just — they are really struggling to see how they embark on that journey of what they regard as a kind of open-ended financial risk.”¹⁸

Some 40% of Americans ages 60 and older are obese, which suggests an ample GLP-1 market for seniors.¹⁹ But Medicare can’t cover these drugs for obesity due to the 2003 federal law establishing Medicare Part D.²⁰ In July, congressional lawmakers introduced the Treat and Reduce Obesity Act (H.R. 4818) to remedy this coverage issue.

Regardless of what happens with Medicare coverage of GLP-1s, forecasts of GLP-1 penetration into the U.S. market appear modest.

In a recent note, Wells Fargo Securities calculated that 8.3 million people in the U.S. will go on GLP-1s for obesity and diabetes in 2030, which works out to 5% of those with obesity or type 2 diabetes.²¹

Navigating Health Care Opportunities in the Ozempic Era

We don’t doubt the benefits of GLP-1s for those struggling with diabetes or losing weight.

But our view is more mixed when it comes to the effects of GLP-1s on the stock market. It’s too soon to know the long-term effects of these drugs on the health care and medical device industries.

Nonetheless, we continue to find many health care stocks with attractive risk/reward profiles, even accounting for the modest impact of GLP-1 drugs.