European espresso: Are obesity drugs a game changer for European pharmas?

GLP-1, a class of obesity treatment drugs – alongside AI – has probably been the biggest story in equity markets over the past year. So why is this? Well, first of all, it is an absolutely huge market. The World Obesity Federation estimates that around half of the global population are overweight, and about a quarter will be obese by 2035. And up until now, there has been no efficacious treatment, with the only alternative really being very invasive gastric surgery. So after decades of research, we are finally at a point where we have had a very big breakthrough with GLP-1s being shown to be capable of reducing body weight by up to 20%.

The other thing to think about here is GLP-1s have been shown to have positive impacts on certain co-morbidities that if you are obese, you typically have to live with. And the early evidence is very good that GLP-1s can have a positive impact on serious cardiovascular events amongst potentially some other things as well.

So in Europe, the direct focus has been on Denmark, and in particular the company Novo Nordisk. Some smaller companies have also been caught up in the positivity around the story including, actually, another Danish company – Zealand Pharma. And if you look at the healthcare sector within Europe, there has been absolutely massive dispersion in stock-level performance over the past 12 months.

So just to put some numbers on it, Novo Nordisk has returned 70% over the period. Zealand 113%. And at the same time, the French pharma company, Sanofi, has been flat. The shares have been flat. And Roche has actually been down a bit. So very big stock-level dispersion.

And to focus on Novo, this is a company with a hundred years of experience with diabetes care. A hundred years of experience in an area that has led them into focussing on obesity. They operate in what could be known as a global duopoly with Eli Lilly, the American company. And they have the first scale efficacious GLP-1 weight-loss drug that has come to the market in the US. A product known as Wegovy.

So what are people thinking about when they look at Novo here? Rather than focussing on the past, what are they considering when they think about what is going to happen in the future? So there’s a few key debates here. The first is coverage. And what I mean by that is how much of the population, in the US initially, but globally beyond that, how much the population actually have insurance coverage to pay for GLP-1s.

So in the US at the moment, that is about 50 million people. Fifty million obese people have insurance coverage. How quickly that builds from here, and that is really in the hands of the insurance companies themselves. So how quickly it builds, especially in the light of these GLP-1s being shown to improve other comorbidities; how quickly it builds is key.

The other factors that people are looking at – competition. Novo Nordisk does not operate in a vacuum. I already mentioned Eli Lilly, I mentioned Zealand Pharma. There’s also Amgen on the horizon with potentially efficacious treatments for obesity.

And the second issue in this part of it is capacity. So supply has been a massive issue. Now this is partly a good problem to have for companies like Novo and Eli Lilly because the fact is that the demand has so far exceeded supply that it has caused these supply constraints. So it has been a positive thing for them really. But supply is improving. And Novo have recently constructed a deal to buy a company called Catalent, who produce some of the finish-fill capacity for Novo Nordisk and other companies. That should help on that front as well.

And finally, as ever with an equity, with a share price, we are thinking about the growth and the quality on offer. But we have also got to think about valuation. So on average, the sell-side analysts are expecting (who knows if this happens or not), about 20% growth for Novo Nordisk over the next 12 months. And the sector, the analysts on the sell-side are expecting more like mid-single digit growth. But for Novo Nordisk, you pay a big premium for that. You pay 30x PE. So that is a key debate, is the valuation appropriate for the current offer? That is something that as investors you have to answer.

So what about the wider impacts outside of pharma? Well, initially, the market has taken a negative view on a couple of areas. So food and beverage has been the second-worst performing sector in Europe over the past 12 months. You know, the actual evidence, pretty mixed as to the impact that GLP-1 drugs may have on the consumption on various types of food and drink. However, as ever, the market acts first. The market looks at a potential negative and looks to address that in the share price of the companies potentially impacted.

So we have seen food producers badly impacted over the last 12 months. The other area is dialysis providers. So this is a smaller part of the market. There is a German company involved in this area as well as some US companies, and those companies have been negatively impacted.