How weight loss could yield gains for investors
A new generation of anti-obesity drugs has the potential to reduce morbidity and improve health outcomes for millions of adults struggling to lose weight. Portfolio Manager Andy Acker and Research Analyst Luyi Guo explain the significance of the innovation for both patients and investors.
- Previous anti-obesity drugs resulted in mid-single-digit (%) weight loss for most people. A new class of therapies could more than double that amount – an outcome approaching what can be achieved through bariatric surgery.
- While millions of people struggle to lose weight through diet and exercise, only a small percentage of those who are eligible for pharmacotherapy use it. The efficacy of new anti-obesity drugs could cause that to change.
- Large biopharma firms – not small-cap biotech – are driving the innovation, underscoring why investors should take a diversified approach when seeking growth in the sector.
While much of today’s biopharma research focuses on rare disease or severe illness such as cancer, advanced drug development continues across many disease categories. In fact, one of the more exciting breakthroughs that has taken place in the last 12 months is in obesity. And while small-cap biotech typically leads drug innovation, in this instance, large-cap biopharma is driving the science. The advance is occurring at a time when rising interest rates and a potentially slowing economy have lifted the appeal of cash-rich biopharma, and in our view, is a prime example of why investors should take a diversified approach to the sector.
Anti-obesity therapies leap forward
Anti-obesity drugs have been available for decades for those struggling to lose weight through diet and exercise. But the drugs have had limited effect, typically resulting in mid-single-digit (%) weight loss for most patients, with side effects that make it difficult to stay on the medications long term. The alternative, bariatric surgery, is more effective but can result in post-surgery complications, often requires pre-surgery weight loss and is unavailable to most people.
A new generation of anti-obesity drugs has the potential to improve on these options. Last year, the U.S. Food and Drug Administration (FDA) approved Wegovy, a weekly injection of a compound that mimics the GLP-1 hormone, which targets areas in the brain that signal “I’m full.” In clinical trials, people given Wegovy lost an average of 15% to 16% of their body weight after 68 weeks. The trials consisted of adults with obesity (defined as a body mass index (BMI) of 30 or greater) and adults with a BMI ≥ 27 and a weight-related health problem, such as high cholesterol.
Another therapy, tirzepatide (brand name Mounjaro), was recently approved for diabetes and could carry even more promise for obesity. Last month, data from the first phase 3 trial showed that people who are obese or overweight and who took tirzepatide for 72 weeks saw average weight loss of up to 22.5% (over 50 pounds of weight loss). Tirzepatide mimics two hormones that help regulate body mass and food intake, and the level of efficacy shown in the phase 3 trial approaches the weight loss of some bariatric procedures.
Average weight loss: early generation drugs vs. new medicines
Source: "Anti-obesity drug discovery: advances and challenges," Nature Reviews Drug Discovery, as of 23 November 2021; European Medicines Agency, as of 10 March 2022; Eli Lilly & Co., as of April 2022.
Note: Results reflect change in body weight from baseline. Tirzepatide results are for the highest dose tested (15 mg).
A potentially significant market opportunity
While the science behind these medicines will continue to evolve, the direction of travel is extremely encouraging. With an average weight loss in the single digits, older-generation anti-obesity drugs had benefits, but were insufficient to materially change health outcomes. The data for Wegovy and tirzepatide are so promising that many believe we are on the cusp of a new era for treating obesity.
We share that view and think the market opportunity could be substantial. More than 40% of the global population is expected to be obese or overweight by 2030.1 Since excess weight is a contributing factor to a number of conditions, including diabetes, heart disease and cancer, the cost of treating obesity-related issues adds up to trillions of dollars (USD) annually. In fact, a remarkable two-thirds of all treatment costs for diabetes are thought to be linked to obesity.2 And yet, given the limited efficacy of earlier drugs and the prevailing stigma that weight loss has more to do with willpower than anything physiological, only a small percentage of people who are eligible for pharmacotherapy use it (approximately 2% in the U.S.3).
That could change. A few months after Wegovy launched in June 2021, we conducted a survey of primary care physicians and endocrinologists to gauge their view of this new therapy. Among respondents, 40% had already prescribed the medication, and none reported negative feedback from patients. We think that percentage could grow, especially if tirzepatide receives regulatory approval and continues to deliver positive results.
Insurance coverage will be a key factor in the rate of adoption by patients, particularly in areas outside the U.S. where reimbursement of anti-obesity drugs is limited. But the risk/reward benefit of the medicines – particularly if they are shown to reduce the rate of major cardiovascular events – could prompt insurance coverage to expand.
As old biopharma leads the way, a reminder for investors
It’s also noteworthy that the new anti-obesity drugs were developed by large pharmaceutical firms, which have spent decades studying the same hormones for the treatment of diabetes. Given the scale of the unmet need in obesity, the drugs could prove an important addition to the firms’ product portfolios. In our survey, doctors said more than half of their patients were overweight (55%), and that diet and exercise were often not effective on their own. Obesity, like high blood pressure, is a chronic disease, so patients who start on treatment and experience both weight loss and improved health outcomes could take the drugs for the long term.
In our view, the anti-obesity revolution is a reminder of the scope of potential growth opportunities in health care and why it’s important to take a diversified approach to investing in the sector. Undoubtedly, small-cap biotech is likely to remain a leader in drug innovation, but medical breakthroughs can happen anywhere. With ample cash reserves, deep-seated knowledge and commercial firepower, large-cap biopharma has the means to open up big avenues of growth. Investors taking too narrow a view could miss an important turn.
Health care industries are subject to government regulation and reimbursement rates, as well as government approval of products and services, which could have a significant effect on price and availability, and can be significantly affected by rapid obsolescence and patent expirations.
Smaller capitalization securities may be less stable and more susceptible to adverse developments, and may be more volatile and less liquid than larger capitalization securities.
Diversification neither assures a profit nor eliminates the risk of experiencing investment losses.
1“Overcoming obesity: An initial economic analysis,” Dobbs, Richard; Sawers, Corinne; Thompson, Fraser; et al., McKinsey Global Institute, November 2014.
2“The Heavy Burden of Obesity: The Economics of Prevention,” OECD Health Policy Studies, 2019.
3“Antiobesity drug therapy: An individualized and comprehensive approach,” Yael Mauer, MD, MPH, Marcie Parker, PharmD, BCACP and Sangeeta R. Kashyap, MD; Cleveland Clinic Journal of Medicine, August 2021.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
Please read the following important information regarding funds related to this article.
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- Shares of small and mid-size companies can be more volatile than shares of larger companies, and at times it may be difficult to value or to sell shares at desired times and prices, increasing the risk of losses.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- The Fund may use derivatives to help achieve its investment objective. This can result in leverage (higher levels of debt), which can magnify an investment outcome. Gains or losses to the Fund may therefore be greater than the cost of the derivative. Derivatives also introduce other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund may incur a higher level of transaction costs as a result of investing in less actively traded or less developed markets compared to a fund that invests in more active/developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.