The appetite for GLP-1 drugs grows

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SIMON BROWN: I’m chatting now with Keith McLachlan. He is CIO at Integral Asset Management. Keith, appreciate the time. The GLP-1 drugs – I just realised I don’t actually know what the GLP part stands for. Anyway, they are the weight-loss drugs. As the market’s looking at it at this point, Eli Lilly and Novo Nordisk are the two ‘poster childs’ at this point for the GLP-1 drugs.

KEITH McLACHLAN: Good morning, Simon. GLP-1 stands for glucagon-like peptide. It’s a synthetic hormone that regulates insulin production by the liver, blood sugar levels, appetite and everything. Actually Novo Nordisk and Eli Lilly were originally spending R&D on these synthetic hormones because their big product lines are actually in diabetes. And in terms of the clinical trials, they found an interesting side effect, and the side effect was weight loss, because what this does is it slows down your stomach emptying, and therefore reduces your appetite. If you eat less, well, guess what happens? You lose weight.

But touching on those effects, it’s not a new market. It’s a market as old as time, people wanting to lose weight and look good and do it in the easiest possible way, not with effort. But these drugs have real effects, reducing appetite. There tends to be about a 15-20% weight loss.

But they definitely are not cheap. There are various risks around them. And in fact, there’s quite a large R&D pipeline of other pharmaceutical companies coming to market for these sort of GLP-1s.

I think where we stand right now, one, these drugs are real. Two, there is a big demand for them. But to quantify the effects in the world, it is also quite interesting how it plays out. The market share as we stand is that Novo Nordisk has two-thirds of the market, and Eli Lilly has one-third. There’s about a percent scattered across a couple of others. But really it’s an Eli Lilly and Novo Nordisk market at this point.

SIMON BROWN: Having two companies essentially sewing up the market is great. Two problems there. One is, if it’s highly profitable, which it is, competition will be coming. The second of course is we are talking pharmaceuticals and at some point those patents expire. There’s always that kind of finite window if you are the leader in the pharma space.

KEITH McLACHLAN: So the R&D pipeline for the drugs, the GLP-1s competing with the existing Novo Nordisk drugs coming to market starts the back end of this year, let’s call it early next year, and kind of runs into about 2028/29. And there are multiples of this drug coming now.

Just appreciate a couple of things about the existing drugs in the market. First of all, they take the form of weekly injections. You literally get injected into your stomach and you cannot self-administer. You have to go to the doctor. So, one, that’s very uncomfortable. The holy grail of this drug is oral delivery; for example Pfizer is working on one, where you just take a tablet. And then two, the drug is very expensive. It ranges from about $900 to about $1 300 per month. That might not sound like a lot, but translated into rands that’s about R20 000 a month and your medical aid is probably not going to cover it.

The nature of weight loss is that’s a discretionary drug, and if you have diabetes and are using those drug for diabetes, or you are clinically obese and can prove some sort of claim there, the odds are your medical aid is not going to cover it. So it’s a big expenditure that’s not going to be covered, which is uncomfortable to administer. And in fact there are side effects here.

So this is very much a market up for grabs. The existing players have first-mover advantage, but by no means do they have this market wrapped up. And in fact I expect massive product deflation of it as competing products come to the market.

SIMON BROWN: Well, that’s just it –competing products which will push price down. But you wrote a point for Moneyweb earlier in the week, which is talking around [the fact that] eventually they come off patent. In this case, obviously Aspen, the plant down in in Gqeberha, is doing generics. You’ve also …. found Sandoz almost the easier way because they don’t have to spend the money. There’s the demand there, and they can do it patent-free at some point in the generics.

KEITH McLACHLAN: Certainly, certainly. One of the challenges with these drugs is that in the early days the demand outstripped the supply. So the FDA [Food and Drug Administration] for example, put it on the medical shortage list in America. What that means, interestingly enough for very logical reasons, if you are on the list of medicines in shortage in America, it means that your patent can be ignored and people can produce their own ones using your formula to address the shortage.

And so you’ve had various pharmacies and the like mixing their own GLP-1, which also has led to a spark in black-market stuff, a spike in problems like where people mix them wrongly and other things.

But the nature of the beast is yes, these drugs come off patent, the demand is there and someone could produce it more cheaply, and it’s the same drug chemically, the guys who spent R&D are in trouble.

SIMON BROWN: And Sandoz I’d never heard of until you mentioned it on a podcast recently. Essentially, as I understand, they were a generic maker and you found some conference they were talking to. They had five or six in their pipeline a couple of years ago. Today it’s 28. Generics is just ever-growing.

KEITH McLACHLAN: It’s an exciting industry. Sandoz is a good example. They were spun out of Nova Nordisk and, although they’re a very big generics company, in the generic space for biologicals the generic equivalent of a biological is called a biosimilar. And it’s far more complex to produce. There’s actually therefore a higher margin, but legally, patent wise, it follows the same kind of process. So once someone’s spent all the R&D it goes off patent, and if you know how to make biosimilars, you can be quick to market, you can ramp it up and you can make a very high margin very quickly with lots of volume.

Sandoz globally is the largest biosimilar player; they’re in the centre of these really nice tailwinds. But yes, there’s definitely opportunity in that sector.

SIMON BROWN: A quick one on Aspen because they made an announcement – was it earlier this year, perhaps late last year – that they would be doing some of these in their plants as well.

KEITH McLACHLAN: That was what my initial impression was. But I was actually incorrect in that article I wrote. Aspen wrote to me, and we’ve had an interaction. In fact, it’s more a distribution agreement is my understanding now. So I was wrong in that aspect, but this happens. We sit as outsiders and we work with the knowledge we have.

SIMON BROWN: A hundred percent. A last point. This is … order effects, and I’ve heard some talk around this. I don’t know how much you dug in, but if we’ve got everyone eating less, does this hit McDonald’s or the chip manufacturers as this plays out, because weight loss, as you said, is as old as time – everyone wants to weigh a little less – and suddenly we get those impacts coming through in other businesses, other industries.

KEITH McLACHLAN: So first of all quantify the signs of the market to quantify the effect.

Currently there are 20 million people taking GLP-1s in America, there are 20 million clinically obese people, but there are 100 million ‘just obese’ people in America.

With the drugs being expensive and medical aids not covering them, etc, and obesity being high in developed markets and emerging markets, maybe globally there are about 200 to 300 million that will end up taking this drug.

That’s about 2-3% of planet Earth, because there are about eight billion people on planet Earth. So this is not a drug everyone everywhere is going to take. It’s expensive, uncomfortable, it does have side effects and the like. And 2-3% of planet Earth are not going to suddenly stop eating and drinking. They’ll just eat and drink a bit less.

Walmart has noticed a shift in the basket where those who buy GLP-1s from Walmart stores tend to buy healthier products, etc. And, interestingly enough, they also tend to buy more apparel. If you lose a couple of sizes on your pants, you buy more pants, not necessarily shoes. But we’ll play it through. There might be some loss of volume.

Mondelēz, a large snack food company, has highlighted that they expect about a half percent or 1% loss of volume over 10 years. I think they’re talking their book. I think they might have a 1-2% volume loss over the next five years. So a bit worse than I expected, but that’s only a 1-2% volume loss.

And then if you look into the alcoholic beverages side, I think beers will be worse affected than spirits and stand back. In this sort of market the low-margin companies are more volume-sensitive. So for example for beer, which runs at about half the margin of spirits, the same volume loss will have a much more dramatic bottom line effect on them.

So if you want to understand the effects and/or protect your portfolio from it, rather go for the higher margin than the low margin. It will have headwinds in the alcoholic beverages, in the non-alcoholic beverages side, in the snack side. Call it 1-3% volume losses.

What is perhaps more interesting is that you, irrespective of what size you are, probably wear the same pair of shoes, but you will change your pants. So this might lead to outperformance of apparel versus shoes and things like that. It definitely has second-order and perhaps even third-order effects. We are till quantifying them, but I’ve tried to kind of put them in context here.

SIMON BROWN: I take your point. Maybe not as big as we think, but when you say apparel, Levi jumps to mind.

We’ll leave it there. Keith McLachlan, CIO at integral Asset Management, I appreciate the time.

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