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Daily Intelligence Briefing

Wednesday, February 28, 2024

Identifying Change-Driven Investment Themes

The Daily Intelligence Briefing is published by McAlinden Research Partners. The report is provided to Hedge Connection blog readers once per week for free. Below is just one of the five sections that delivers Change-Driven Investment Themes everyday.


I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

GLP-1 Obesity Drugs Likely to Have Significant Impact on Biopharma Share Prices and Non-Healthcare Sectors

Summary: The development of a new GLP-1 receptor agonist at Viking Therapeutics helped the company’s shares surge by 150% this week – a testament to how impactful the deployment of new obesity treatments have been in the US thus far. Novo Nordisk and Eli Lilly, which have rolled out Wegovy and Zepbound, will seek to consolidate their massive market share in this class of pharmaceutical products, but they will need to compete with an increasing number of competitors in the pipeline. 


The broader impact of weight loss drugs throughout the healthcare sector and the US economy at large will be profound. Insurers and government healthcare programs may find themselves overwhelmed by their elevated prices in the near-term, but hundreds of billions of Dollars in savings may eventually be attributable to the products throughout the next few decades. Snack food companies could find themselves in the crosshairs, as GLP-1s nearly decimate Amercians’ grocery spend, but clothing retailers and even airlines could stand to benefit.


Related ETFs: VanEck Pharmaceutical ETF (PPH), SPDR S&P Retail ETF (XRT)

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Earlier this month, MRP highlighted the potential addressable market for popular diabetes and weight loss therapies utilizing glucagon-like peptide 1 (GLP-1) receptor agonists, some of which have been as high as $200 billion. Goldman Sachs has forecast that Novo Nordisk and Eli Lilly will control a combined 80% share of market for anti-obesity drugs by the end of the decade. Those two companies have built on successful diabetes therapies in Ozempic and Mounjaro, rolling out Wegovy and Zepbound for weight loss. While these two companies will try to consolidate their first-mover advantage, similar drugs are already in the pipeline to challenge their products that have already faced shortages over the last year. Just yesterday, a mid-stage study at Viking Therapeutics showed the company’s experimental VK2735 drug (an injectable GLP-1 agonist) helped patients struggling with obesity lose an average of nearly 15% of their body weight throughout the 13-week trial period. That is a significantly higher rate of weight loss than the 8% decline witnessed in the first 13 weeks of Zepbound’s Phase 3 study. Participants in Lilly’s trial ended up losing 22.5% of their body weight on average after 72 weeks on Zepbound. Other companies working on GLP-1 agonists, with varying levels of success, include pharma giants Amgen and Pfizer.


Novo Nordisk parent company Novo Holdings acquired pharmaceutical manufacturing company Catalent for $16.5 billion in February to boost the fill-finish process, which involves filling and packaging syringes and injection pens, for Novo Nordisk’s injectable weight loss therapies by 2026. Catalent sites were already manufacturing Wegovy, but Novo Holdings sale of three Catalent sites to Novo Nordisk for $11.0 billion will further concentrate the production capacity of these facilities. As part of Novo’s Q4 2023 earnings call, Novo’s head of North America operations, Doug Langa noted that the company has been trying to overcome the high prices associated with scarce supplies by restricting supply of starter doses to new patients. Per Langa, the company is “doubling the amount of the lower dose strength of Wegovy compared with the previous months,” enabling more patients to start. “We will gradually be increasing the overall supply throughout the remainder of 2024,” he added.


Once patients get started on these drugs, which can begin to work within the first monthly dose, the data has shown that it is very hard to get off of them without risking a reversion to weight gain. A 2022 study funded by Novo Nordisk, and cited by The Wall Street Journal, found that patients regained two-thirds of their lost weight a year after they stopped taking semaglutide, the main component of Wegovy. A separate study following patients who had taken tirzepatide, the compound in Zepbound, for 36 weeks – losing almost a fifth of their bodyweight on average. After that period, half of the participants continued to take a high dose of tirzepatide for a year while the other half received a placebo shot.  Even with diet modifications, exercise, and counseling, those in the placebo group gained back 14% of their body weight on average. Participants who continued taking tirzepatide lost an average, another 5.5% of their body weight.


While it is clear that GLP-1 agonists will have a profound impact on the biopharma industry, investors should also examine some of the externalities that may result from the widespread use of commercial weight loss therapies.


As we have previously noted, the American Medical Association (AMA) suggests that about 42% of Americans suffer from obesity, up from one-third a decade ago – a stunning pace of increase. The AMA chalks up nearly half of the total cost of American chronic disease to obesity. Though some have warned that the $1,350 per month price tag on just four Wegovy auto-injectors (one dose per week) could be a burden in the short term for insurers and government health plans, a recent USC Schaeffer paper, cited by Barron’s, argued that Medicare coverage of obesity medicines would save the program more than $700 billion over 30 years by mitigating the cost of other conditions associated with or caused by chronic obesity. The so-called “Ozempic effect” extends far beyond healthcare, however.


The most obvious impact of GLP-1 agonists is a drop in consumption of food – particularly snacks. A recent Morgan Stanley cited data from Numerator, showing that monthly household grocery spending decreased by 6% –  9% versus non-GLP-1 residences when adjusting for factors including household size and income. Snack foods were among the most heavily impacted products. Americans currently spend an average of about $500.00 per year on snack foods, according to findings from Moonstruck Chocolate.


Numerator’s data showed 12.3% of households said they had a member taking a GLP-1 agonist in January. If we extrapolate that figure across the US adult population, it would be equivalent to nearly 32 million patients. Novo has estimated that about 50 million obese Americans could be eligible for Wegovy coverage under their current health plans, with four out of five paying less than $25.00 out of pocket per month. While sustained weight loss might cut spending on food out of the budget, spending on new clothes could potentially supplant that decline. In particular, spending on activewear could rise if a Wegovy or Zepbound regime is paired with increased exercise. Even the travel industry could be impacted by widespread weight loss among Americans. Jeffries analysts recently estimated that United Airlines Holdings Inc. would save $80 million per year on fuel expenses if the average passenger weight were to fall by 10lbs.  All in all, Goldman Sachs sees GLP-1 agonists adding a net 0.4% to the US’s GDP if  30 million Americans take them. This addition to the economy could rise to a full 1.0% with 60 million users.

THEME ALERT – LONG Pharmaceuticals

MRP added LONG Pharmaceuticals to our list of themes on June 16, 2022 amid huge cash balances among pharma firms and rapidly declining biotech valuations opening up opportunity for the former to bolster pipelines with a trove of new drugs at a major discount. Though we’ve specifically highlighted the looming prominence of pharma industry “patent cliffs” throughout the next several years, noting that they are likely to increase M&A activity throughout the biopharma industry, recent dealmaking by Novo Nordisk shows that big pharma can also leverage their cash balances to boost the supply chains of in-demand drugs. A recent PwC report notes that the biopharma industry is looking for assets that can start to provide value from 2024 as patent cliffs have put about $180 billion in revenue for the largest companies at risk in the 2023 through 2028 time frame.


According to an RBC count, the cumulative value of biopharma deals in 2023 topped $128 billion, more than doubling up on $61 billion in deals in 2022. EY’s 2024 Firepower report, which assesses the capacity of pharma companies to execute M&A deals based on the strength of their balance sheets, found that the top 25 companies have $1.37 trillion on hand to make deals. These assets can be deployed by pharma firms to bolster their drug and therapeutics pipelines as the weak performance of publicly traded biotech shares, compounded by massive layoffs and other economic disruptions to business at privately held operations, has made valuations increasingly attractive to possible big pharma buyers. Through the first eight months of 2023, a Fierce Biotech analysis shows the number of biotech companies that cut staff matched the total for full-year 2022, with 119 firms reporting workforce reductions. Per a recent survey commissioned by CRO Icon, 48% of biotechs are now using partnerships with big pharma firms as a financing method. Further, VC funds are expected to total just $24 billion for the year—the lowest tally in four years, according to PitchBook data.


Attractive prices, combined with particularly strong cash positions of large pharma companies will allow the pharmaceutical industry to ramp up the expansion of their pipelines at a favorable value. Since the initiation of this theme, the VanEck Pharmaceutical ETF (PPH) has returned 24%, thus far underperforming the S&P 500’s increase of 38% over that same period. Since the start of the new year, however, PPH’s gains have outpaced those of the S&P 500 amid Eli Lilly and Novo Nordisk floating to the top of the fund’s holdings, respectively.


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