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Market Pulse
Monday, October 16, 2023

Weight loss economics

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

We have three interconnected stories this week:

  1. From GPT 4 to GLP-1
  2. Knock-on effects
  3. A contrarian view

Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Adrian (Portfolio Manager), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) From GPT 4 to GLP-1

Suppose you gathered a group of people and asked them about the most impactful business story of the year. You'd undoubtedly hear a chorus of Artificial Intelligence. After all, just this past April, Goldman Sachs predicted that Generative AI could raise global GDP by 7% (or almost $7 trillion) and lift productivity growth by 1.5 percentage points over a 10-year period [1]. Nothing could beat such ground-breaking innovation in 2023, right? 

However, the latest wave of weight-loss medications, which you're likely familiar with by now, is poised to take the spotlight away from AI, and it's not hard to see why. Obesity-related expenses are staggering, estimated to cost the US economy between $1.4 to $1.7 trillion annually [2], or nearly 7% of the GDP annually. That's a magnitude 2-4 times greater than Goldman's audacious AI prediction.

GLP-1 is a hormone that our bodies use as an internal messenger. It plays a role in various functions, including stimulating the pancreas to make insulin. This role caught the interest of diabetes researchers, leading to the creation of a synthetic version of GLP-1 known as semaglutide. In 2017, Novo Nordisk introduced semaglutide to the US market, branding it as Ozempic.

Initially, the scientists developing semaglutide faced a problem - higher doses caused appetite loss in patients. Ozempic was created with a lower amount to minimise this side effect. But Novo quickly realised this appetite suppression could be a benefit, not a drawback. Thus, they formulated a higher-dose weight-loss version, Wegovy, which gained approval in 2021.

One indication after another, semaglutide's string of conquests seems to know no bounds. On October 11, Novo Nordisk halted the Phase 3 kidney trial (FLOW) early, as the interim analysis met efficacy criteria. The trial tested semaglutide's effect on delaying renal damage and reducing mortality in Type 2 Diabetes patients with kidney disease. It was semaglutide's third promising indication for approval, following Non-Alcoholic Fatty Liver Disease and Cardiovascular Disease [3].

The news sent shockwaves through the MedTech sector. A Bloomberg Global Index tracking medical technology peers has lost -10% since Wednesday, with dialysis companies like DaVita and Fresenius Medical down -18% to -20%. In addition, traders have been betting close to $1 billion against restaurant stocks in the last month alone [4]. Is the reaction justified, or have we reached peak hysteria regarding the impact of GLP-1s?

2) Knock-on effects

There's no doubt that the potential for meaningful societal change is massive. In America, 70% of people are obese or overweight [2]. Corporate America, thus, faces a pressing question: How does a consumer who is less hungry and more resistant to impulses impact our business model?

For some in the medtech space, this is an existential question. Indeed, several companies, including Dexcom (glucose monitoring), Insulet (insulin delivery), Abbott Laboratories (cardiovascular products), and Zimmer Biomet (orthopaedics), have published slides [5] addressing the issue, arguing that there will be either little or no impact or potentially a positive impact from GLP-1s on their businesses. 

But, to date, none of these arguments has done more than cause a temporary pause in the selloff. That's partly because they are trying to disprove a long-term negative (most agree that the impact of GLP-1 is at least a few years away) and partly because the data has been complex to translate directly to effects on their companies, causing uncertainty. 

Beyond medtech, companies, from retailers to food manufacturers, are weighing up how much to factor GLP-1s into their strategies. John Furner, CEO of Walmart's US operations, recently said the retailer is seeing a "slight pullback in the overall basket" of food purchases due to the drugs [6]. The comments have helped drive a market reaction, pushing the S&P 500 Consumer Staples Index down 0.5% on the day [7].

Less obvious knock-on effects include the impact on the apparel industry. People could initially splurge on clothes to fit their new bodies, but less variation in body shapes could mean fewer wardrobes to accommodate different "selves" in the long term. Gyms may seem obsolete in a world where nobody needs to lose weight, but sports where fitness is a prerequisite stand to benefit. Airlines bosses are thrilled: analysts at Jefferies estimate that United Airlines could save $80m per year in fuel costs if its customers lost an average of 10 pounds [8].

The consequences won't manifest overnight with an Ozempic prescription costing $1,000 per month [9]. Yet, an ongoing debate revolves around whether the net impact on Corporate America will be positive or negative. Some argue that the typical Ozempic user is unlikely to trim their monthly grocery, dining, and alcohol budget by $1,000, thus making a net contribution. If that's the case, it raises an interesting question about whether corporations can collectively increase their profits by charging people not to use their products rather than by selling those products.

3) A contrarian view

It's clear that GLP-1 is a significant breakthrough set to improve the lives of many. However, concerns about how weight-loss drugs might affect both the food and medical technology industries should be reflected on carefully, as for now, most of the projections are based on guesswork. 

Take the $1trn-plus food industry, for example, driven by long-term trends like urbanisation, busy lives and a growing middle class, which are set to continue into the next decade. The potential reduction in calorie consumption is expected to be relatively modest. If, over the next five years, the percentage of long-term users of these drugs among US adults increases to 10%, the projected decrease in calories consumed over this period would be just 2.5%, translating to an annual reduction of approximately 0.5%, according to a study by Bernstein [10]. 

Similarly, in MedTech, the names perceived to be exposed to GLP-1 risk, serve markets that are very large and underpenetrated. Investors have been quick to infer that lowering the obesity and diabetes burden could impact the growth curves of these names. Still, the addressable markets are so large and growing that even some improvements in the disease progression would likely only scratch the surface of the opportunity ahead [11] [12]. 

Lastly, orthopaedic companies like Stryker, Smith & Nephew, and Zimmer are down between -15% and -25% since mid-July, as obesity contributes to osteoarthritis. But with circa 10% of patients being too obese to undergo a hip or knee replacement, GLP-1s could have the positive effect of expanding their addressable market by bringing inoperable patients into the funnel [5]. While studies show that weight loss can delay some knee surgery [13], osteoarthritis is also a degenerative disease related to movement and wear and tear. So ironically, losing weight can cause patients to move more and receive more knee replacements, which other studies have shown [14].  

Initial market reactions may prove accurate over the long run. However, similar to Generative AI, it'll take time to determine the real winners and losers. What's clear is that the current market uncertainty presents an opportunity to discover companies that might be undervalued. It's a dream environment for stock pickers like us.


Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.


[1] https://www.goldmansachs.com/intelligence/pages/generative-ai-could-raise-global-gdp-by-7-percent.html

[2] https://milkeninstitute.org/sites/default/files/reports-pdf/Weighing%20Down%20America%20v12.3.20_0.pdf

[3] https://www.sidekickmoney.com/market-pulse/paypals-stablecoin-pay-by-palm-and-a-weightloss-blockbuster-drug

[4] https://www.bnnbloomberg.ca/ozempic-risk-higher-rates-fuel-short-bets-on-restaurant-stocks-1.1982241

[5] https://investor.zimmerbiomet.com/~/media/Files/Z/ZimmerBiomet-IR/reports-and-presentations/assessing-the-potential-impact-of-glp1s-final2.pdf?

[6] https://www.bloomberg.com/news/articles/2023-10-04/walmart-says-ozempic-weight-loss-drugs-causing-slight-pullback-by-shoppers

[7] https://www.bloomberg.com/news/articles/2023-10-06/ozempic-threat-is-causing-a-selloff-in-candy-and-beer-stocks

[8] https://www.businessinsider.com/ozempic-wegovy-weight-loss-drugs-airlines-fuel-costs-savings-2023-10?r=US&IR=T

[9] https://slate.com/technology/2023/07/ozempic-costs-a-lot-it-doesnt-have-to.html

[10] https://www.economist.com/business/2023/10/12/weight-loss-drugs-are-no-match-for-the-might-of-big-food

[11] https://www.medtechdive.com/news/tandem-diabetes-insulin-pump-use-growth-insulet-dexcom/611065/

[12] https://s201.q4cdn.com/758408164/files/doc_presentation/2023/06/Investor-Day-Presentation_June-2023.pdf

[13] https://orthoinfo.aaos.org/en/treatment/weight-loss-and-joint-replacement-surgery/#:~:text=Healthy%20weight%20loss%2C%20while%20not,the%20need%20for%20joint%20replacement.

[14] https://evidence.nihr.ac.uk/alert/obesity-should-not-rule-out-knee-replacement-surgery/

[15] https://www.morganstanley.com/ideas/obesity-drugs-food-industry

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