PFE - Profiting From Obesity Drugs HRTS Novo Nordisk And Eli Lilly

2024-01-02 06:12:49 ET

Summary

• Spending on anti-obesity medication is increasing, with some individuals spending more on medication than on food.
• Novo Nordisk's semaglutide drug, sold as Wegovy, is in high demand and the company is struggling to meet the soaring demand.
• Expenditures on obesity drugs may eventually exceed spending on food, becoming an important indicator of a country's wealth and standard of living.
• The Tema Cardiovascular and Metabolic ETF may be a diversified way to invest in the boom in obesity drugs.

In my November 2014 Seeking Alpha Article, ARNA Management And Investors Underestimating The Potential Of Belviq And Phentermine Combination , I predicted:

…The obesity drugs which will be used in the future to treat obesity will have profound impacts on the economy. At some point the definition of an advanced economy might be one that spends more money on anti-obesity medication than on food….

Today, in regard to spending more money on anti-obesity medication than on food, my view is we're not there yet, but we're getting there. Already, there are some spending more for semaglutide sold by Novo Nordisk ( NVO ) as Wegovy, than most people spend on food. Without insurance, the list price of Wegovy is $1,349.02 per package, which breaks down to $269.80 per week or $16,188.24 per year. As has been widely reported, NVO cannot currently produce as much Wegovy or Ozempic, its' version of semaglutide that is approved for diabetes, but is widely used off-label for obesity, to meet the soaring demand.

The New York Times reported on October 22, 2023

..The drugs are driving such a bonanza that they account for almost all of the latest economic growth in Denmark, the home of Novo Nordisk...

The amount of dollars from coming into Denmark from NVO sales of Wegovy and Ozempic, has forced Denmark's central bank to lower interest rates in order to keep the value of Krone from rising too much against the Euro.

According to the U.S. DEPARTMENT OF AGRICULTURE, expenditures on food accounted for 12.8 percent of U.S. households' spending in 2022. Expenditures on food account for about 5.4% of US GDP, which means that they now are about $1.5 trillion. I still think spending on obesity drugs will eventually exceed spending on food, in advanced countries. Today, economists use statistics such as the number of telephones or automobiles per capita to differentiate between the rich, industrialized "first world" countries, and the rest of the world. In the future, the ratio between the amount a country spends for anti-obesity pharmaceuticals compared to what is spent on food, may be an important indicator as to the relative wealth and standard of living for a country.

The populations of industrialized countries such as the United States will probably spend more on anti-obesity medication than they do on food. Obesity-prevention medication is a more appropriate description of what consumers will be spending a greater percentage of their income on. That is, people will not actually be obese, but will require the pharmaceutical products in order to remain that way.

NVO's semaglutide is based on an imitation of glucagon-like peptide-1, known as GLP-1. Eli Lilly and Co. ( LLY ) also has two versions of their drug that imitates GLP-1, tirzepatide. Mounjaro approved for diabetes and Zepbound approved for obesity. Tirzepatide also targets a second hormone, called glucose-dependent insulinotropic polypeptide, or GIP. Zepbound has shown in trials, even greater weight-loss than Wegovy.

The PBS Newshour reported on November 8, 2023 :

..Touted by celebrities and on social media, semaglutide and tirzepatide drugs have already been in such demand that their manufacturers have struggled to keep up. Both have been listed on the FDA's drug shortage site for months…

Investment Implications

The sentence "At some point the definition of an advanced economy might be one that spends more money on anti-obesity medication than on food." Was originally in a book that I wrote in 1997, RICH AND THIN: Treatment of Obesity in the Twenty-first Century and Its Investment Implications . I was unable to get it published. The title came from the saying "You can never be too rich or too thin" that is usually attributed to the Duchess of Windsor.

As an obese person, I was obsessed with the goal of finding a drug or drugs that would allow one to be thin without the need of any diet or exercise. That has to be possible. We all know people who can eat whatever they want and remain thin. The difference between them and obese individuals is slight differences in hormones circulating in their bodies.

My hypothesis is that obesity exists because of when our neolithic ancestors began living in hunter-gather groups, natural selection worked in a manner similar to that of portfolio managers as described in modern portfolio theory and the capital asset pricing model.

Financial theory says that portfolio managers try to maximize returns while minimizing risk. In the Modern Evolutionary Synthesis, natural selection works in a way to maximize the population of a species while minimizing the risk of extinction. The tendency to gain more weight by storing more fat when food was available, and retain weight when food was less available, was beneficial for our neolithic ancestors. When a hunter-gather group was unable to find food, for an extended period, those genetically disposed to obesity would be the ones who survived.

Even in primitive hunter-gather groups, the tendency towards obesity was not always beneficial. Lean individuals could probably run faster and for longer, which would be a useful trait in terms of catching game or running from danger. Clearly there is some evolutionary factor which prevents the entire population from becoming obese, even when the trait of obesity makes survival of famines more likely.

Similar to the way in which portfolio managers diversify by including securities that will do well under some economic conditions and some that will do well under very different conditions, natural selection diversifies by including some individuals with a genetic tendency to store and retain fat and are thus more likely to survive during a famine and others with a genetic tendency to remain lean even when food is plentiful.

When I developed my hypothesis regarding the genetic basis of obesity, I was also in the investment industry, working for White, Weld & Co., which was the sixth largest investment firm when it was bought by Merril, Lynch in 1978. In 1974, I had read about experiments conducted by a Dr. Shahida Niazi at Northwestern University, which suggested that a chemical, perflourooctyl bromide had a certain molecular size that would block absorption of fat. It worked in laboratory rats. I flew to Chicago met with Dr. Niazi and some of his associates to discuss financing possibilities.

With great difficulty, I managed to obtain some of this experimental chemical from Du Pont and tried it on myself. The compound had previously been shown to be safe in studies testing its efficacy as an opaquing agent, (a chemical ingested to enhance X-ray contrast). This approach led to naught. However, I think this illustrates where I am coming from.

The unpublished 1997 book listed 20 public companies that were working on drugs to treat or prevent obesity and which drugs they were running trials on. NVO and LLY were on that list, along with some companies that no longer exist now. Diversification is always advised when investing in a new technology.

Along with writing the book, in 1997 I wrote and filed a prospectus for a mutual fund, the Metabolic Biotechnology Fund, which was to invest in the companies listed in the book. Due to office politics and infighting in the mutual fund group I founded, the Metabolic Biotechnology Fund never went effective.

While the book and mutual fund were unsuccessful, my quest for finding a combination of drugs that would allow me to be thin without the need of any diet or exercise, was eventually successful. My weight has gone from 303 pounds to 153 pounds. I am one of the best customers of Ben & Jerry's ice cream.

Exactly how the GLP-1 drugs work is still not completely understood, appetite suppression is certainly a factor. In the financial press and media, much focus is on the potential losers from the GLP-1 drugs, such as the fast-food and snack industries. However, if drugs eventually allow many to be thin without the need of any diet or exercise, the fast-food and snack industries could actually be winners.

In the mid-1990s there was much publicity about leptin. Leptin is a hormone that occurs in most mammals. Photographs of laboratory rats who were allowed to consume enormous amounts of food and become extremely obese, and then lose all of the weight after being given leptin and still allowed to consume enormous amounts of food and not gain weight, sparked much media excitement. Additionally, there were a few extremely obese individuals who were found to have a rare genetic condition, which prevented their bodies from producing leptin, who lost all of the excess weight when administered leptin. Legendary investor, Jim Rogers, a panelist on the CNBC "Strictly Business" television program, reacted to the 1995 leptin publicity with a recommendation to invest in sugar producers. That is exactly the opposite of what panelists on similar programs today are saying about NVO and LLYs obesity drugs.

Special Considerations When Investing in Technological Breakthroughs

Important technological innovations from the railroads to the internet have created vast fortunes. However, even some investors who get in early, end up losing. Remember Commodore Computers. As Warren Buffett has said about new technologies , first come the innovators, then the imitators and then the idiots.

Pharmaceutical companies are particularly vulnerable to rapid bad news induced falls. Pharmaceutical companies involved in anti-obesity drugs are extra vulnerable. In 1999 American Home Products Corp. agreed to pay as much as $3.75 billion to settle lawsuits over its Redux and Pondimin diet drugs. Belviq, the subject of my article mentioned above, was abruptly withdrawn from the market in 2020, when a study showed that there might be a possibility that Belviq increased the risk of cancer. The FDA called for the withdrawal of Belviq even though, the connection with cancer risk was not statistically significant.

All drugs have some negative side effects. However, anti-obesity drugs face much more regulatory scrutiny. If there was a drug that cured a disease such Alzheimer's disease and a non-statistically significant study showed that there might be a possibility that it increased the risk of cancer, the FDA would not call for its' withdrawal.

Even with good information, there are no sure things in pharmaceutical investments. In 1995, Amgen Inc. ( AMGN )., paid $20 million for commercial rights to recombinant human leptin, a record amount for a deal with an academic institution. In 2006, Amgen sold the rights to Amylin Pharmaceuticals. When Amylin began a trial of leptin in combination with their GLP-1 drug Symlin for obesity, my wife was in the trial and a lost considerable amount of weight. However, in 2011 Amylin and their partner Takeda Pharmaceutical (TAK) abandoned the study, presumably for side effects.

If obesity drugs become a multi-trillion-dollar industry, there is enormous amount of money to be made. I don't think there is much to be gained by investing in sugar or producers of similar highly caloric foods as Jim Rogers suggested in 1995 as a result of the leptin publicity or shorting the same companies in light of publicity around NVO and LLY's successful drugs as some have recently suggested. However, those now involved in non-pharmaceutical treatments for obesity such as bariatric surgery, probably should be worried.

Stock Recommendations

Even someone who has obsessively followed obesity drug developments for many decades such as me, has had mixed results in investing in obesity drug related stocks. My investment NVO and LLY have done well. Pfizer ( PFE ) has not done so well. Reuters reported on December 1, 2023 :

Dec 1 (Reuters) - Pfizer ( PFE) said on Friday it would not advance a twice-daily version of oral weight-loss drug danuglipron into late-stage studies after most patients dropped out of its midstage trial with high rates of side effects such as nausea and vomiting, and its shares fell 5%.

Pfizer has a once-daily version of the weight-loss pill still in the development. It hopes a change in the drug's release mechanism can reduce side effects, but early data on the new formulation will not be available until the first half of next year.

One issue with investing for the eventual success of obesity drugs, is that there are few pure plays. Large pharmaceutical companies frequently buy promising small drug development firms or their patents, early in the development stage. That also reduces the risk but limits the upside. However, if industrialized countries are eventually spending more on obesity drugs than food, there will a number of market cap stocks created as a result.

Picking which ones will be the winners, is a challenge, as was the case with the computers and the internet. With NVO and LLY there is a "self-hedging" aspect, since they presently are major suppliers of products such as insulin, whose demand will decrease as type 2 diabetes and other obesity related disease recede.

The imperative of diversification when investing in technological breakthrough was the reason for my filing a prospectus, for the Metabolic Biotechnology Fund in 1997.There now is an ETF focusing on somewhat similar securities. On November 20, 2023, the Tema Cardiovascular and Metabolic ETF ( HRTS ), which I am not connected with, started trading. HRTS invests in companies leading the fight against, obesity, diabetes and cardiovascular disease. I have not yet invested in HRTS, possibly out of bad memories regarding the Metabolic Biotechnology Fund, but I may do so in the future. The third and fourth largest holdings of HRTS are NVO and LLY, as is shown in the table below.

HRTS holdings as of 12-31-2023

Source: Created by the author with data from HRTS

Some may be dissuaded from investing in HRTS because of its' newness or small size. However, it could be a diversified way to become rich as many become thin via pharmaceuticals.

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