Actively Speaking Podcast
Steve Bleiberg, portfolio manager and thought leader at Epoch Investment Partners, Inc. (TD Epoch) takes on current topics and issues facing today's investor.
Actively Speaking Podcast
The GLP-1 Revolution
In 2023 we saw the explosion in popularity of drugs to treat obesity, known as GLP-1s and attractive returns for their manufacturers. With the popularity showing no signs of diminishing in 2024, Quality Capital Reinvestment Analyst Tim Wengerd, who covers health care companies, joins to discuss the implications for investors. Looking beyond health care, Tim and Steve also explore what other types of companies may be impacted by the wide use of GLP-1s.
Important Disclosures:
For institutional investors only. TD Global Investment Solutions represents TD Asset Management Inc. ("TDAM") and Epoch Investment Partners, Inc. ("TD Epoch"). TDAM and TD Epoch are affiliates and wholly owned subsidiaries of The Toronto-Dominion Bank. ®The TD logo and other TD trademarks are the property of The Toronto-Dominion Bank or its subsidiaries. The information contained herein is distributed for informational purposes only and should not be considered investment advice or a recommendation of any particular security, strategy or investment product. The information is distributed with the understanding that the recipient has sufficient knowledge and experience to be able to understand and make their own evaluation of the proposals and services described herein as well as any risks associated with such proposal or services. Nothing in this presentation constitutes legal, tax, or accounting advice. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Certain information provided herein is based on third-party sources, and although believed to be accurate, has not been independently verified. Except as otherwise specified herein, TD Epoch is the source of all information contained in this document. TD Epoch assumes no liability for errors and omissions in the information contained herein. TD Epoch believes the information contained herein is accurate as of the date produce...
Hello, and welcome to Actively Speaking. I'm your host, Steve Bleiberg. Join us each episode as we discuss current issues concerning capital markets and portfolio management from the perspective of an active manager.
Speaker 2:Welcome to another episode of Actively Speaking, and today we are going to be talking with Tim Wingard. Welcome Tim.
Speaker 3:Thank you. Uh ,
Speaker 2:Tim is , uh, like me, is a member of our capital reinvestment team here at, at , uh, TD Epic . And one of the areas he focuses on is healthcare. And we're gonna talk about , uh, something that was big last year, but it was kind of dwarfed. Uh, the people were so focused on the performance of the magnificent seven stocks. Uh, all those, you know, those tech related names that they kind of missed that under the radar. There were a couple of , uh, large drug companies , uh, one in the us , one in Europe that were doing quite well on the back of the , uh, market expectations about these new obesity drugs that they are selling. And , uh, they go by the name of , uh, Glip ones. Am I getting that right? That's what these drugs are called . You got it. Uh, originally developed for diabetes about later found to have , uh, weight loss in it . Tell, tell us how these drugs came to be.
Speaker 3:Yeah, so these products are decades in the making. There were plenty of stops and starts and a little bit of luck along the way, but just a detour. So in the eighties, researchers started to identifying gut hormones, including GLP ones or Glip ones and Glip one, it increases glucose dependent insulin secretion and it slows down digestion. So the initial problem though is that as they were discovering, these is like Glip ones or GLP ones that our bodies produce , it gets chopped up by enzymes that are body produces right away. So it only lasts a few minutes and you can't really make a , a product out of something like that. So that was the first challenge. And so in the nineties, a Danish scientist or a team of scientists and discovered that, you know, if by attaching long fatty acid chains with a little spacer in it, if they, they could just modify GLP-1 a little bit and it would essentially hide it in our blood. And so the duration of effect would, would last much longer. And that, you know, that became the first GLP one drug liraglutide, and that entered clinical trials like way back in 2000. So, you know, more than two decades ago, that's how long they've been working on these products. And so as the data rolled in, liraglutide showed that, oh, you know, these people were losing weight as well as controlling their blood sugar. It's not just, it's not just a type two diabetes product. You know, at first, you know, management wasn't necessarily convinced that obesity was going to be a big, a big market for liraglutide. I mean, honestly, the scientists that had been working on GLP ones, Glip ones, they had always intended liraglutide to treat both diabetes and obesity. But it wasn't until the data started showing it that the companies thought like, yes, this, this could potentially be a market for us. Mm-Hmm. <affirmative> , um, you know, semaglutide was , uh, the Dan's Next Gen , Glip one, this is Ozempic, this is what people talk about now. Uh , so that reduced calorie intake by around 35% compared to only 15% for Liraglutide. So why is it so much more effective? You know, I think that this is still an open question. The Danish scientists that led that program thinks that semaglutide chemical structure makes it a little easier to slip into the brain and signal feelings of fullness. So that's what the Danes were doing. Of course, the Americans weren't sitting still. Um , we have large pharma companies here as well, and one in the Midwest, they were working on finding additional gut hormones that might supplement or improve , uh, the, the amount of weight loss that a GLP one produced . Um, and they found one GIP. So , um, tirzepatide is a combination of a GLP one with a GIP. So that's the product that we might know is Zep or Manjaro. So those are the main products that we have on the market. Tirzepatide and Semaglutide at this point. So just in summary, you know, these products are decades in the making , um, even if only now they've become household names.
Speaker 2:Okay. So that's , uh, that's a , that's a background how we got here. So what is the size of the , uh, prospective market for these drugs? I mean, the stocks did quite well last year for these companies that, that we're referring to. Um, I mean on up on the order of like 60% or so last year, and they've both kind of doubled over the last couple of years , um, which is, which is a big move for companies that were already large. Um , so what, what does the market seem to be thinking that is the size of the prospective market for this and how does that compare to some of the other, you know, widely , uh, prescribed drugs out there? Like say statins?
Speaker 3:Yeah, so like, okay, let's look at , uh, 2023. So Semaglutide had sales of a little over $20 billion, and Tirzepatide had sales of a little over 5 billion, so call it 25 or 30 billion market last year. Okay. So just to put that in perspective, we all remember, or we all know Covid vaccine sales , uh, covid vaccines. Those sales were almost 60 billion in 2022. So we're still half of where the Covid vaccines were at their peak. You know, another category, so people have probably heard of or seen commercials for Humira, that is a TNF blocker. TNF blockers are used to treat immune disorders. So that category has global sales of a little over 40 billion. So again, smaller than TNF blockers. Uh, another, you know, immuno-oncology drugs, PD one and PD L one inhibitors are very , that's a very large category. Keytruda is the one that people might know those drugs sell as a category. Oh , they sold almost 40 billion a year. So we're still smaller than some of these larger categories of drugs. Now, of course, you mentioned the performance of the stocks, like expectations are clearly much greater than 25 or 30 billion a year . So, you know, if I look at consensus expectations out in 2030, I mean , it's more like a hundred billion a year is where expectations are right now that are, are published. So, so with a hundred billion a year, well, if I look at the entire, the entire global market for biologics, that that's around 400 billion. So a hundred, another a hundred billion between now and 2030. I mean, that's the, that's a bit like adding more than three points of growth , uh, on top of the growth rate for biotech products.
Speaker 2:Okay. Well, so we'll come back , uh, in a few minutes we're gonna come back to talk about, you know, how, how realistic that those expectations are because of some of the assumptions behind them. But let's , uh, talk about something else first. Something that I find fascinating is the impact that these people are assuming that these drugs are gonna have. First of all, on the need for treatments for other diseases. You know, it's like if, if you think about a cancer treatment, if, if it cures you of cancer, great. But it does , it's not like it necessarily , uh, changes your life or your demand for other , uh, types of healthcare that much. I mean, it , it keeps you alive. So of course, if , if anything it increases your demand for a future healthcare 'cause you'll still be around. But with these drugs, it's really fascinating to see what people are speculating about how, you know, if, if you could get a lot of obese people or overweight people to lose weight, the impact that that would have on their demand for other healthcare products and services might actually decrease. So let's start with just the impact within healthcare. What , what, what are the biggest impacts , uh, you know , thought to be at this point?
Speaker 3:Yeah, so obesity and the metabolic problems that cause it increase the risk for a litany of, of other conditions. So the risk of type two diabetes increases about 3.4 times given obesity. The risk for end stage kidney disease that increases 3.6 times increase of getting osteoarthritis, that's three times higher. So , um, the , you mentioned cancer, the risk of getting a host of cancers increases not as dramatically, but it , it, it's higher and , and then the risk of getting Alzheimer's is, is two times higher. So, you know, if I think about the amount of, if I think about the healthcare spending that are, that that's already going to treat all of these, these other conditions, like I can kind of, you know , you can add up a trillion dollars of spending, you know, of course blip ones won't eliminate all of these conditions, but we can imagine that this is going to have , uh, a big impact on spending elsewhere within the healthcare system.
Speaker 2:Yes. Well, that's kind of ironic actually, so that, you know, that this is something that would increase, there would be huge demand for <laugh> , uh, for this product, which at the margin increases spending on healthcare. But then , uh, the marginal effect of that might be to actually more than offset that and , and an even greater reduction in spending on other drugs , uh, and, and procedures and so forth. Which, which would be , uh, sort of ironic. Um, again, we'll come back to whether this is all realistic or not and , and unintended consequences and so forth. But , um, let's, let's turn our attention to the world outside of health direct healthcare impacts . 'cause some of the things you're seeing people writing about are really kind of fascinating things like, well, if, if everybody is , uh, you know, if, if the average weight of of the population goes down, then then planes will be able to fly with less fuel and , you know, calorie consumption will go down and impact on food companies. I mean, this, this could have really far reaching effects. Tell us about some of the, the things you've , uh, seen people speculating about and how realistic they're
Speaker 3:Yeah, so the airlines won . That was fun. That <laugh> that was entertaining. I think like that estimate , uh, started, well, so in 2018 , airlines started printing their magazine on lighter paper and it cut an ounce from each magazine. So this weight savings, it was, it was expected to save like 170,000 gallons of fuel and then almost $300,000 a year in fuel savings. So the thought is like, okay, well if you can save that much with one ounce on each magazine, like how much are you gonna save when everyone's on a GLP one? And someone ran the math on that and they came up with like, oh, this is gonna save, you know , 0.7% of on fuel ex expenses. Okay. I mean, I guess so, you know, like if I think about it simplistically, let's say 40% of people on an airplane take a clip one and they lose 10% of the weight, that's 4% , right? But then you have to add in the weight of the airline and all the luggage and things like that. So like, maybe, maybe it saves 1% in weight, but like I , you know, I'm not a physics major, but from what I understand, most of the kinetic energy that an airplane produces goes into fighting drag, not not lifting weight. So yeah, I mean, maybe it saves a little bit, but course stretch it out over years, eh ?
Speaker 2:Yes . And of course the airlines, if that was the case, if everybody was really smaller, they would just cram in another row or two of seats and bring back all that weight. So , um, but anyway, let , let's talk about some other things besides the airlines. Yeah . You know, what, what other examples have you got?
Speaker 3:Yeah, I mean, I think, so I mentioned semaglutide reduces calorie intake by, you know, perhaps 30, 35%. So if you think well, like fewer calories, that means less food. Um, and you know , food companies get questions like this, like <laugh> , oh no, what's gonna be the impact of GLP ones in our business? But, you know, I think like, let's say that if you are someone that wants to lose weight, you start taking GLP one and you're like, okay, I'm gonna change my habits. I'm gonna change what I eat, and things like that. Maybe you change , reduce the number of calories, but you're changing the type of food that you eat or you're changing other parts of your life. It , you know, fewer calories does not necessarily mean fewer dollars in terms of food. And, you know, another example is, you know, alcohol, you know, if just looking at surveys from people that are on GLP ones self-reported, a quarter of them will say that they're drinking less alcohol. I mean, a, it's self-reported, so take it with a grain of salt. And B like, you know, 1% of the, about 1% of the US population already has a script for these products. I , I don't think the alcohol companies have really noticed an impact so far. So, I mean, it's still a question mark. I guess just generally speaking, like if we run the math on calories, maybe there's a low single digit impact on calorie intake in the us but then again, stretch that out over several years of adoption, the impact is gonna be really small.
Speaker 2:And one of , one of the things I think I've read about, correct me if I'm wrong, is that , um, people also on the sort of self-reported basis are reporting reductions in sort of compulsive type behaviors, whether it's overeating, but also things like gambling , uh, you know, things that people didn't really felt they couldn't control that they're finding they're doing less often. Is , is that showing up?
Speaker 3:Yeah, it's, it's certainly self-reported and there's, there are ongoing trials to, to understand if GLP ones can be a help , uh, can be helpful in reducing addictive behaviors. You know, and I think that introduces another big question that I have that I think is really important for the category is, is Alzheimer's. That , you know, there's a big question about whether Glip ones will reduce the risk of getting Alzheimer's. And, you know, the US already spends, you know, depending on where you look, maybe $300 billion a year on, on things like medications, doctors visits, hospital stays, long-term care and lost wages for family member members all related to Alzheimer's, whatever the right number is. It's, it's large and it's tragic. Um, and the Danish scientists that kind of led this development for semaglutide, that's what they're focused on right now. The truth is we don't really know, but if one is to be optimistic about treating Alzheimer's with Glip ones, it's probably that, you know, insulin resistance in the brain may lead to the plaques and the tangles caused by Alzheimer's disease. Whatever the mechanism, it does seem like Glip ones are, are impacting the brain, which could affect , um, addictive behaviors or , or maybe even help treat Alzheimer's or reduce the risk of Alzheimer's.
Speaker 2:Okay. Very interesting. Okay, so now I said we were gonna come back to something, which was all , all the stuff we've been talking about, about all these very far reaching impacts, they're all premised on the assumption that people will stay on these, on these drugs, that when they start taking clip ones, they will keep taking them. And , uh, the evidence that's, so far, it's been a relatively short time that large numbers of people have been taking them, but the evidence so far actually is not that convincing that that most people will stay on them . What , what is , what do the numbers look like?
Speaker 3:Yeah, so the first real world data on adherence suggested that maybe only a third of people taking the products for weight loss are still on them after one year. That's pretty low. So call it a third on the low end might be the adherence rate. Another thing that I , I would look at or I've looked at is, you know, what are , what about other medications? Um, and what are the adherence rates for those? And like even when there are tangible consequences of non-compliance, HIV medications or psoriasis or things like that, the adherence rate tends to only be a little over 50%. Um, and you know, right now these, these products are mostly injectables, so that adds a little bit of a complication for some , uh, a little bit of a wrinkle for some people. If we look at, on the positive end for adherence, like if we look at earlier Glip ones mainly used for type two diabetics. The adherence rate was like around two thirds, or, you know, close to 70%. You know, of course that population using them probably had a different mindset in that they were taking them to manage diabetes and probably had been trying other approaches. So we don't really know, but yeah,
Speaker 2:So well, I mean, so in addition to the fact that it's an injection, which obviously will turn some people off, there's also, there are side effects like , uh, nausea and so forth. I think for in , in some percentage of people do sort of react badly to these drugs, right?
Speaker 3:Yeah. That's the biggest side effect by far is, is nausea.
Speaker 2:Okay. Um, let's, let's finish up with , uh, something. So one of my favorite topics in on any, in any area is sort of the iron law of unintended consequences that I just think is something that people never really take into account. You know, what are the unintended consequences? So, you know, in the case of these drugs, for example, I mean we, we talked earlier about how it could reduce spending on all sorts of other healthcare problems if people don't encounter those problems because they're not overweight. But I, I kind of have this gut feeling that , uh, no pun intended, that , um, you know, people always find other ways to, to do stupid things. <laugh> , I mean, I don't know how else to put it. Yeah . But if they stop overeating, you know, if they , if they're no longer fed , they're gonna , they're gonna do other things that we're not even thinking about that could well lead to other, you know, healthcare problems for them . I mean, what, you know , what, what do you think about that?
Speaker 3:Yeah, I, I could not agree more, and I wish I , I don't really know what will be the next thing. It , it's kind of like, it's kind of like, what is that game like hitting the mole?
Speaker 2:That a whack-a-mole
Speaker 3:Whack-a-mole. Yeah. It's kind of like whack-a-mole in that Yes. You know, now we have Glip ones, this helps, but something else is gonna happen. This is, this probably isn't gonna be the end of whatever treatments we're developing. And, you know, I think many of the healthcare companies are in our portfolio, they make products for illnesses that can be thought of as, as evolutionary mismatched diseases. I'm going on a tangent here, but I will connect it, I promise. <laugh>. So like for a hundred thousand years we lived in small groups of hunter gatherers . Then, you know, five or 10,000 years ago, you know, farmers and herders came along and they tended to dominate. And now we've had industrialization for a couple hundred years. How most of us live would be completely unrecognizable and unimaginable to our ancestors. Like even 10 generations ago, you know, at the time of the first US census, so we're talking like 1790, 90% of the population in the US lived on farms. Like , and , and now that's just like a , a few percentage and single digits. So the way we've lived is completely different. And from an evolutionary perspective, our bodies have had no time to adapt. Right. And
Speaker 2:The way we eat is completely different.
Speaker 3:Yeah. It's completely different. Like the amount of activity we have during the day, like we're sitting in a nice office right now. This is, this is just foreign to the environment in which our body's evolved. And, you know, now we have increases in rates of illnesses like type two diabetes, Alzheimer's allergies and immune disorders, myopia, dental mal occlusions, illnesses that as near as we can tell Hunter gatherers didn't have, if we're not really addressing the underlying issue, then yeah, it , it just seems like a , uh, a game of whack-a-mole that could continue. Now, I am not saying that we would be better off if we all live like hunter gatherers. Oh darn . There , there are trade-offs to modern living, which I think is what you were getting at and, and most of us would prefer to live now versus 10,000 years ago. You know, many of the healthcare companies in our portfolio, they have significant businesses treating what, what I'm calling mismatched diseases, which will probably continue to proliferate as people choose to adopt modern lifestyles. You know, of course we are looking for businesses with high returns on invested capital that are sustainable in our judgment. You know , it's not as simple as just buying a company that is developing a really cool product that could have a big , a big impact. It's, you know, we want to understand the underlying drivers for that product demand, and we want to have some comfort that the company's expertise will probably be in high demand as the world develops.
Speaker 2:Yeah . Well as long as we're on this tangent to when you, this reminds me of the, there's that book Sapiens, you know? Yeah . A few years ago, I , was it Yuval Harra ? Is that the interest name ? Yeah . Yeah . And if I'm remembering it correctly, he was kind of making the argument that humans kind of took a wrong turn <laugh> when they went from being hunter-gatherers Yeah . To focusing on agriculture germs . 'cause uh, well, and , and and you know , um, the idea that now you had to worry about somebody stealing your crops and you had to worry about is it gonna , am I , is there gonna be bad weather this year and I'm not gonna have a good harvest reading it? I remember thinking, I, I thought, I thought he was kind of idealizing the life of the hunter gatherer because it's not as if they lived a worry-free existence. Right. You know? Yeah.
Speaker 3:Just read Stephen Picker's book.
Speaker 2:Yeah. We just replaced one set of worries with another. But that's kind of the point is that, you know, that always happens that when you, you fix one thing and then something else pops up. Yeah . Uh , because that, you know, that maybe didn't pop in the past because the, the first, you know, certain diseases that are diseases of old age, for example, we never had to deal with when people didn't live as long as they're living now. And so there's always Right . There's always gonna be something that's gonna come along, so Right.
Speaker 3:But like as humans, we're a really adaptable species. We'll probably figure it out. It's probably gonna be okay, but it might take a while .
Speaker 2:Yeah . Okay. Well , uh, this has been very interesting. Uh, Tim, thanks for joining me and , uh, thanks for listening and we'll see you again with another episode sometime soon. Thanks. Remember to
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