Weighty Matters

by Carl Tannebaum, Chief Economist, Northern Trust

2024 is upon us.  We hope that the old year concluded well, and that you are all excited about the possibilities offered by the new one.

January witnesses a seasonal surge in gym memberships.  The trend is founded on new year’s resolutions and the guilt of holiday binges.  According to Statista, exercising more, eating in a healthier manner and losing weight are three of the top five goals that people establish as the calendar turns over.

But I am wondering whether I will see the same crowds on the treadmills this year, and in the years ahead.  The advance of the new generation of appetite suppressors has become a game changer for many who struggle with their weight.  The economic consequences of the new drugs could be profound.

A number of countries around the world struggle with high rates of obesity.  The condition is associated with greater risk of heart disease, strokes, diabetes and some cancers.  The consequences for those afflicted can be severe; the consequences for societies are high medical costs, reduced labor force participation and less-than-optimal allocations of capital.  A 2020 study from the Milken Institute estimated that the costs of obesity in the United States run close to 7% of gross domestic product.

Obesity has a series of causes, which range from biological to behavioral.  Remedies have typically focused on the latter: people have been encouraged to follow strict diets and to get regular exercise. Unfortunately, many communities do not have access to fresh groceries or fitness facilities.  Results of lifestyle changes are inconsistent, and the benefits of these strategies are often fleeting.  According to Johns Hopkins, most people who succeed in losing significant amounts of weight regain it within two or three years.

While some attribute that outcome to a lack of willpower, scientists have shown that evolutionary biology shoulders much of the blame.  Our bodies reduce metabolism in response to reduced caloric intake, and continue to generate impulses to consume.

It is that impulse that has been the subject of the new generation of medications.  Known as GLP-1 agonists, products like Ozempic, Wegovy and Mounjaro regulate chemicals in our systems that trigger feelings of hunger.  They slow the rate at which our stomachs empty and may also increase energy expenditure.  Originally approved for the management of diabetes, studies show that these products produce lasting weight loss and reduced risk of related conditions like hypertension.

The benefits to many individuals are clear.  In the aggregate, GLP-1 drugs are poised to produce a demographic benefit.  Improved health and longevity should enhance labor force participation and productivity. The data also show that reduced obesity increases fertility.  For societies that are aging, these would be welcome developments.

There are an estimated 700 million people worldwide who are challenged with obesity, so the potential market for GLP-1 drugs is massive.  Morgan Stanley estimates that nearly 7% of Americans will be using these products over the next decade.

The new class of obesity drugs are not for everyone.  Apart from the side effects that can appear in some patients, the medications are very expensive.  Reuters estimated the cost of Ozempic at $1,000 per month.

A number of insurance companies are limiting coverage, and even those with good insurance plans will find themselves bearing significant out-of-pocket costs.  GLP-1 drugs prescribed for weight loss are not currently covered by Medicare in the U.S.; most European national healthcare programs also exclude them.  Economically disadvantaged communities, which have a disproportionate incidence of obesity, may struggle to access and afford the treatments.

Overall and over time, however, the new medications have the potential to reduce health care outlays.  Governments bear the responsibility for providing care to many of their citizens, and the bill for doing so is an important component of national budgets.  Aging and infirm populations threaten to make this an expensive proposition; GLP-1 drugs may bend this cost curve and help keep national debts sustainable.

The impact of GLP-1 medications is being mentioned more and more frequently in corporate earnings calls.  On one side are the pharmaceutical companies: makers of the drugs have seen their share prices skyrocket.  On the other side are a whole host of companies whose business models are based on people’s cravings and their efforts to break free from them.  Curbed appetites will limit demand for snacks, fast food and diet products, and traditional weight loss programs may lose popularity.  Insurance companies will have some hard work ahead to reprice health, disability, and life policies.

Based on data from his pharmacy and grocery sections, the U.S. Chief Executive Officer of Wal-Mart reported that people taking Ozempic are buying less food.  Share prices of food and beverage companies have slumped, even as the overall market has rallied.  Makers of medical products that deal with the consequences of obesity have also seen their market values decline.

Some of this may be an overreaction, an emphasis on potential over the present. Advancing acceptance and application of GLP-1 drugs will be a long process that could encounter any number of twists and turns.  But while artificial intelligence is getting the lion’s share of attention as a major economic innovation, the new weight loss drugs also have the potential to be transformational.

Selfishly, I will be happy if GLP-1 treatments reach their full promise.  My fitness center is pretty crowded at the moment, and I often have to wait to access my favorite machines. It would be nice to get a workout completed in less than two hours.

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