by Ling Han, M.Sc., MBA, CFA®, Analyst, AGF Investments Inc.
The market enthusiasm for glucagon-like peptide 1 (GLP-1) drug makers has been undeniable since the more effective second-generation GLP-1 drug was approved by the U.S. Food and Drug Administration (FDA) for treatment of Type 2 diabetes in December, 2017, and then rubber-stamped for use in treating obesity three and a half years later.
Shares in the only two biopharmaceutical companies currently in market with the drug have vastly outperformed the average healthcare stock since the obesity label approval, rising 299% and 341%, respectively.
But these names and others working to bring additional GLP-1 products to consumers aren’t the only ones potentially impacted by the latest pharmaceutical phenomenon. We believe subsectors of the Healthcare sector may be affected in both positive and negative ways as well, including medical technology firms, managed care and pharmacy benefit managers (PBMs), and providers of life science tools and contract development and manufacturing organizations (CDMOs).
Medical Technology
The two areas of the medical technology subsector that we expect could be influenced most by GLP-1 are related to diabetes devices and bariatric surgeries. Of the former, companies manufacturing continuous glucose machines (CGMs) are of particular relevance, with some studies showing their use increasing since the introduction of GLP-1 drugs.
This increase can be attributed to something known as “companion therapy” that is believed to provide better outcomes in people living with Type 2 diabetes because of its potential to improve certain aspects of treatment such as proper drug dosage and the promotion of various behavioural modifications deemed necessary for long-term health.
The growing market for GLP-1 drugs may also impact companies that make insulin delivery systems (i.e. pumps), yet not likely to the same degree. In fact, we believe GLP-1s will have an immaterial effect on pump utilization in the foreseeable future because Type 2 diabetes patients – for whom GLP-1 drugs are approved — represent just 5% of total insulin pump users.
Meanwhile, on bariatric surgeries, GLP-1s have caused some near-term disruptions as patients try to achieve weight loss through therapeutic treatment alone. However, in the longer term, we anticipate that GLP-1s could be a tailwind – not a headwind – if they help patients lower their Body Mass Index (BMI) to levels deemed safe for surgeries of this kind.
U.S. Managed Care and Pharmacy Benefit Managers (PBMs)
The use of GLP-1 drugs to treat obesity could be a positive for pharmacy benefit managers that can generate more fees and greater spreads from an increase in drug volume. This is true across two important coverage markets: employer health insurance and government programs (such as Medicare and Medicaid), which combined cover roughly half of the U.S. population.
Still, there are potential limitations to this opportunity. For instance, weight management drugs are explicitly banned through Medicare right now and are only covered in very limited fashion through Medicaid.
Meanwhile, some employers may be naturally hesitant to expand coverage to obesity drugs due to high employee turnover rates in the short term that could undermine potential long-term benefits of such coverage, which may include the avoidance of extended employee sick leaves from a reduction in obesity-related surgical procedures.
As such, bigger employers with longer-tenured workforces – or those that are warring for talent with competitors – seem more likely to cover GLP-1s in their benefits packages. According to AllianceBernstein, large employer coverage of the drug could expand to 50% in 2025 from percentages ranging in the 40s currently, yet the total employer market coverage is still only around 20 to 25%.
Life Science Tools and Contract Development and Manufacturing Organizations (CDMOs)
We believe subsectors that are part of the GLP-1 manufacturing value chain may be the most obvious beneficiaries of the drug’s growing market potential – at least beyond the drugmakers themselves. And this is especially true in the supply-constrained environment of today.
More specifically, Life Science Tools companies are critical to the process. Not only do they provide instruments, resins, ligands, filters and other apparatus that biopharmaceutical manufacturers need to produce active pharma ingredients (API), but they also make parts of the auto-injectors or syringes required for their final products.
Contract development and manufacturing organizations (CDMOs) are also hugely important as providers of “fill-and-finish” services that include procedures such as filling syringes as well as labeling, packaging and quality inspection before the drugs leave the manufacturer. Indeed, this may be the biggest bottleneck in the current capacity constraints impacting the segment.
Ultimately, then, it’s not just the biopharmaceutical companies who manufacture GLP-1 drugs that stand to gain from their growing acceptance as a treatment for Type 2 diabetes and obesity. Other segments of the Healthcare sector may benefit as well, meaning more options and avenues to play the theme than surely some investors may have realized.
The views expressed in this blog are those of the author and do not necessarily represent the opinions of AGF, its subsidiaries or any of its affiliated companies, funds, or investment strategies.
Commentary and data sourced from Bloomberg, Reuters and other news sources unless otherwise noted. The commentaries contained herein are provided as a general source of information based on information available as of June 20, 2024. It is not intended to address the needs, circumstances, and objectives of any specific investor. The content of this commentary is not to be used or construed as investment advice, as an offer to buy or sell any securities, and is not intended to suggest taking or refraining from any course of action. Every effort has been made to ensure accuracy in these commentaries at the time of publication, however, accuracy cannot be guaranteed. Market conditions may change and AGF Investments Inc. accepts no responsibility for individual investment decisions arising from the use or reliance on the information contained herein.
This document may contain forward-looking information that reflects our current expectations or forecasts of future events. Forward-looking information is inherently subject to, among other things, risks, uncertainties and assumptions that could cause actual results to differ materially from those expressed herein.
For Canadian investors: Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), AGF Investments America Inc. (AGFA), AGF Investments LLC (AGFUS) and AGF International Advisors Company Limited (AGFIA). AGFI is registered as a portfolio manager across Canadian securities commissions. AGFA and AGFUS are registered investment advisors with the U.S. Securities Exchange Commission. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. The term AGF Investments may refer to one or more of these subsidiaries or to all of them jointly. This term is used for convenience and does not precisely describe any of the separate companies, each of which manages its own affairs.
AGF Investments entities only provide investment advisory services or offers investment funds in the jurisdiction where such firm, individuals and/or product is registered or authorized to provide such services.
Investment advisory services for U.S. persons are provided by AGFA and AGFUS. In connection with providing services to certain U.S. clients, AGF Investments LLC uses the resources of AGF Investments Inc. acting in its capacity as AGF Investments LLC’s “participating affiliate”, in accordance with applicable guidance of the staff of the SEC. AGFA engages one or more affiliates and their personnel in the provision of services under written agreements (including dual employee) among AGFA and its affiliates and under which AGFA supervises the activities of affiliate personnel on behalf of its clients (“Affiliate Resource Arrangements”).
® ™ The “AGF” logo and all associated trademarks are registered trademarks or trademarks of AGF Management Limited and used under licence.
RO:20240702-3666051
