Why Wall Street no longer fears sprawling impact from the weight loss drug craze
With the surge in popularity of weight loss drugs, chatter around their potential impact crescendoed into a chorus last fall, tanking the outlook for medical device and food and beverage stocks.
But the dark clouds are dissipating in 2024. The $100 billion-plus industry is still primed for growth — just not at the expense of others.
JPMorgan analysts covering medical devices said that, at January's JPM healthcare conference in San Francisco, the expected talk was missing.
"Thankfully, what we didn’t hear was mention of GLP-1’s — that bubble of fear and panic seems to have burst for the most part," the analysts wrote in a note.
GLP-1s like Novo Nordisk's (NVO) obesity drug Wegovy and diabetes drug Ozempic, as well as Eli Lilly's (LLY) weight loss drug Zepbound and diabetes drug Mounjaro, belong to a class of drugs that have been around since 2005. They work by slowing digestion and creating more insulin — but the latest formulations have shown record weight loss, which is driving their popularity.
The last quarter of 2023 became unexpectedly volatile for medical device, food, beverage, and restaurant stocks as a growing frenzy over the potential long-term impacts of these obesity and diabetes drugs drove a sell-off.
A lengthy report from Bank of America analysts in October started the fire, as it outlined possible declining sales for snacks, restaurants, tobacco, gaming, apparel, and food retail companies as consumers reduce their cravings.
But shares of restaurant chains like McDonald’s (MCD), Restaurant Brand International (QSR), Yum Brands (YUM), Wendy’s (WEN), and Chipotle (CMG), have since recovered from that drop.
The popularity of GLP-1s has not waned, and both Novo and Lilly are poised to see continued demand in 2024.
But at two recent conferences, Yahoo Finance noticed a lack of discussion about GLP-1's effects.
Medical devices
More weight loss could equal fewer bariatric surgeries, and the drugs promoting insulin production could eliminate the need for glucose monitoring devices, delivering a hit to the medical devices industry.
But the opposite has become true, as people became more interested in keeping track of their health. Continuous glucose monitoring (CGM) device makers like Dexcom (DXCM) and Abbott (ABT) have reported surging interest in the devices as a direct result of GLP-1 use.
Abbott said on a Wednesday earnings call that medical devices sales were strong in the last quarter of 2023, and CEO Robert Ford recently told Yahoo Finance he sees the trend continuing.
Company data shows “that people that were using the GLP-1s were actually using more Libre more often than those that weren’t using GLP-1s,” Ford said.
The Freestyle Libre is Abbott’s flagship CGM, raking in $5.4 billion in 2023 sales — a 24% growth year over year. Abbott reported $40.1 billion in total sales for the year.
And despite GLP-1s' success, some pharmaceutical companies are not chasing the trend.
Sanofi (SNY), which exited the space over a decade ago when other big pharma players also left, doesn't believe it can catch up to the current duopoly.
"You can't go back and close six, seven years of work that's been done on these studies and to try to catch up — even though there's a lot of appetite for it," Sanofi CEO Paul Hudson told reporters at the JPM conference.
JPM analysts shared a similar sentiment. They said in a note that Lilly and Novo have "the first mover advantage" and expect the market "to largely remain a duopoly over the next five to seven years."
Food and beverage
Meanwhile at the ICR conference in Orlando, which mostly features mid-to-large consumer-facing companies, a once must-ask on investor calls was scarcely heard, if at all.
Not a peep from executives at Domino’s (DPZ) and Papa John’s (PZZA), both of which saw stock prices decline in the fall as doomsday predictions frazzled investors' nerves.
But in December, McDonald’s CEO Chris Kempczinski told Yahoo Finance, “We're seeing no impact today with GLP-1s and ... nobody has any idea what the impact is going to be in the future.”
The Big Mac maker clocked an 8.1% gain for same-store sales in its Q3 results and is planning a record restaurant expansion.
TD Cowen analyst Andrew Charles credits a “cooling GLP-1 narrative” for quick service and casual chain’s valuation rebound from its 6-month low. The sector is also benefitting from “slowing interest rates” and “greater investor optimism for 2024 consumer spending [estimates]."
Restaurant demand in December stayed “solid” across fast food and casual dining, according to UBS analyst Dennis Geiger.
“We expect underlying restaurant demand and share of wallet should remain largely resilient over the coming months, even as we think relative restaurant spend could ease some in '24,” he wrote in a client note. Restaurant spending grew 12.5% year over year in December, up from 12.4% in November.
Several factors have staved off a true doom and gloom scenario. Side effects like nausea and dizziness cause some patients to stop taking the drugs within a year. There's scant insurance coverage for off-label use, so patients taking it for weight loss often shell out roughly $1,000 out of pocket for a month's supply.
“Accessibility to these drugs is really difficult, especially for the lower-end consumer,” former Wingstop CEO Charlie Morrison, who currently leads startup Salad and Go, told Yahoo Finance. This spells opportunity for chains to offer affordable, fresh food options to consumers, as the industry has become increasingly health-conscious over the years.
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Anjalee Khemlani is the senior health reporter at Yahoo Finance, covering all things pharma, insurance, care services, digital health, PBMs, and health policy and politics. Follow Anjalee on all social media platforms @AnjKhem.
Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].