Starry-eyed venture capitalists love to talk about how promising startups might capture a chunk of a giant total addressable market (TAM). This concept can also work in reverse, though. New anti-obesity drugs have the potential to transform public health, while obliterating demand for products and services from the medical, food and fitness industries. Think of them as total unaddressable markets (TUM).
Drugs developed by Novo Nordisk and Eli Lilly appear to be the first truly effective diet treatments. They work by targeting receptors in the brain that reduce appetite and help people feel fuller for longer. Originally developed to tackle diabetes, they’re gaining traction as treatments for obesity. In one clinical trial, patients taking Eli Lilly’s soon-to-be-launched weight-loss drug lost about 50 pounds (23 kg). The benefits for public health are potentially huge. In August, Novo said Wegovy, its obesity drug, reduced the incidence of serious cardiovascular events like strokes and heart attacks by 20% in overweight patients who have a history of heart disease but don’t have diabetes.
Sales are already soaring. Last year, Novo sold nearly $2.5 billion worth of Wegovy and Ozempic, its treatment for people with diabetes. Analysts expect that figure to balloon to $16 billion by 2027, according to forecasts compiled by Visible Alpha. Demand for the medicines, collectively known as GLP-1 drugs, far exceeds what manufacturers can currently produce. Yet excitement has lifted Novo’s market capitalization to $420 billion, making it Europe’s most valuable company. Lilly, whose diabetes treatment is called Mounjaro, has seen its market value nearly double to more than $500 billion in under 18 months.
Such a dramatic revolution in public health will also produce losers, though. The drugs are designed to suppress appetite, mimicking a gut hormone which is released after eating. During trials, patients showed reduced appetite and even an aversion towards food generally. This has the potential to affect giant groups such as Switzerland’s Nestlé, Cadbury and Oreo maker Mondelez International and Kraft Heinz. These companies dominate a global market for snacks which is currently worth more than half a trillion dollars in revenue per year and is expected by Fortune Business Insights to expand to nearly $840 billion by 2029. Fast food groups like McDonald’s, Burger King and KFC owner Yum Brands could also face shrinking or shifting demand.
The potential impact on the medical industry could be even bigger. Over 40% of Americans are obese, according to the Centers for Disease Control and Prevention, and that number has increased by nearly 40% over two decades. Obese people are more likely to suffer from cardiovascular disease, various cancers, arthritis and dementia. In 2016 the Milken Institute estimated the medical costs associated with obesity in the United States at nearly $500 billion a year. A 2021 study published in the BMJ projected that costs from reduced health and higher absenteeism worldwide would rise 50% by 2060.
The adoption of anti-obesity drugs remains hard to gauge. At a cost of about $1,000 per month, it’s unclear whether insurers and public health authorities will fund widespread treatment. Side effects can also be harsh. Only about a third of those who started taking the drugs for obesity were still doing so a year later, according to one analysis.
Any destructive impact is therefore likely to be gradual. Even so, investors are beginning to fret. We scanned transcripts of corporate earnings calls, presentations and other events tracked by LSEG for mentions of Wegovy, Ozempic and Mounjaro — excluding those hosted by Novo and Lilly. In 2022 there were 18 such events. So far this year, at least one of the drugs has been mentioned 71 times.
Among the potential losers are firms like ResMed and Inspire Medical Systems, which make products that treat sleep apnea, a condition where patients intermittently stop breathing while asleep. Around 70% of sufferers are obese. On a call with investors in August, ResMed CEO Michael Farrell said he thought weight-loss drugs wouldn’t have a major impact on the company’s future sales because the treatment is harsh and its cost would discourage many patients from taking it long term, while awareness of the effects of obesity could push patients towards apnea treatment. Even so, ResMed’s stock has since lost about a third of its value.
Meanwhile, companies selling joint replacements such as Zimmer Biomet and Smith+Nephew could see their $25 billion and $11 billion values slimmed. These two firms earn about two-thirds and 30% of their revenue, respectively, from hip and knee implants. One study estimated about a quarter of surgical cases involving knees could be avoided if patients weren’t overweight. Rival weight management treatments also look vulnerable. Since June 2021, when Novo Nordisk’s first obesity drug gained regulatory approval, shares of WW International, formerly Weight Watchers, have collapsed about 70%, despite the company unveiling a plan to distribute weight-loss drugs.
Economic destruction could spread further afield, too. Anecdotal reports and trials on animals suggest GLP-1 drugs may also dampen urges beyond snacking, including consuming alcohol, nicotine and possibly engaging in other addictive behaviors like gambling.
These changes may have limited impact or affect only a small number of users. But any reduction in addictions could have big effects. The gambling and alcohol industries tend to display so-called Pareto distributions, where a few users provide most of the profit. In England, for example, 4% of drinkers account for 23% of the industry’s revenue, according to a study in the journal Addiction. And the top 20% most engaged gamblers using an online casino operated by the Canadian government made up 92% of revenue and 90% of losses.
Widespread adoption of GLP-1 drugs could also produce corporate winners as consumers divert cash previously spent on food and medical care. Plastic surgeons may benefit if patients seek nips and tucks following weight loss. Dating services like Match and Grindr may attract newly confident users. Fashion brands and sporting goods groups could get a lift from people seeking new wardrobes or embracing athletic pursuits. Yet even as Novo, Lilly and others see their addressable markets expand, some companies will see theirs shrink. For investors, the TUM may be just as important as the TAM.
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