GLP-1: the wonder drug strikes again with a kidney punch

What happened

Novo's Clinical trial hits remarkable success, ending a year ahead of schedule

Following the independent Data Monitoring Committee's recommendation to evaluate the results of the FLOW trial, which began in 2019, Novo Nordisk stopped the trial one year earlier, thanks to promising interim results. Independent monitors can recommend stopping a trial early if there is clear evidence that a drug will succeed (or fail) based on interim analyses. 

The trial aimed to study the progression of kidney impairment and the risk of renal and cardiovascular mortality in individuals with type 2 diabetes and chronic kidney disease.

Following the news, stocks of companies active in kidney dialysis, such as DaVita, Fresenius, and Outset Medical, all traded sharply down (-15% to -22%) yesterday. Similar to the cardiovascular space and the diabetes space for Medtech in August, each piece of positive news about GLP-1 puts some other sectors under pressure as investors square off positions in industries where GLP-1 could have an impact.

Impact on our Investment Case

Diabetes is more than a blood sugar issue

Diabetes is a chronic, metabolic disease characterized by elevated levels of blood glucose (or blood sugar). Diabetes is caused by genetic factors in ~5-10% of cases (Type 1) and by dietary and lifestyle habits in ~90-95% of cases (Type 2). Among the most prevalent complications of diabetes, we find serious damage to the heart, blood vessels, eyes, kidneys, and nerves. Today, the spotlight is on diabetic nephropathy (related to kidneys), which eventually affects approximately 15–35% of patients.

A quick word on GLP-1

The obesity and diabetes treatment industry experienced two shockwaves in the last few years.

The first was in 2017 when the FDA approved Ozempic among the relatively new class of drugs, GLP-1 Receptor Agonists, for diabetic people. In addition to managing blood glucose levels, these patients unexpectedly lost weight. Novo Nordisk received approval for its GLP-1 drug (Ozempic/Wegovy) for treating obesity in 2021, as this class of drugs acts as a hunger suppressant and can be used for weight loss in obese patients. These drugs promise efficacy comparable to bariatric surgery, and Eli Lilly’s competing drug Mounjaro confirmed the results. Novo Nordisk and Eli Lilly accumulated a combined $5.1bn from their GLP-1 sales in 2Q2023 alone.

The second shockwave was last August when Novo Nordisk showed a 20% reduction in adverse cardiovascular events when on Wegovy in a Phase 3 trial. For us, anywhere above 10% was an upward catalyst, while other analysts mostly expected a 1-15% benefit. With retinopathy, nephropathy, and other diabetes complications, the market can expect more positive news in the future for unmet medical needs. 

A reminder of the power of innovation in Healthcare

For once, we are addressing one of the leading causes of chronic diseases with a relatively safe drug. It is a striking reminder that innovation in healthcare can drive massive changes in its industry but be felt in others - anecdotally even by Walmart and many others as the average calories bought by consumers (and most notably by people on GLP-1 drugs) has fallen lately. Furthermore, the efficacy of GLP-1 drugs in managing weight and blood glucose levels bridges the gap between lifestyle modifications and bariatric surgery.

Market impact of the GLP-1

While we are very bullish (and have been for the last few quarters) on GLP-1 drugs, we also believe that investors are overreacting by sharply selling off many of the stocks of companies treating obesity, cardiovascular diseases, monitoring glucose, etc. For example, our Bionics thematic is trading below 1X PE/G (historical lows) vs. 1.7X PE/G at the end of July 2023 despite the exceptional visibility in the portfolio's earnings constituents. 

First and foremost, weight reduction by GLP-1 does not solve the current chronic diseases for obese patients, as their increased risk 3 of cardiovascular events is only very partially mediated by losing weight.

Second, compliance with the GLP-1 treatment is an issue; between a third and half of the patients drop out after the first year, as is the case for most long-term treatments except for oncology.

Third, some forms of obesity have a hereditary component that GLP-1 does not mitigate. Over 1k genes or gene combinations have been identified that may increase weight gain risk.

Our conclusion is that the companies already in this space will keep growing fast – first, to address the gigantic backlog resulting from COVID-19, and second, as their markets remain widely underpenetrated even if the GLP-1 were to cut their total addressable market by 5%-10%.

Lastly, investor sentiment for Medtech companies is at the lowest level since 2009 and has never traded at such a discount (-15%) to the S&P 500 vs. the historical average of +25%.

Unintended consequences

While GLP-1 drugs offer beneficial effects, they do not provide a one-and-done cure. The necessity for lifelong use of GLP-1 agonist drugs often leads to challenges in maintaining consistent adherence, which can result in weight regain on top of muscle mass loss. This pattern increases susceptibility to chronic illnesses, especially among older patients. Muscle mass depletion contributes to reduced metabolic rates and further exacerbates the health risks associated with weight rebound. Over time, this scenario has the potential to magnify overall health risks.

In addition, while GLP-1 drugs are generally safe, they come with various possible side effects. As much as the market looks at the last results in a precise population at higher risk of kidney failure, GLP-1 has been associated with increased acute kidney injury in the general overweight/obese population. The picture will be clearer when the full data is released in 1H2024 by Novo Nordisk.

Supply is the current main limitation before price.

Adverse events aside, the supplies for the GLP-1 RAs are not expected to meet market demand until at least mid-2025, if not later. Currently, GLP-1 RAs are self-injected. A transition to a pill version would increase patient compliance and uptake but also demand 10 to 50 times more active ingredients, worsening the shortage.

Today, despite the self-injection formula, patients are so eager to lose weight that 80% of patients in the U.S. pay up to $800 out-of-pocket per month as insurance coverage is lacking. In addition to insurance coverage, another impactful measure is the current suggestion by Congress to add Ozempic/Wegovy to the list of CMS-reimbursed drugs. 

Our Takeaway

The advancements in GLP-1 research and its application in treating kidney failure solidify the "wonder drug" status for GLP-1.

Of course, caution is also advised, the benefits seen against kidney failure for patients with CKD are partially counterbalanced by a risk of kidney injury in the overweight/obese population. Today, the main hurdle is production, or in other words, supply and not demand.