Emma Boyde
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With more than 10 per cent of people globally now suffering from obesity it is no surprise the share price of the providers of the latest weight-loss drugs has surged.
But investors seeking exposure through two newly launched weight-loss exchange traded funds need to ask if they are the best way to gain exposure to this generation of drugs, industry observers say.
The Roundhill GLP-1 Weight Loss ETF (OZEM) and the Amplify Weight Loss Drug and Treatment ETF (THNR) both launched on May 21 with the same expense ratio of 0.59 per cent. Both also carry an extremely heavy combined weighting — of about 40 per cent in the case of OZEM and 30 per cent in the case of THNR — to industry heavyweights Eli Lilly and Novo Nordisk.
The two pharmaceutical companies are currently the only companies licensed to supply GLP-1 agonist drugs for weight loss under the brand names: Zepbound, which is Eli Lilly’s version, and Wegovy, supplied by Novo Nordisk.
There is much to be excited about. The drugs have been found to promote a reduction in body weight of between 10 per cent and 20 per cent. GLP-1, or semaglutide, drugs have been used to treat patients for nearly two decades, since the first iteration was licensed to treat diabetes, but their use cases are expanding. The results of a long-running trial of Wegovy and Ozempic, Novo’s diabetes drug, has shown they can also reduce the risk of heart attacks and strokes and there are anecdotal reports of success in curbing craving for things such as alcohol.
Sales growth as a result of these drugs’ success is eye-popping. For example, Novo Nordisk reported Q1 sales growth of about 30 per cent compared with the same period in 2023 for diabetes GLP-1 drugs and about 40 per cent for obesity care drugs.
But there are some caveat emptors, as industry observers point out. The first concerns the long-term prospects for the drugs themselves.
“‘Solving obesity’ has been one of the modern holy grails of pharma, with many false dawns,” said Kenneth Lamont, senior research analyst with Morningstar.
A recent research paper from VettaFi, provider of the VettaFi Weight Loss Drug & Treatment index that THNR tracks, outlines some of the concerns.
The researchers draw attention to a long history of such false dawns starting in 1933 when 2,4-Dinitrophenol (DNP), previously used in pesticides, was found to cause weight loss and began to be prescribed for obesity. By 1935, the US Food and Drug Administration had labelled it “extremely dangerous” and unfit for human consumption.
Other drugs in the rogues gallery over the ensuing decades include amphetamines such as benzedrine, methamphetamine and so-called rainbow pills.
Investors also should be aware that the early advantages being enjoyed by Eli Lilly and Novo Nordisk could be eroded as new drugs in the pipeline gain approval with a potential for improvements such as less frequent administration, by pill rather than by injection, and fewer side effects (patients currently report nausea and vomiting and even more serious side effects such as intestinal blockage).
In addition, the success of these drugs, if it continues, could impact the future use case of other treatments the pharmaceutical companies provide, for example for heart disease.
However, the idea of being ready to capture the success of other providers’ drugs in the pipeline could be an argument to consider capturing the weight-loss drug frenzy via an ETF rather than by investing directly in the companies. THNR, for example, includes companies with drugs that are expected to come to market soon. But it also includes Fujifilm Holdings, which is involved in the manufacture of the injection devices for which there is a shortage.
Christian Magoon, chief executive of Amplify, thinks that shortage was one of the bottlenecks that indicated there was more potential growth for the injectable GLP-1 drug market. The other is the fact that many insurance companies will not fund the drugs as part of regular medical cover.
Dave Mazza, chief executive of Roundhill, wanted to emphasise the importance of his fund’s active strategy given the fast-moving pace of new developments in the industry. “Just as we’ve seen in the generative AI space, the ability to use active management is beneficial.”
Lamont still questioned, however, whether the most sensible investor route was through the use of these ETFs.
They represent very concentrated bets: OZEM has just over 30 constituents while THNR is even more concentrated at just over 20.
“One of the touted benefits of thematic ETFs, is that they allow easy diversification of these risks, although in the case of OZEM, for example, even this appears to be limited,” Lamont said.
“We must also ask ourselves why you would need to pay a fee of 0.59 per cent annually when we can gain 50 per cent of the same exposure by buying just four stocks in OZEM,” he added.
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