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Excess body weight is a growing problem. Too much fatty tissue increases an individual’s risk of disease and puts health budgets under strain. One forecast suggests that by 2035, 51 per cent of the world’s population will either be overweight or, worse, obese. That compares to 38 per cent in 2020.
Until recently, there were few effective remedies. The benefits of dieting tend to be short-lived, while bariatric surgery on the digestive system is costly and carries risks. However, new medicines that mimic gut-released chemicals promise a better solution.
“When you eat, your stomach releases a group of hormones, and one of those is called GLP-1 [glucagon-like peptide-1],” explains investment manager Ross Mathison in a recent episode of Baillie Gifford’s Short Briefings on Long Term Thinking podcast.
“It has multiple jobs, such as controlling your blood sugar levels and sending signals to the brain about how hungry you are. The pharma industry has learned how to replicate it, creating a feeling of reduced appetite.”
The Danish firm Novo Nordisk is a leader in this field. The insulin pioneer began work on GLP-1 drugs over 30 years ago as part of its efforts to treat diabetes. Its tests confirmed a slimming effect, leading the business to release Saxenda in 2015, which helped patients lose about 5 per cent of their body weight.
In 2022, it introduced Wegovy, whose longer-lasting active ingredient, Semaglutide, achieves a more substantial 15 per cent weight drop. Last year, the UK’s health regulator approved the NHS’s use of the shot, albeit limiting patients to two years of injections. Mathison, however, believes the restriction will be short-lived.
“This is a chronic therapy,” he explains. “You need to take it for the rest of your life, or your weight goes up again. So, it doesn’t make a huge amount of sense to bear all the cost but not see the benefits down the line.”
This point was reinforced by Novo Nordisk’s announcement in August 2023 that Semaglutide appears to reduce the incidence of heart attacks and other serious cardiac events by 20 per cent among overweight and obese adults with existing cardiovascular disease.
“This was a trial of 17,000 patients over five years, the biggest in Novo Nordisk’s history,” Mathison says. “It makes people who have to pay for these drugs sit up and notice because we know the health care burden of caring for patients with these conditions.”
Novo Nordisk’s shares rose following the development, making it Europe’s most valuable company. Data also indicates that Semaglutide could be an effective treatment for chronic kidney disease. Additionally, research is underway to see whether it can tackle Alzheimer’s, Parkinson’s and fatty liver diseases, as well as sleep apnoea – a condition that causes lapses in breathing – among other maladies.
Manufacturing edge
Novo Nordisk isn’t without its challenges. The company has been unable to satisfy demand for Semaglutide, leading to shortages of Wegovy and related diabetes treatments. American pharmaceutical company Eli Lilly also launched Zepbound, a rival GLP-1 drug, in US pharmacies at the end of 2023.
Longer term, the Danish firm’s patents on Semaglutide are due to expire in the early 2030s, opening the door to generic drugmakers. However, Mathison is currently exploring whether that threat is less than it might seem.
“Novo Nordisk is spending in the region of $20bn to $30bn on building up capacity, and that will be a barrier to others,” he says.
“A lot of technology and know-how has gone into this.
“I remember very early on, maybe 2013, visiting the firm’s site in Denmark and speaking with one of the engineers, who was studying a metal pipe. It looked very ordinary to me, but hearing him passionately explain its importance to marginal improvements in yield highlighted the firm’s manufacturing edge. That may mean it can produce these drugs at a far lower cost than most.”
Even if that doesn’t happen, Novo Nordisk can pursue long-term growth by other means, including combining Semaglutide with other novel substances. One such cocktail, CagriSema, is already in a ‘phase three’ trial that pits it head-to-head with Eli Lilly’s Zepbound to see which is most effective.
“There’s lots of room for improvement, including reduced side effects,” says Mathison. “Nausea should be sorted by future iterations, and the company also wants patients to lose less lean muscle mass and be able to take the drug in the form of a pill. Future combinations might also let patients sustain weight loss without rebounding if they stop taking the therapy.”
Foundational advantage
The company benefits from having an altruistic controlling shareholder. The Novo Nordisk Foundation owns 28 per cent of the company’s shares and 77 per cent of its voting rights. The charitable body’s interest in improving health in low- and middle-income countries gives the firm an added incentive to reduce the cost of its weight-loss treatments over time to increase accessibility.
“The company’s mission-driven approach to serving more patients is guided by the foundation,” says Mathison. “Having that type of cornerstone investor protects the firm and ensures it’s thinking long-term and maintaining focus on what it’s good at.”
The foundation sometimes plays a more direct role. For example, in 2004 it blocked Novo Nordisk management’s plan to merge with the Swiss pharmaceutical firm Serono.
More recently, Novo Holdings, the foundation’s investment manager, struck a deal to buy Catalent – a company that packages medications for others – and to sell three of its factories to Novo Nordisk for $11bn. The plants specialise in inserting sterile drugs into syringes and injection devices. Novo Nordisk has said it expects the move will let it increase ‘filling capacity’ from 2026, which could help it address Wegovy’s constrained supply.
Investigative research
The Scottish American Investment Company (SAINTS) and our Global Income Growth Fund – both of which Mathison helps manage – have been shareholders in Novo Nordisk since 2016.
"We look to invest in companies for 10 years or longer, so we need to do our own research to generate ideas," Mathison says. "That includes having conversations with academics. For example, my excitement about treating obesity came from reading an article in the New England Journal of Medicine, tracking down the co-author, who'd been studying GLP-1s for decades, and getting him to put context around the latest data.
"We also have an investigative researcher, a former journalist, who speaks to many ex-employees and experts not in traditional asset management industry networks to gather a picture of what companies are like. When Novo Nordisk had a period in which it was less productive, she suggested we shouldn't give up on it because the company remained capable of breakthroughs. And that's exactly what we've seen."
Novo Nordisk recently celebrated its centenary. Age can sometimes be an impediment, but in this case, the mix of deep experience and fresh opportunity means the firm appears in better shape than ever.
This communication was produced and approved in January 2024 and has not been updated subsequently. It represents views held at the time of writing and may not reflect current thinking.
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