The societal side effects of weight-loss drugs

Today, we look at a hot topic rocking the healthcare industry and beyond: obesity drugs. These medications have enjoyed enormous success over the past year, leading to huge share price gains for their producers, Novo Nordisk and Eli Lilly. But while this field is looking increasingly lucrative, it raises some tough questions for investors focused on environmental, social and governance risks and impacts.

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Exploring the ESG impact of weight-loss drugs

The surging popularity of obesity drugs is having a huge societal impact. For that reason, the 2023 FT Person of the Year went to Lars Fruergaard Jørgensen, chief executive of Novo Nordisk, the pharmaceutical company that brought these successful weight-loss drugs to market.

Doing a simple Google search for ESG and obesity drugs will yield unexpected results. Rather than environmental, social and governance, the majority of hits will be about a different ESG — endoscopic sleeve gastroplasty, which is an obesity treatment to reduce the size of the stomach via an endoscopic procedure.

But that doesn’t mean investors aren’t looking at these drugs from an ESG angle. 

“These drugs align with the social component of ESG investing,” Kate Hewitt, ESG and impact specialist from London-based Montanaro Asset Management, told me. Healthcare systems can benefit from positive effects of the drug, such as reduced risk of heart disease, which according to the World Health Organization is the number one cause of death globally. 

Patients on average can expect to lose about 12 to 15 per cent of their body weight when using the drugs. This could have a major impact in the US, where more than 40 per cent of the population is obese, according to the US Centers for Disease Control and Prevention.

There might be some modest energy efficiency gains too. Sheila Kahyaoglu, a financial analyst at investment bank Jefferies, estimated that if the average passenger weight came down by 10 pounds (4.5kg), United Airlines would make fuel savings worth $80mn.

At the same time, however, these drugs pose ESG risks — primarily in the social category.

Obesity drugs are derived from type 2 diabetes treatments, and use the same compounds but in varying doses. These mimic a hormone called GLP-1, which helps keep blood sugar rates down and sends signals to the brain and stomach to suppress appetite.  

With demand for obesity drugs booming while supply remains constrained, many doctors have started prescribing diabetes drugs for weight-loss purposes. Almost half of the users of these drugs did not have a history of type 2 diabetes, according to a 2023 analysis by Trilliant Health, a healthcare analytics firm.

This means that many diabetes patients are now having trouble getting their prescriptions refilled. The US Food and Drug Administration says there is a shortage of Novo Nordisk’s and Eli Lilly’s diabetes drugs, while Belgium has banned the off-label use of Novo Nordisk’s diabetes drug for obesity treatments.

Pandora Zilstorff, a research analyst specialising in healthcare at Sustainalytics, warns that this trend may put drug developers at risk of litigation for off-label marketing, which is illegal under US law (unlike off-label prescribing by doctors). Zilstorff also cautions that compared with diabetes patients, for whom these drugs are a life-saving treatment, those targeting weight loss may be less willing to accept side effects and more likely to litigate if they experience adverse effects.

Another factor worth considering for ESG-minded investors in the health sector is the pricing of these drugs. Without insurance coverage, they typically cost about $1,300 per month in the US, making them inaccessible for many. This is especially problematic as obesity is more prevalent in lower income households.

Zilstorff warns that as demand for these drugs rises, there is a risk that prices increase even further for both obesity and type 2 diabetes drugs. “The pricing issue raises concerns about health equity and fairness,” said Hewitt.

Much is still unknown about these drugs, especially regarding long-term usage. So far, some concerning side effects such as suicidal ideation and hair loss have been reported.

But there have also been studies that found that patients using these drugs became more inclined to eat healthier meals, and steer clear of deep fried and fatty foods. ESG investors will want to weigh these issues carefully before rushing into the shares of obesity drug developers. (Kaori Yoshida, Nikkei)

Smart reads

• Governments may need to tolerate higher levels of debt and inflation to support an effective energy transition, argues Angel Ubide at hedge fund Citadel.

• The FT’s Lex column writes on Chinese smartphone maker Xiaomi’s push into electric cars, and on the UK’s need for energy storage plants to support a renewables-based electric grid.

• The chief executive of Mercedes-Benz has urged EU officials not to increase tariffs on Chinese electric car imports. Tariffs should instead be cut to strengthen competition, Ola Källenius said.