Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life. For today’s Soundbites, we’re talking about healthcare and the recent revolution in obesity and diabetes treatments, with Jennifer Martin, vice president and portfolio specialist with T. Rowe Price. We talked about the winners and losers, and we started by asking why market leaders Eli Lilly and Novo Nordisk are still a good investment, long after the introduction of their breakthrough GLP-1 drugs.

Jennifer Martin (JM): I think what’s interesting about Eli Lilly and Novo Nordisk is both companies have been investing in capacity. They are both manufacturing these. They don’t outsource it. They’re the direct manufacturers. They’ve been buying capacity that will help the re-acceleration of scripts for both companies. And then the real excitement that people are looking at in the future of these companies is, the bigger picture to unlock this market is when both companies produce an oral drug. It’s still early in the understanding of how big that oral market could be. But we do think a GP — you know, your general doctor or a physician — feels much more comfortable in prescribing an oral versus injectables. The current medicines are injectables. And so if you give this oral prescription, really, that is an acceleration for another addressable market. So that’s another thing that we’re looking at, and something that, from a capacity standpoint, comes on more materially in 2026.

Companies that stand to benefit from the GLP-1 revolution

JM: There aren’t like a lot of directly tangential winners. Maybe like a Catalent [New Jersey-based Catalent, Inc.] or a Thermal Fisher [Mass.-based Thermo Fisher Scientific Inc.], they help produce cartridges. But, like I said before, Lilly and Novo do most of the manufacturing themselves. Other benefits, if I think about the pharmacy benefit managers that — really predominantly in the U.S. — that will give you that prior authorization to make sure you get these medicines, I guess they could be benefiting from it. But you can go in a lot of areas and directions, but it is pretty profound what’s happening, just from this innovation.

Companies that stand to lose

JM: If you think of what this medicine is addressing, there’ll be fewer diabetic patients. So, if you think of what some diabetic patients require, they require renal and dialysis and maybe that’s not good for the pump manufacturers and there’s, sort of, less equipment in general that you would need. There’s also other companies that are providing insulin pumps but maybe If we’re having less patients, anyone in that downstream effect will probably have less volume. And so, it really makes you think about the impacts — particularly from investment standpoints — knowing some of these things might be coming to these different businesses.

Where the healthcare industry is headed

JM: Well, what’s interesting is 2023 was actually a very challenged market environment for the healthcare sector, with the exclusion of maybe Eli Lilly and Novo Nordisk. If you weren’t in those two stocks, you probably suffered some volatility, maybe even a drawdown. One of the outside views we’ve taken is when you look at healthcare as a percentage of the S&P, it is almost at a 10-year low. That usually is a good tell for the next 12 to 18 months, that there could be higher hit rates, in terms of improving returns for other companies in that sector. And you’ve already seen it. You’ve seen some M&A in large-cap pharma and biotech. And so the industry seems to be re-emerging from an activity standpoint. That may be because of some of the Covid challenges that you saw, and just the cyclicality of that impacting healthcare, [that] might be resolving as we head into ’24.

Is this a time for research among investors?

JM: To be a good investor in healthcare you have to be a creative thinker. You have to be creative. You have to think about how big this could be. And you have to be front footed. The real insight, once we started seeing those indications for weight loss, we started appreciating, wow, that addressable market for just obese Americans is over 100 million. Like, that’s a population that we [didn’t] have a clinical opportunity to solve for. Now we do. You know, maybe we should be excited about the future. We’re all going to be healthier because of artificial endocrines or the GLP-1s. The outlook for healthcare investing compared to last year seems very bright. Part of it’s just some of the challenges that we experienced we think will be resolved. And then you still have the nice background. And so there’s a lot of parts of healthcare that we’re really excited about, that we’re investing behind in the portfolio.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Jennifer Martin of T. Rowe Price. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.


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