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Sura, and welcome to this episode of Shared Lunch, where we lift the lid on the weight loss drug boom in the US. It's been big business for pharmaceutical companies for a while, but how do investors know if it's a fad or weather this promise. I'm your host, Halen Madison, and I'll be discussing this with doctor Deborah Lambe, global Equities analyst at Milford Asset Management.
Investing involves risk you might lose the money you start with. We recommend talking to a licensed financial advisor. We also recommend reading product disclosure dot douments before deciding to invest. Everything you're about to see and hear is current at the time of recording.
Great to have you on the program. Dead after your trip to America.
Yeah, it was much warmer in the States. I actually spend quite a significant portion of the time in Vegas, so it was about thirty five degrees when I was there, which was really nice. A bit of a shock to come back to the cold, rainy Auckland, but hopefully it doesn't last too long.
Wind to hear now, deb let's start with what you do at Milford and the reason for your trip to the US, which I understand included seeing a number of pharmaceutical companies.
So at Milford, I'm in the global equities team, which means I'm not looking at companies in New Zealand or Australia. Rather, I'm focused on listed companies that are based in the US, in Japan, and in Europe. And you mentioned my trip to the US, so traveling and getting on the road is an important part of what we do. And I've just spent two weeks, a pretty well win couple of weeks in the US. The first thing days I visited seven cities and drunk much more coffee than is probably
healthy for me. And then the trauff itself comprise of a few independent days where I've visited companies by myself and then visiting two conferences, so one was a global bio Farmer conference, and then one was a global healthcare investing conference, and I guess you also asked why is it important to do this? So when I go and visit a company and talk to the management team, I'm going to be testing the assumptions that I have about
the company. So is what we believe about that company correct, looking for risks that we may not be aware of, and then also thinking about how is the management team thinking about opportunities and then also challenges that it's facing. And it's not just about visiting companies that we already invest in, but it's also about visiting companies or hearing from companies that might be a new company to invest in. So it's a great source of new ideas as well.
Now it'd be good to actually put in context the size of the pharmaceutical industry in the US. I mean, the numbers are eye watering from Australia and New Zealand's perspective, but also maybe the future and the potential that this sector has.
Yeah, So the pharmaceutical industry itself in the US, pharmaceutical industry itself is it's massive. So more than five hundred billion dollars per year as the size of the industry, which that to kind of put that in context, that's bigger than the GDP of countries like Austria and Norway, and that's more than twice the GDP of US here
in New Zealand. And then if you think about, though, of course, the US technology industry, that's a whopping one point seven trillion, So it's smaller than that, but it is for something that's essentially mostly selling small white pills, it's pretty big numbers. And then you also asked about
I guess like future growth. So the pharmaceutical industry itself, it's forecast to grow about five percent per ADDAM through to twenty thirty and that's driven by a few factors, but one that I would really call out is this aging population and changing demographics that we have. And that's not just in the US, but that's also here in
New Zealand. And so if you think about our population of people over sixty, that's forecast to double by twenty fifty, and then the number of people that are aged over eighty that's actually going to triple by twenty fifty. So that means a much greater proportion of people that need medicines for their chronic conditions and also to manage their quality of life. I suppose two.
With medicines. One thing investors really need to think about too, if they're looking at such sectors is that it takes a while for a medicine to be developed and go through all the tests and the regulation, et cetera.
That's exactly right, and that pharmaceutical industry itself, and for me is an investor learning about it, it's quite a kind of complicated industry and for companies itself, getting a medicine on the market is both time rechieving and expensive. So to have a medicine approved for use, it has to go through phase one, Phase two, phase three clinical trials, and then the approval proceeds, and that's very expensive, and I think from memory it costs around two billion dollars
per drug that's approved on average. On average, it takes about ten years. And then also if you look at that whole process, a lot of companies fall out, a lot of companies, a lot of medicines fall out along the way. So around only seven percent of molecules that start at phase one make it all the way through to phase three clinical trials, and then of course, once you have that medicine approved, so the regulator gives it a tick, it says that it's safe and effective in patients.
Then what happens is is that it's given a period of loss of exclusivity on the market. And what that means is that copycats can't come in and copy the medicine. But that only has a finite life, and so after that's on average ten years, and so after ten years, what happens is then other companies can copy that molecule
and produce what's called a generic medicine. So then at that point in time, then what we see is the price of the drug falls rapidly, so normally to the tune of seventy percent in and revenue from that molecule falls away. So that means that farmer companies here on this kind of wheel of having to make new drugs which then have a period of exclusivity and then that
revenue drops right away. So for drug companies to continue to grow, they have to be continually innovating and have medicines coming through that pipeline over time.
Gosh, quite a juggle then actually jumping into weight loss drugs, I mean they have been talked about a lot. There's a fair bit of hype. Why do you think it has sort of struck a cord?
Yeah, and this is this is a really interesting one. And one of the companies that I actually visited on the trip was Elight Lilly, which is one of the leaders in the weight loss in the weight loss race, and there's been heaps of focus on the weight loss phenomenon recently, despite the fact that weight loss medicines have actually been around for quite a long time, and so they were initially developed for use in diabetes to help
people manage their weight and blood sugar levels. But what's driven the excitement over the past kind of twelve months is new research that has shown that these medicines provide benefit not just in people who have diabetes, which is around five percent of the population, but also in people who are oh weight or obese, which means that the pool of people that can use them jumps from that
five percent to thirty three percent of the population. And then the other really important thing that's been shown in these clinical studies is not only do these medicines provide a benefit in terms of the weight loss, but also they provide other health benefits. So if you take these medicines for a period of time, it will reduce your risk of heart attack, it will reduce your risk of stroke, it will reduce the progression of your kidney disease, it
will reduce the pain if you have arthritis. So it's the combination of now proving out that it's a much broader pool of people that can benefit from them, and then also that the benefit extends beyond that of weight loss alone.
What about, though, if you stop taking these strikes. I mean, they've got all those other aspects and benefits by the sounds of things, But do you have to stay on them forever?
And yeah, this is a really good question, and it's actually something that invests a debating, But what the trials show so far is that to your point, to keep the weight loss off, you have to stay on these medicines. And as soon as you stop taking the medicine, slowly but surely, the weight comes back on. And so they're self administered injections, and they essentially work by making you
feel full and suppressing your appetite. And so when you're no longer taking them, that means that you basically you don't feel for that fullness your appetite comes back and then slowly but surely that weight will just come back on.
What about the side effects? So this seems to be always side effects for drugs no matter what you take.
Yeah, I think that's true. And so there is side effects with these medicines, but so far the evidence is that they're generally pretty well tolerated and the main side effects are things like nausea, upset stomach and that kind of thing. But there hasn't been anything so far that would be a really risky side effect that people have to be worried about.
Given these new weight loss drugs, I mean, how much weight can you actually lose on them? And also what is the bar for obesity?
So currently all the research has been done on people that have a b ANDI over twenty seven, so that's classified as overweight or obese, so they're not for you some people who are a normal weight or a healthy or a healthy weight range, which is be in eighteen to twenty four. And then what we see is if you take these medicines for a year, on average average person will lose between fifteen to twenty percent of their
body weight. So if you take Novo Nordics ozempic you lose on average fifteen percent and Eli Lilly's medicines interesting are slightly more effective and you'll lose an average twenty percent of your body weight. And what we're seeing is that next generation versions of the drug that are currently in earlier clinical trials, they're showing a similar safety profiles but losing more like twenty five percent of your body weight.
So what about in this part of the world, can you actually get hold of these medicines or is that some way off?
Yes that so so far, what we've seen is that Novo Nordous medicine ozempic that has been approved for use and both diabetes and obesity. But Eli Lindity's medicine so far has just been approved for use in diabetes but not yet obesity, so the company is going through that approval process now. And then another thing that's important to keep in mind is that even though they're approved for use here and in Australia, they're not yet funded. So
in New Zealand it's not funded by FARMAC. So that means that if you are prescribed that medicine, you are paying out of pocket cost yourself to take that medicine and those are expensive, so around one thousand dollars per person per month just to take the medicine. And then the other factor to layer on top of this as well is that there's been massive global shortages of the medicine.
So in Australia been able to get their hands on a little bit of supply, but here in New Zealand there's been very little, if not any, people able to take it so far.
And what about the pricing. If the supply and demand, wouldn't it go up and you'd be paying more again?
And that's it's kind of interesting because in most markets you would expect that really high demand with a constrained supply, that you would see prices go up, especially in the short term until more supply comes online. But in the farmer market, when the drug is approved, prices are negotiated at that point in time and so they're set and then what you see is over time, generally the price of medicines actually will come down a little bit over time.
So this means maybe while we're supply constrained in the near term, that prices will be able to stay a little bit higher, so there'll be less pricing pressure over time. But we still expect the overtime prices will come down.
Now, deb you're a medical doctor, you aren't practicing at the moment. I think you've been out for about seven years. But what do you think would you be prescribing these medicines given what you know?
Yeah, so seven years it's time does really fly. But I would say so based on what I know. Mine understanding is there's a really good basic evidence to show that these demonstrate good health benefits and people over a sustained period of time when they take them, and also also basically that the risks are pretty are pretty small. Side effect profile is good. So I am with the caveat that I'm not currently practicing. I see Nobodyson why I wouldn't prescribe these.
Now, let's look at some of the companies involved in this weight loss drag race, if you like. There's some some pretty big ones and some pretty big numbers. As we've just discussed, it'd be quite good too to see how their share prices have performed given this new theme, if you like.
So, the two main the two main leaders in the weight loss race are Eli Lilly, Who's the US company that I visited while I was on my trip. And then also there's a Danish company called Novo Nordisk, and that is a Danish company. And so what we've seen is that all of this information, all of this new information has driven really strong share price performance over the past year. So shares an Eli Lilliar up around ninety two percent I think last time I checked, and then
shares a Novo Nordisk up around seventy percent. So it's been pretty stellar performance. And it's also meant that these companies they are now pretty big companies. And so to put it into context, if you look at the size of these two companies combined and then you compare it to all one hundred and eighty one companies that we have listed on our New Zealand Stock Exchange, these two companies are worth more than thirteen times all of our listed companies combined.
At the same time, the prices might be high, I'm not sure whether you've looked at the price to earnings ratio, which is obviously what investors use as a sometimes fairly blunt instrument to understand whether you're getting valued that but there's also they're also spending a fee bit of capex or capital to actually bring these medicines to market, aren't they?
And so I guess on the pe ratios, if you look at what Eli Lilly is trading on relative to Novo Nordisk, relative to other farmer companies, these are on eyewatering multiples. So they are pretty they look optically pretty expensive.
They do have a great growth opportunity ahead of them, but to your point, they are also spending a lot and the kind of manufacturing of these is very complicated and I think combined, by twenty twenty eight, it's expected that they will spend around fifty billion dollars on capex. And so one of the debates that investors are kind of thinking about is are the shares getting overvalued? Because while the growth opportunity is very exciting, there's no I guess,
in my mind, there's no debating the opportunity. The key debate is really the valuation and then how much of that is reflected in the valuation of these shares.
Now we've talked about valuation in terms of thinking about investing in the sector, and there's probably a number of other things that investors need to think about. There's the exclusivity, that's the time it takes to actually get a medicine to market. Are there other issues that have been brought up with this new theme if you like.
Yeah, and I think with these farmer companies specifically and the weight loss opportunities specifically aside, putting valuation aside, the key questions would be priced. So how long will the price stay at one thousand dollars per person per month? And what will the price be in twenty thirty and then what will the price be when other competitors bring their products to market because competition is on the horizon. Also, another debate is will people want to say on these
medicines for life? Because as we know, you stop taking the medicine, the weight comes back on. That's a massive commitment for someone to be taking either an injection currently every week for a month or an oral pill for life. And the third is given the high price point of the medicines currently, will governments and house systems want to pay for them? Will be able to pay for them?
Because if you think about it, if it's one in three keywis a classified as overweight or obese so could benefit from these medicines and effort costs currently one thousand dollars per person per month and you sum that up, that's a massive cost for our healthcare system. So the price kind of it's like where does the price land and then how does that impact the proportion of people that are on the medicine are kind of key debates that investors are focusing on.
Another thing I think investors probably need to think about too, is are they a one show pony. I mean, hopefully a pharmaceutical company has got a few strings to its bo For example, Eli Lilly, I think is also getting an Alzheimer's drug towards market production, aren't they?
Yes? Yes, And this is it's a key difference between Novo Nordicic and Eli Lilly. Is Novo Nordicic is currently it's basically solely focused on diabetes and weight loss medicines, whereas Eli Lilly is a much more diversified company. So not only does it have its weight loss medicine, it has gone Alzheimer's medicine coming. It also has an oncology portfolio. So they are quite two different companies when you think about what sits in them and then the Alzheimer's opportunity.
That's something that investors have been pre focused on for a while now. There's currently two main companies, so Eli Lilly, and there's also a US company called Biogen, which has been kind of like vying to get in the Alzheimer's market. And Biogen has had a few controversies along the way
with its Alzheimer's medicine. The first was approved back in twenty twenty one, and this was controversial because it was the first disease modifying Alzheimer's treatment, and so that means that it works to reduce the progression of the actual disease. But the approval was controversial because it just showed improvement in the scans of brains of people with Alzheimer's, but
it didn't actually prove that it improved their symptoms. And so there are a number of people that actually resigned from the FDA, which is a regulary body on the bottom of that. On the back of that, and then they were also very criticized because of the high price point that the medicines were priced at at that point when they were approved, which I think from memory was around fifty six thousand dollars per person per year, So that's much higher price than the weight loss drugs, for example.
But then so Biogen they've got a new CEO's coming. They've since had a subsequent version of the medicine that's been approved that does show improvement in symptoms of people with Alzheimer's disease. And then also what we've seen is that they've cut the price dramatically. It's still expensive. I think it's maybe twenty six thousand dollars per person per year, which is a lot, but it's come down from that fifty six thousand.
Fascinating. I think Alzheimer's and the drugs and the race is probably a whole episode in its south dev which I think we'll probably come back to just getting back to manufacturing these pharmaceuticals. Has AI had much of a place here in terms of speeding things.
Up, So this AI kind of in farmer companies and in drug discovery. It's been a topic that investors are kind of increasingly focused on and increasingly excited about. And one of the key kind of themes or takeaways I would say that I really noticed when I was in the US is just how excited companies are about the use of AI and drug discovery. Because we've already talked about how time consuming and expensive it is to develop
new medicines. And what we've seen is that the developments in AI mean that you can develop new molecules around ten times as fast, or so, you can design new molecules around ten times as fast, you can run simulations on those molecules around a hundred times as fast. And then there's this new concept, which I think is pretty interesting. You've heard of the concept of a self driving car.
There's this new concept of a self driving lab. And so what this means is that you have AI and then you robotics, and so you use AI and robotics together and they drive the cycle of kind of prediction, experimentation and analysis, which means that you can iteratively identify new compounds which you then run experiments on, which then mean that the whole process is much faster and then importantly more cost effective for companies.
Gosh, So do we have any idea how much that would speed things up? We talked about ten years before being the time that it can take, I think for exclusivity, but I think you know, when you've got a medicine in the wings that can take even longer, can't it?
Yeah, And I think it's I think it's probably too early yet. To put an actual number on how much it could speed things up. But I think what we're seeing is more and more companies are talking about it, more and more companies are using it in their drug discovery process. So I think over time we'll be able to get a better sense of how much time it
actually is taking off the drug discovery process. But to the extent that it means we can develop medicines that are cheaper, I feel like that could only be a good thing given the high costs of healthcare that we're seeing around the world now.
Just thinking about investors looking to invest in the sector, I mean, there are those direct stocks, they are probably quite expensive at the moment for some people. But also what about ETFs. I know on cheeseys, for instance, we've got about five or at least there's more actually pharmaceutical ETFs that people can look to. They are mainly in
the US. But also I did see that there was a couple of applications for more themed weight loss ETFs by I think Amplify and round Tel investments were two, though I don't think they've actually come to fruition yet.
So I guess when you're thinking about healthcare, health care itself is super broad, and then within that there's all different kinds of companies, so hospitals, medical device companies, companies that sell chemicals that are used in farmer companies that sell tools that are used in farmer So all of
that kind of sets in the broader healthcare space. And I think if you're thinking about getting a broad kind of eatif exposure, maybe one way to get a sense of what could be better is looking back at what's happened over time. And if you look back over a significant period of time, say twenty years, the s and P five hundred index and the SMP Healthcare Index have actually interestingly performed basically neck on neck, So they both generated around a ten percent return per year over a
twenty year time horizon. If you look at farmer itself, that generated around half a percent lower return, so around nine and a half percent over that twenty year period of time. But if you had managed to pick farmer winner Novo or farmer Winner Eli Lilly over that period of time, you would have generated I think from memory it's around a sixteen percent return per ANIM and then
a twenty five percent return per ANIM. Picking a winner can be great, but then if you're looking at a diversified exposure, as she would suggest that rather than looking for a narrow farmer exposure, a broader healthcare exposure would
be better. And then I think especially worth keeping in mind with a diversified eatia for Farmer, you're likely to have a higher exposure to the largest companies and they may have a higher proportion of medicines that are coming up to that loss of exclusivity and revenue and revenue dropping off. So that's a really important thing to keep in mind with Farmer itself, is what is that loss of exclusivity burden and how does that sit across the companies that are in that etf.
Well, we could talk for ages dead. There's so much to unpack here, but look, thanks so much for your insights today and coming in even though you have got a cold.
Thanks so much for having me. It's been awesome to be here.
And thanks to everyone for joining in. But before you go, we'd be really keen if you could fill out our audience survey, which you'll find in the show notes. Alne, you take few minutes and you'll be in the drawer to win fifty dollars to invest, So stay warm and stay safe, and we'll see you next time on shed lunch.