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Anti-obesity medicines (AOMs), or GLP-1, have dominated discussions in the fmcg sector in the past few months, sparking share price underperformance. Investors have been shunning food companies and looking for sectors not impacted, such as home and personal care.

GLP-1 patients eat less because the drug suppresses appetite, and makes people feel fuller for longer, though side effects such as nausea are reported to be quite common. These drugs are already changing food buying habits for GLP-1 patients, and the concern is that with rising numbers, volume growth particularly for less healthy food and alcohol sub-sectors could be impacted.

We expect the topic of GLP-1 to be a major talking point in the forthcoming earnings season. So far, PepsiCo and General Mills have said the impact on consumption from GLP-1 is negligible, but both companies are watching consumer trends closely. General Mills’ CEO Jeff Harmening likened the current GLP-1 hype to when Amazon first announced in 2017 it was buying Whole Foods Market, and market cap in the packaged food space took a hit greater than Whole Foods’ entire market cap. He went on to say nobody really knows what the actual impact of these drugs will ultimately be.

However, the issue is less about near-term risks and more about the long-term prospects for the space, given consumer staples is a long-duration sector where a high percentage of group valuation is in the terminal growth.

Meanwhile, Novo Nordisk, the manufacturer of the GLP-1 drug Wegovy, keeps beating expectations, and at one point during the summer became Europe’s biggest company. Eli Lilly is hot on Novo’s heels with its Mounjaro Type 2 diabetes drug, which is expected to be approved for weight loss by year end.

The angst for the sector was sparked by comments from US retailer Walmart, which said: “We definitely do see a slight change (for GLP-1 patients) compared to the total population, specifically a slight pullback in the overall basket with less units and slightly less calories.”

Currently, because of the shortage of GLP-1 supplies, the focus for manufacturers is the US market, with the European rollout of GLP-1 drugs expected to be gradual. But Wegovy is already available albeit with limited supply in Denmark, Norway, Germany and the UK.

Right now, the three barriers we see for the drug are supply, cost and convenience. In time, we see these friction points easing as supply increases and the scaleup pushes costs down. There are also new GLP-1 drugs in the pipeline, including an oral tablet, which will likely increase penetration. There is of course the big question of who ultimately pays. Insurance companies will be loath to foot the bill without clear guidelines of who might be eligible, and this is likely to be a very thorny topic.

It is interesting to see that some of the largest food companies are already pivoting to prioritise healthier foods. Nestlé recently announced it is aiming to increase its healthy food revenues by CHF20-25bn by 2030, representing 50% growth versus its 2022 baseline. Whilst the timing of the announcement is not related to GLP-1, it is an interesting time to signal an accelerated direction of travel. Nestlé is also one of the first food companies to start nutritional profiling of its portfolio against the Health Star Rating (HSR) system. We expect others to follow.

The other less discussed aspect with GLP-1 drugs is that if patients lose 15% of their body weight relatively quickly, they lose muscle as well as fat. To build muscle requires protein, which comes from food, and it makes sense that demand for protein options in easily digestible formats is on the rise. GLP-1 medications can also reduce the amount of acid in the stomach, which acts as a barrier to bacteria, so products containing live bacteria such as yoghurt and kefir can help good gut health by supporting the immune function.

In summary, clearly there are a lot of unknowns, particularly the adoption of the drug and the long-term retention of patients. However, GLP-1 could impact M&A decisions as it could influence CEOs to consider healthier or more premium categories. If food volumes suffer, we think there is an even bigger incentive for food CEOs to drive mix and premiumisation.

Nestlé’s former CEO and chairman Peter Brabeck-Letmathe made an illuminating comment on the direction of travel a decade ago: “It is not any more the quantity of calories, it is the quality of calories.” 

CEOs will also be seeking out new product opportunities, such as meals and dietary supplements that address the nutritional needs of patients who consume less food, or meal plans for patients that discontinue the treatment. Burying heads in the sand is not advised – this topic is not going away.