Markets by Grant | Investing Behind GLP-1 Drugs
Hello and welcome back to Markets by Grant.
I recently cowrote this piece with my excellent colleagues Naren Ramaswamy and Alim Giga — and figured I might as well post it here as well. Here’s the published version on av.vc. In addition to my colleagues, a shoutout to all the great portfolio companies mentioned in in this piece — many of them my own!
You may notice that the writing tone here is a bit more reserved / conservative than my typical style. And perhaps you will wonder, “has Grant changed? Has he lost his spunk? His joie de vivre? His je ne sais quoi? Why is he using so many French idioms these days?”
My response: George Miller, the writer and director of Mad Max: Fury Road, also wrote and directed Happy Feet. …and Babe: Pig in the City. In other words, every great master of craft is also a master of emotional range.*
*Note: I am aware that I am just another VC with just another blog
Back to the subject matter: I’ll be coming out with a deeper dive in a few weeks, tracking an individual Ozempic patient’s journey, and commenting on areas of innovation along the way. Should be a fun one — stay tuned!
Until then, here’s the piece:
Around the water cooler, on any news website, and in social media forums, you’re bound to find buzz about Ozempic and a new class of weight-loss drugs. Beyond being the focus of medical and cultural attention, economists and investors are weighing in on this topic.
As venture capitalists, we are always examining the impact of new models and technology, gauging which sectors might grow and diminish in the wake of innovation.
This blog tracks our early read on what could be developments in “the Ozempic® trade.”
And, if you want to learn more sign up for our free webinar* where we will interview top experts at the intersection of investing and science.
*Unfortunately, we already hosted this webinar. Selected quotes from attendees: “Interesting and informative.” “Fun!” “A wild ride.” “Decade-defining.” “Cool.” “Sorry, totally zoned out.” “Honestly pretty boring.” “Grant looks different (worse) than in his picture.”
PROBLEM AND SOLUTION
Obesity Is More Prevalent Than Ever Before
Roughly 70% of Americans are overweight, over 40% are obese, and obesity rates have continued to steadily increase. Massive industries have spun up to address these and related issues. For example, approximately 13% or 40 million adults in the US have diabetes, with another ~100 million estimated to have prediabetes. Worldwide, obesity is the fifth leading cause for premature death. These spaces and others are serviced by the healthcare, insurance, CPG / foodtech, fitness, leisure, media, and consumer tech industries (and more). But to date, the impact on weight loss has been modest at best.
The Promise of GLP-1 Drugs
Now with the advent of GLP-1 drugs, many experts see a solution that might finally move the needle for weight management. GLP-1 drugs are a group of medications initially developed to treat type 2 diabetes. They work by increasing glucose-dependent secretion, suppressing glucagon secretion (which increases blood sugar), slowing gastric emptying, and promoting a feeling of fullness.
The result is a decrease in appetite, as well as other cravings. GLP-1 patients consume 8–10% less food in general, but specifically less “craving” foods, like snacks, sweets, fast food, and alcoholic beverages. The average patient on a GLP-1 weight loss drug experiences a staggering 15–24% reduction in total body mass.
GLP-1 receptor agonists have also been shown to have benefits beyond their pancreatic effects, including cardiovascular benefits and a reduced risk of kidney disease and non-alcoholic fatty liver disease. Further, there’s evidence that some craving suppression effects extend to other addictive behaviors, such as gambling, content consumption, and risky behavior. However, the drug does have negative side effects, predominantly gastrointestinal issues.
As of now, it’s estimated that 1–2% of Americans have used GLP-1 drugs for diabetes or weight loss. Use has more than doubled annually since the drugs’ initial release in 2021, and experts estimate that another 25%-30% of Americans have near-term interest in using GLP-1 drugs to manage weight. Drug supply has been short in face of high demand and increased popularization.
Beyond those numbers, the total addressable market exceeds 70% of the US population, extending to even those interested in weight and cravings management. This is considered to be one of the largest consumer markets to have been measured in recent memory. For comparison, roughly 40% of Americans own iPhones, and 50% have watched a show on Netflix. Morgan Stanley conservatively projects that within this decade, 7% of the U.S. population — 24 million people — will be taking these drugs. Further, by 2035, half of the world’s population — about four billion people — will meet the definition of being overweight or obese (World Obesity Federation).
As a result of the blistering pace of adoption, massive market size, and groundbreaking efficacy of GLP-1 drugs, many experts predict a wave of significant ripple effects in the global economy. Next, we’ll take a look at the opportunities in venture capital investing.
HYPOTHESIS: THE OZEMPIC TRADE
As VCs, we come to the question of how to weigh GLP with our own realities and viewpoints. We can’t “short” or invest directly in the downfall of any legacy / incumbent businesses — that’s not how venture works. We can only make “long” investments in early-stage businesses that we expect to have a disproportionate upside from GLP-1s.
Further, like most VCs, we believe in making strong investments, not just “GLP-1 market” investments. If GLP-1 takes the world by storm, these investments will enjoy asymmetric upside and growth. And if GLP-1 drugs underperform, these companies may still succeed on their own merit, with the flexibility to pivot to superior strategies in the weight management market.
INVESTMENT AREAS
Which categories/spaces might be most and least appealing in a GLP-impacted market? While there are no guarantees here, we believe these spaces might be boosted. We’ve listed sectors in order of how directly they’re related to GLP-1 adoption, with the top of the list spaces most connected to GLP-1 drugs being bought, and so on.
Pharma and Biotech.
These players receive the vast majority of proceeds from drug sales (~90%). While a venture strategy doesn’t enable us to invest in Eli Lilly and Novo Nordisk (current leaders in the space), it does let us invest in challengers and upstarts, especially those with a scientific/technological advantage.
The popularization of GLP-1 drugs will drive the popularization of the weight-loss category at large, which is predicted to result in many new drugs being launched. Meanwhile, side-effect profiles, risk factors, and predispositions will limit some use of GLP-1 drugs, which will likely further jump-start new drug development.
Example Ventures: Transcera, Carmot Therapeutics, Rivus Pharmaceuticals, Glyscend Therapeutics.
Drug Development Infrastructure.
These solutions can range from hardware and software for drug production management — driving efficiencies that will be bolstered by increased drug demand — to ingredients suppliers, product management tools, discovery software, and more. Such products will serve the cash-rich biopharma businesses that are producing GLP-1 drugs.
Example Ventures: Iterative Health (AV portco), Concerto Biosciences (AV portco), Cyrus Biotech (AV portco).
Drug Distribution and Add-on Services.
Many startups have already launched as platforms to prescribe and distribute GLP-1 drugs. Owing to the low margins on the drug itself, these startups will succeed by layering on services such as consultations, tracking software / hardware, affiliate / referrals to other businesses, and so on.
This is becoming a fast-moving and active space for venture investment. Incumbent, broader online pharmacies and prescribers will also likely benefit from cross-selling by bringing more volume from GLP-1 onto their platforms.
Example Ventures: Thirty Madison (AV portco), Form Health, Hims/Hers, Calibrate, Lark, Vida Health.
Supplementary Weight Management Services.
These are non-competitive services focused on weight management that are not directly involved in the trade of GLP-1 drugs. Examples include coaching/diet management services during or after a course of drugs or potentially new services that address negative side effects of GLP-1 drugs, such as gastrointestinal issues.
Example Ventures: Mindset Health (AV portco), IsoThrive (AV portco), Levels (AV portco), Oura (AV portco), Oviva.
Cosmetic Products and Procedures.
Rapid weight loss comes with cosmetic consequences in addition to benefits. These include loose skin, facial wrinkles, and leftover effects from previous weight gain, such as stretch marks. While a person’s skin will gain elasticity to account for gaining weight, stretched skin can sometimes require surgical removal. As a result, we expect ventures which provide cosmetic products and procedures to improve skin appearance to see higher demand due to GLP-1 adoption. This includes both traditional procedure-based treatments like injections, plastic surgery, and skin removal surgery, as well as new developments in cosmetic technology and skincare products.
Example Ventures: Droplette (AV portco), Peachy, Ourself, Moxie.
Health Foods/Food Programs.
By reducing cravings and overall food orientation, GLP-1 actually incentivizes healthier eating by decreasing the pleasure of eating for its sake. To optimize the results of a course of drugs, a consumer will more likely adopt healthy / diet food programs. These are solutions such as meal prep and delivery program (not to be confused with restaurant delivery; to be discussed later), meal supplements / replacements, alternative meats, and other recurring use products / services. In favor of this hypothesis, only one food category is purchased significantly more by GLP-1 patients than the general population: shelf-stable meals (a 12% difference).
Example Ventures: Athletic Greens, Blue Apron, MudWTR (AV portco), Prime Roots (AV portco), WECO Hospitality (AV portco).
Health Insurtech.
If the overall population loses excess weight, comorbidities and healthcare spends will also drastically decrease. As a result, insurance businesses (startups and incumbents) will benefit in aggregate, with fewer claims resulting in more flexibility on underwriting. This margin expansion may be a boon to new insurance startups and insurtech players who support the overall value chain. With this said, big insurers may be less willing to pay for products if the health benefits of GLP-1 turn out to be profound. The higher the correlation between GLP-1 adherence and medical cost savings, the lower insurance companies’ motivation to dole out subsidies, incentives, and channel partnerships to other startups tackling related spaces. Of course, this is subject to significant regulation, so outcomes here are highly uncertain, even in a future where GLP-1 proves to be a blockbuster.
Example Ventures: Modern Life, Fabric (AV portco), Taro Care (AV portco).
Apparel.
There is a widespread expectation that apparel retailers will benefit from selling more products as individuals lose weight — both transitional products and smaller sizes. Retailers will further benefit should there be rebound effects, where patients previously on GLP-1 drugs regain weight. Beyond more product sales, popularization of GLP-1 provides opportunities to address new customer personas, marketing channels, and purchase occasions.
Example Ventures: Lululemon, Bonobos, Rhone (AV portco), Nextiles (AV portco).
Exercise.
Perhaps counterintuitively, GLP-1 patients tend to exercise much more than before. A recent survey found a twofold increase (from 35% to 71%) in weekly exercise for people using weight-loss drugs. The hypothesis here is that these patients feel more energized and able to exercise, plus more excited to see what their “new bodies” can do. Patients are also aware of the need to instill strong habits to keep the weight off. Meanwhile, traditionalists who believe in exercise as the best path toward weight loss may redouble their motivation in the wake of a general weight loss trend. As a result, we expect fitness lifestyle expenditure to increase.
Example Ventures: Kabata (AV portco), Hydrow (AV portco), Peloton, Equinox.
Active Leisure.
Activities where being in shape is a prerequisite may experience a boom in popularity. Even a small portion of newly fit individuals trying/returning to physically demanding activities could bring an influx of millions to sports.
These can be physically intensive activities — such as skiing, climbing, biking, hiking, running, etc. — or aesthetic activities that involve simply enjoying or displaying a lighter physique.
Example Ventures: Cabana (AV portco), Future (AV portco), Strava.
WHERE TO TREAD CAREFULLY
Spaces poised for downside as a result of GLP-1 popularization might include the following.
Competitive Weight Loss Products and Medtech.
GLP-1 use is expected to decrease demand for more invasive weight-loss procedures like banding, liposuction, and cosmetic procedures. Devices purpose-built for these procedures may also suffer due to the availability of a cheaper, less-invasive alternative.
Example Ventures: ReShape Lifesciences, USGI Medical.
CPG and Grocery.
Analysts expect the 8% aggregate decrease in food consumption by GLP-1 patients to most directly hit grocery stores and food producers, especially for snack categories. A new snack brand or grocery-enabling tech company may experience headwinds due to less consumer appetite, coupled with contracting volumes and margins by enterprise buyers such as grocery stores.
Example Ventures: Instacart.
Alcohol.
Diminished cravings and focus on healthy consumption driven by GLP-1 drugs are expected to significantly reduce alcohol consumption. Beyond impacting beverage producers, this trend could also hit industries closely tied to alcohol consumption.
Example Ventures: Instacart.
Restaurant Delivery.
As with food producers and grocers, restaurant basket sizes are expected to decrease. This hits delivery providers particularly hard, who rely on larger basket sizes to generate contribution margin.
Restaurants might also see reduced totals per seating, but could compensate by altering price or portion sizes. Macro trends around restaurant popularity remain, and eating out may popularize more as a leisure experience of GLP-1 patients are excited to be seen out and about.
STAY NIMBLE
With GLP-1 drugs only recently popularizing, we don’t yet fully understand side effects and the longitudinal effects of the drug. This includes how pronounced a rebound effect may be after finishing a course of medication. Besides being key considerations for patient health outcomes, it’s also important to consider the effect they have on public opinion and sentiment towards GLP-1 use. Highly negative health effects, as well as negative sentiment, could sink the economic promise of some sectors we’ve highlighted. This underscores the importance of a nimble investing strategy focused on strong management teams and businesses with high degree of GLP-1 upside, as well as insulated downside through innovation and capitalization.
