Novel weight loss drugs broaden the menu of investment opportunities

Fidelity's Paul McElroy says there are many compelling ways to play the recent frenzy among stocks of weight-loss drug manufacturers.

• A class of drugs approved by the U.S. Food and Drug Administration to treat diabetes and weight loss have generated significant interest among investors looking to capitalize on their anticipated blockbuster growth and impact on many market segments, including Fidelity Portfolio Manager Paul McElroy.
• "We believe GLP-1 drugs will meaningfully shift dynamics within the health care sector, and may also have a widespread, long-term positive impact on consumer staples and consumer discretionary companies," says McElroy, who co-manages Fidelity Advisor^® Healthy Future Fund with Melissa Reilly.
• Launched in May 2022, Healthy Future Fund is a thematic equity strategy dedicated to investing in global health and wellness companies. A major theme for McElroy and Reilly is to follow the health care sector and tap into businesses that are on the cutting edge of medical research and development that may extend or improve life expectancy, as well as general health.
• The drugs, knowns as GLP-1 receptor agonists, have proven effective at suppressing appetite and controlling diabetes, leading to projections of blockbuster growth for certain drugmakers, given elevated obesity in the U.S.
• Eli Lilly, which produces multiple FDA-approved GLP-1 treatments, including Mounjaro^®, Wegovy^® and ZepboundTM, is an outsized fund holding as of February 29. "Lilly is a leader and at the center of these obesity treatments, and its growth potential is significant," says McElroy. "We don't see this frenzy abating, and I think these drugs will be revolutionary in terms of improving health."
• Investors have begun to assess the impact these weight-loss drugs could have on other areas of the market, including makers of snack food and sugary beverages. Producers of these discretionary food items have seen their shares decline for the past year due to concerns about weakening demand, given the projected adoption of GLP-1 drugs.
• McElroy notes that he and Reilly have identified potentially overlooked areas that may have yet to play out and that align with the fund's investment objective. For example, fund holding DexCom, a California-based maker of continuous glucose monitors, saw its shares drop because investors discounted the company, reasoning that its monitors may be less relevant among diabetics taking these drugs.
• "I disagree with that notion," McElroy attests. "Regular monitoring of blood sugar is the most important thing you can do to manage type 1 or type 2 diabetes, and it's not a function that can simply disappear when a diabetic loses weight," he says. "In fact, we see continuous glucose monitors as a critical feedback loop for GLP-1 users, so we invested more in DexCom when its stock price declined, believing there was good value to be had."
• In other areas, the fund has favored a trio of apparel and footwear companies in the consumer discretionary sector: lululemon athletica, On Holding and Deckers Outdoor. The co-managers' assessment is that these companies could experience further sales and earnings growth as people undergoing a weight-loss transformation purchase more fitness gear to supplement higher physical activity.
• "We are excited to follow this segment of the market, especially since it directly pertains to the fund's focus on global health and wellness," McElroy concludes. "As we monitor the impact of these potential blockbuster weight-loss drugs, we will continue to seek opportunities to capitalize."