Morgan Stanley IM: Next Order Effects of Increasing GLP-1 Use

Since the launch of Ozempic in 2017-18, GLP-1 drugs have gained social acceptance as an effective way to lose weight quickly. Looking ahead, GLP-1s are expected to become the biggest drug class in history, with annual sales projected to potentially top USD $100 billion over the next five years. [1] Though only injectable versions of the drugs are currently available, adoption among target populations is still strong. GLP-1 demand will likely be turbo charged as pill versions are launched over the next year or two, which will reduce cost concerns and eliminate the burden of weekly injections.

While health care is the most obvious place to look for investment opportunities related to GLP-1 trends, we are considering the broader implications. We believe some of the most interesting investment opportunities, or threats, to companies are actually uncovered when considering the second- and third-order effects from these kinds of developments. One of the biggest areas of impact we see is a shift in the consumption behavior of individuals, with alcohol demand likely to be among the hardest hit.

In fact, with that expectation in mind, we reduced or exited our alcohol holdings last year, before these effects could meaningfully play out.

Early retrospective studies suggest GLP-1s may significantly reduce users’ alcohol consumption, to the extent the drugs are now being studied as potential treatments for alcohol and other substance use disorders. Scientists are working to understand the underlying mechanisms, but one theory is that GLP-1s may slow alcohol absorption in the stomach, reducing its rewarding effects while increasing gastrointestinal side effects like nausea and vomiting. Another hypothesis is that GLP-1s affect the brain’s dopamine reward system, reducing cravings. [2]

Our analysis of third-party studies points to a potential 75% reduction in alcohol consumption among all patients taking GLP-1 drugs, driven by 50% fewer drinking occasions and 50% fewer drinks per occasion.[3] This contrasts with some estimates that suggest a 50% reduction in intake among just 50% of patients, implying about a 25% overall drop. Further, some argue there won’t be a headwind at all, pointing to differences between the GLP-1 patient population and the core alcohol consumer. However, some companies are already noting the effects. One tequila market leader has highlighted that overall spirits consumption in the U.S. has been affected by GLP-1 use, while a popular whiskey brand maker cited GLP-1 use as a potential contributor to the spirits industry’s slowdown.

If our analysis is correct in assuming an approximate 75% drop in alcohol consumption among GLP-1 users, the impact on total alcohol demand could be significant, especially in markets where consumption exceeds the global averages. For example, in the U.S., if just 10% of the overweight and obese population were taking a GLP-1, alcohol demand could decline by 6%. In the event the entirety of this population were to take a GLP-1, that negative impact jumps to a staggering 55%. And usage isn’t limited to the target population; individuals not considered overweight are also taking them, implying the total addressable market, and the impact on alcohol demand, could be even more meaningful. [4]

While alcohol stocks have been weak in recent years, we don’t believe this level of potential long-term demand disruption is reflected in the companies’ current cash flow estimates and valuations.

On the other hand, studies show that 70% of people who begin taking a GLP-1 report exercising frequently, double the 35% who did so before they started using the drug. These behavioral changes can also influence others in the household, whether they are taking the medication or not. [5] In our view, the increase in physical activity could benefit makers of athletic clothes and footwear, and other fitness-related goods and services. That said, not every company will benefit equally from this trend. We favor companies with strong brands and innovative products that have a unique edge in their respective markets.

As a team, our goal is to invest in undervalued, high quality companies with sustainable competitive advantages. When we consider the quality of a company, one of the elements we analyze is how disruptive change could impact its fundamentals. We take a “first principles” approach, weighing both the opportunities and risks that can result from these developments. Often, looking beneath the surface of the headlines reveals wider-ranging, actionable insights for active, fundamental investors to uncover.

1 Source: AlphaSense.
2 National Library of Medicine, “Human Laboratory Screening of Semaglutide for Alcohol Use Disorder,” Dr. Christian Hendershot (Principal Investigator), et. al., February 9, 2023.
Nature Communications, “Associations of semaglutide with incidence and recurrence of alcohol use disorder in real-world population,” by William Wang, Nora D. Volkow, et. al., May 28, 2024.
3 Patton C, Brooks A, Brooks B, McKelvey K (preprints study); Morgan Stanley Investment Management analysis.
4 National Institutes of Health, Centers for Disease Control and Prevention, Morgan Stanley Investment Management analysis.
5 AlphaWise; Morgan Stanley Research.