Ryan Daniels, CFA, partner and group head of healthcare technology and services, discusses the impact of GLP-1 drugs on healthcare spending and care delivery, along with the need for healthcare services and digital health providers that can help employers and consumers effectively manage the emerging wave of GLP-1 drugs.

Podcast Transcript

Chris Thonis
Hi, everybody. It's another episode of William Blair Thinking Presents. This time we welcome back Ryan Daniels. He's CFA, partner, and group head of healthcare and technology and services sector [in equity research]. Ryan is once again joining us to talk through his team's latest healthcare mosaic report they release every quarter, which sets out to cover a far-reaching topic of interest in the healthcare space, analyzing its impact for the broader healthcare marketplace.

Thus far, we've done two of these. This one, however, is focused on the growing impact of GLP-1 drugs on the healthcare spending and care delivery sector, along with the need for healthcare services and digital health providers that can help employers and consumers effectively manage the emerging wave of GLP-1 drugs. So, with that, Ryan, do you mind just providing a brief overview of what this latest report is all about and why you decided to do a deeper dive into the role of GLP-1s and, how they're playing out in the healthcare marketplace? And I'm thinking maybe we first briefly touch on your section about the growing prevalence of GLP-1s and then we can go from there.

Ryan Daniels (01:28)
Sure, Chris, that's actually a great starting point. Let me thank you again for the invite to join you on the podcast. As you mentioned, we've done two of these already and it's always a fun experience. So first off, just a little bit of background. GLP-1s have actually been around for about two decades, but the primary use of these drugs has been for treating type 2 diabetes. However, over the last two years or so, the use of such drugs for weight loss indications, both on and off label has really gained a ton of momentum.

And because of all the recent approvals for weight loss and subsequent studies on the potential of long -term health benefits, GLP-1s have become a major buzz topic in the healthcare industry today. However, the focus to date has really been on the pharma manufacturers that are making the drugs and their growth potential, or maybe the second order effect on other areas in the healthcare value chain. That's a little bit less clear, so let me give you an example.

These drugs could have an impact on the demand for medical devices like sleep apnea masks, meaning if they truly reduce weight, does that concomitantly lower the need for such devices and how quickly might that demand disruption manifest? And as another example, similar questions have surfaced in areas like continuous glucose monitoring or CGM as well, meaning if the drugs proliferate and help reduce diabetes, would it reduce demand for such medical technologies over time? But with our report, we wanted to take a novel angle on the impact for healthcare services and digital health vendors as we actually see a really significant role for these entities as GLP-1 drugs for weight loss become more common across the United States. Yet based on our conversations with clients, no one has really addressed this topic before.

So to directly answer your question, that's why we decided to focus on this aspect of the market for our report.

Chris (03:18)
How broad, Ryan, would you say is coverage for GLP-1s for weight loss? I know as you mentioned in the report, the assumption might be that insurers and employers are anxious to offer drugs to their members given the cost of obesity around the globe, but it seems like these trends are actually a bit mixed. Do you mind talking a bit about that?

Ryan (03:35)
Yeah, a few points here. First, the market's truly massive. For one, in the United States, it's estimated that about seven in 10 adults are either obese or overweight, along with one in three children. And more broadly, data from the World Obesity Foundation predicts that by 2035, about half the world population will be overweight or obese. So obviously, this is a huge problem. It's become a huge health care crisis for society.

So, you can imagine the excitement if there really is a drug that's safe to use, which can address this issue for so many people. And it really is a potential $100 billion annual market. And that's the reason why we titled our report, The $100 Billion Solution to the Trillion Dollar Problem, which is in reference to the cost of obesity and treating all its related conditions. Second point, and I think this is probably inferred in your question, we know the healthcare costs for patients that are obese is markedly higher than for the average person. In fact, we reference data from the Kaiser Family Foundation or KFF in our report that indicates that the average healthcare spend for an obese member in a health plan was about $12,600 in 2021. And that was about three times higher than the $4,700 spent on non -obese members. So there's a huge cost delta that can be addressed if the drugs help drive long term weight loss and the comorbid conditions that are often developed due to or are exacerbated by obesity. So again, out of the box, employers were pretty anxious to cover the drugs for weight loss. And in 2023, we estimate about a quarter of employers covered GLP-1 for obesity. And subsequent surveys indicate that that could grow to about 40% this year in 2024. That said, initial data from many of the employers that covered it last year has also raised some really important questions. So number one, data from the U.S. Bureau of Labor Statistics indicates that the median time employers have been with their employers only about four years, 4.1 years to be exact. Some employers are now worried that if they cover the drug, they won't really see the long -term benefit associated with long-term healthcare costs, because an employee will be gone by then. Second, as you probably know, the cost of these drugs is really significant.

It ranges between $600 if you get a purchasing discount to upwards of $1,000 per month. And some early adopters saw such explosive growth that their healthcare spending skyrocketed. So after only a year of covering it, they already started to make coverage changes. And we've even seen this in the healthcare industry. So, to give you a few examples here, not to be too long-winded, but I think it's really interesting.

Chris (06:14)
No, that was great. Yeah, go ahead.

Ryan (06:16)
The Mayo Clinic is a great example. They actually imposed a lifetime limit of $20,000 on the drugs. And then the University of Texas Health System saw a great report there. They actually saw spending on GLP drugs grow from about $1.5 million a month to about $5 million a month over the last 18 months. And they stated that the drugs were now the most costly things they cover, even more than medications for complex conditions like cancer. Importantly, they also stated that fewer than 46% of the patients on the drugs actually stayed on them. So they were very worried that getting the ROI related to the initial spend was not going to be there, especially as data indicates that a large percent of patients will regain weight after they stop taking the drugs. And then not to belabor the point, but I just saw this a week or two ago, the state of North Carolina actually voted to drop coverage altogether as the number of covered members using the drug grew from 5,000 to about 25,000 during 2023.

And they felt they were going to have to massively increase premiums for the healthcare plan for the entire plan population of about 700,000 members just to offset the cost for the 25,000 using it. So again, they just dropped coverage altogether. And then as a final point, and this is also pretty important, Medicare does not cover this drug yet. They are not authorized to cover drugs for weight loss as the 2003 law that established prescription drug coverage, which is known as Medicare Part D, actually prohibits it. To be fair, there is legislation called the Treat and Reduce Obesity Act, which could authorize Part D coverage for certain individuals on Medicare for the drug. So that could change in the future. And, you know, in our view, it probably makes sense is unlike the working age population, individuals on Medicare are going to stay on Medicare. So, the ROI is probably more evident there. But again, as of today, Medicare does not cover the drug at all for weight loss. So again, to sum it up and really answer your question, Coverage today, still under half the market. Employees definitely want the drugs to be covered, but employers are pretty skittish given the cost and again, the uncertainty around the ROI.

Chris (08:24)
So, you pose a question around whether a market for healthcare services and digital health vendors exists in the GLP-1 space. It seems that the short answer is yes. You infer that not only does a market exists for these vendors, but they will prove to be critical assets for payers and consumers to capture ROI from the drugs. Do you mind unpacking that a little bit?

Ryan (08:46)
Indeed, I think that's one of the key takeaways from our report. And put simply, without a broader support structure in place for patients, the true clinical and health value of the drugs is unlikely to manifest in our opinion. And we see the surfacing in three ways or perhaps three different stages. So first, there's rationale to provide this pre-prescription of GLP-1. A lot of employers and insurers are actually starting to prescribe digital health programs before they approve the drug for coverage.

Ryan (09:15)
For example, employers may get access to virtual health coaches that develop exercise programs. They may get nutritional counseling, remote devices to monitor weight loss progress. Some even provide behavioral therapists and virtual care communities to help promote broader, healthier lifestyle change. And as an example here, Blue Cross Blue Shield of Michigan, they actually just instituted a change to their GLP-1 coverage, stating that you have to go through six months of this lifestyle modification program through digital health coaching before they're going to approve GLP-1 for anyone. So again, this can be seen almost as a step therapy where you begin with diet and exercise and behavior change, and then you can progress onto the drug option only if it's needed, given its cost. And then as you think about the second step or phase two, if you're going to get the drug, you need a virtual doctor visit to see the patient, assess risk, and actually prescribe the drug. You might need some lab work, and then you still need all this virtual support.

I discuss while you're taking the drug that you still need to watch your diet. You need to exercise to maintain muscle mass. You might even need more behavioral or clinical support and counseling to help stay on the drug because you're going to face initial side effects, potentially like nausea or diarrhea. So again, these digital health programs in tandem with the drug improve the chance of better clinical outcomes and outcomes that will lead to longer term adherence and the benefit of positive lifestyle changes that can be ongoing as well. I also think it's pretty critical to have things like remote monitoring and digital weight scales so you can remotely monitor the progress of individuals on the drugs because if they're not losing weight, you don't want to keep them on the drugs. You want to pull them off and again, try something else. So that's critical as well. And then lastly, part three, just ongoing maintenance of a healthy lifestyle, support of the patient, maybe moving beyond weight loss to address other chronic conditions. As I mentioned before, studies show that about 44 % of patients regain some or all of the weight they lost after they stopped taking the GLP-1s. So again, there's clearly a long-term need for digital solutions to keep these patients engaged. And then final point here, I think this is really noteworthy. Most patients are really interested in the drug for weight loss, especially if recommended by a doctor if they're obese.

But only 14% say they would be interested if they heard they'd regained the weight after stopping the prescription. So again, the drug and behavior changes really need to be embraced as a package offering in our view to get the full value here.

Chris (11:50)
All right, well, as a final question, do you mind just breaking down at the end of your report, I know you break down the addressable market analysis for this area. Do you mind just doing that for us?

Ryan (12:02)
Yeah, of course. That's always a question we get from investors when we write these reports, we try to address it. So for this analysis, we looked at some data from initial studies about how many patients are truly suitable for the drugs. And the data that came out indicates there's about 93 million adults in the U.S. So that was our starting point. And then second, we need to price out the cost of these digital health services, which we think would range between $60 and $90 per month based on the models we see in the marketplace today.

To be clear, many of these are currently priced at a much higher level, but we think this is a range that will probably settle in given what we see in the competitive market and what we've seen in other digital health offerings. And then lastly, we had to look at usage or penetration. Of the 93 million lives, we assumed that anywhere from 10 to 30% would be on the drug and use a digital health program, and that led to an annual total addressable U.S. market or TAM that range between about $1 billion and $2.5 billion, again, depending on the price and the penetration range. So for those interested, it's laid out, as you said, in a lot more detail in our report as part of a fairly detailed scenario analysis. The other thing we did was we reran the entire analysis, just excluding Medicare members. As I mentioned earlier, it's not yet covered. So here we estimated a market, ex-Medicare, closer to about $750 million to $1.8 billion annually. So still large, not as sizable as if Medicare covered it, but still a huge TAM for these operators as they look to the market.

Chris (13:33)
Ryan, as usual, I cannot thank you enough for joining. This has been great. Before I let you go though, is there anything we didn't mention that may be worth mentioning on your end?

Ryan (13:39)
No, I think we covered most of the key points. I guess the only other thing I would mention is, you we have an entire section in the report dedicated to all the companies that started offering digital health solutions in early ‘23 and early 2024. And it's pretty amazing as they range from leading pharma manufacturers that are producing the drugs. You've got health systems like the Mayo Clinic, you've got traditional weight loss companies, and of course our digital healthcare providers that really have the infrastructure and broader offering to provide this to payers and employers. So that's one thing. The second thing, I think it's also noteworthy that some of these solutions that are being sold direct to consumers for a monthly fee and kind of an initiation fee, almost like a gym membership and then ongoing monthly fee while you use it. But we believe the larger, more sustainable markets really going to be partnering with self-insured employers or partnering with health plans to offer this in tandem with the coverage. So again, we outline all of that in the report.

And those would probably be the only other things that I'd highlight. So that's it. And thanks again for the opportunity to join you. I really enjoyed doing this.

Chris (14:41)
All right, Ryan, appreciate it. Let's do it again soon.

Ryan (14:43)
Sounds great. Thank you.