This article was first published in The Telegraph’s Questor column today.

Investors looking to back the next generation of weight-loss drugs following a warning that the current blockbuster treatments from Novo Nordisk and Eli Lilly may cause ‘more harm than good’ should put Bellevue Healthcare (BBH ) investment trust on their watchlist.

Fund manager Paul Major has put 4% of the £665m fund into three companies developing alternatives to – or combination medications that can work with – the best-selling Ozempic and Wegovy drugs from Novo, and Lilly’s Mounjaro and Zepbound.

Shares in the Danish and US pharmaceutical giants have soared 355% and 745% respectively in the past five years, helped by booming sales of the injectable appetite suppressants, which were forecast to hit $47.4bn (£36bn) this year.

Their meteoric rise and out-sized returns have dominated the healthcare sector and drawn comparison with the Magnificent Seven technology titans that pushed the US stock market to all-time highs but left investors worried about their valuations.

Concerns over the glucagon-like peptide-1 drugs (GLPs) currently leading the treatment of obesity and type 2 diabetes follow clinical studies that suggest patients lose muscle at a far faster rate than people who are dieting or exercising.

George Yancopoulos, co-founder and chief scientific officer of Regeneron, a US biotech that is one of more than 80 companies seeking to break into the lucrative weight-loss market, this week told the Financial Times: ‘The GLPs should be viewed with a lot of concern in terms of the way they’re being used in the real world.’

Bellevue’s Major, a former healthcare analyst and corporate financier turned stockpicker who does not hold Novo Nordisk or Eli Lilly, agrees. Although the weight-loss treatments are ‘broadly safe and effective’, he said they have drawbacks.

In addition to the challenges of scaling up manufacturing to serve a potential global market of 800 million people, Major said there were side effects of nausea and the loss of bone and muscle mass, which could be serious for older patients and postmenopausal women. 

Even where treatment is successful, ‘if there is no support, after a year of medication people put 70% of the weight back on and can end up unhealthier’.

Major (pictured above), who in July had 2.2% of his fund in Structure Therapeutics, a San Francisco-based company trialling a weight-loss pill that may be easier for patients to take than Novo’s and Lilly’s injections, said: ‘There’s a realisation they need to pair up with a next-generation treatment... I think oral drugs will be superior.’

Major and co-manager Brett Darke are not getting carried away with the hype and will only allocate more money when trials are passed and the potential winners of a sustainable ‘weight maintenance’ market emerge.

The Bellevue trust is a concentrated portfolio of their 32 best stock ideas, almost all in the US, whose healthcare market is the largest and most dynamic in the world. They spread the positions across different sectors, with 24% in ‘focused therapeutics’ companies, such as Structured, and 22.1% in diagnostics companies, such as top holding CareDx, whose shares have shot up 169% this year to account for more than 10% of the fund.

A range of technology companies account for just over 30%, with health services and managed care providers taking 12.2% and 8.5% respectively.

Unfortunately, like rivals International Biotechnology (IBT ), Biotech Growth (BIOG ) and Worldwide Healthcare (WWH ), the Bellevue fund has also suffered a crash diet.

The 3.4%-yielding shares have fallen 14.5% in the past three years, reflecting how the sector was shunned after the 2020 pandemic as either too racy as interest rates rose or too boring as the speculative boom in AI took off.

Bellevue, which is 56% invested in smaller and medium-sized companies, was hit badly in the interest rate scare of 2022 when the shares slumped 21%, costing the fund its earlier outperformance since launch in 2016.

While bruised, the trust is like its rivals a good way to play the global trend for increased healthcare spending as populations age or grow wealthier. With interest rates falling, sentiment towards its companies should improve.

Remarkably, unlike previous battles for the White House, the US election has not focused on healthcare costs. That’s fortunate for the healthcare sector, which suffers when a political football. With the shares at 147p trading 9% below the valuation of the portfolio, a wider-than-average discount that could narrow as the company completes an annual redemption for shareholders who want to sell, this is a good time to jump in.

Key facts

Market value: £665m
Year of listing: 2016
Discount: 9%
Average discount over past year: 7%
Yield: 3.4%
Most recent year’s dividend: 5.99p
Gearing: Zero (31 May)
Annual charge: 1%