There's a new class of weight-loss drugs in town. GLP-1 medications including Ozempic, Wegovy and Mounjaro were created to treat diabetes but have since been found to suppress appetites and induce substantial weight loss. It's a big deal for the companies which make them, with shares of Novo Nordisk and Eli Lilly all soaring in recent weeks. But the drugs could end up having a much broader economic impact too. On this episode, we speak with James van Geelen of Citrinitas Capital, about the second-order effects of effective weight-loss drugs. He talks us through how he's evaluating the potential of the new meds and how he approaches possible 'mega-trends' like GLP-1 or AI. The transcript has been lightly edited for clarity.
Key insights from the pod
:
What are GLP-1 drugs? — 7:05
How to invest in a hype cycle — 15:03
How much do these drugs cost? — 19:35
What are other companies saying about them? — 21:15
How many people are taking these drugs today? — 28:23
Obesity trends in the US — 30:17
What about fast food companies? — 33:15
The economic impact of obesity — 39:20
What are the impacts on insurance and other benefits? — 44:02
Tracy: (00:09)
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe: (00:14)
And I'm Joe Weisenthal.
Tracy: (00:15)
Joe. Would you ever go on Ozempic?
Joe: (00:19)
Oh yeah, definitely. Yeah. I can't wait.
Tracy: (00:21)
Really?
Joe: (00:21)
Well, yeah, why not? It seems fun. You know, it reduces your appetite. You probably lose weight. It seems like it also has a bunch of other things... I keep seeing these other things like it's good for like, you know, impulse control and all kinds of positive things. So yeah, why not?
Tracy: (00:37)
Yeah. Supposed to be good for impulses and addiction. And also, I think there's some new stat out saying that it reduces the risk of heart attack and stroke by 20%.
Joe: (00:47)
Would you?
Tracy: (00:49)
I think, yes. However, I would definitely wait for the price to come down a little bit and maybe for more of the side effects to become apparent. But I'm very cautious with these sorts of medical breakthroughs.
Joe: (01:04)
Yeah I am too. I don't know that much about all these drugs like Ozempic and Wegovy and the other GLP-1s, but they seem pretty great. And I'm just like, yeah. ‘Upward and onward. The March of Progress. Science. I love it.”
But I actually do think people are so skeptical of even the possibility of the existence of a wonder drug. People are like “It's gonna do this. It's gonna be bad, it's gonna reverse.” And maybe that's possible. But what if it really is a wonder drug?
Tracy: (01:37)
Well, exactly. And I think it opens up a ton of interesting questions, specifically about what it means for wider society. And the wider economy. When we know that obesity and diseases like diabetes have been this huge weight on both the socio-economy and the healthcare industry.
Joe: (01:57)
Obesity itself is like just this gigantic economic force. It's a business force. There are businesses that thrive on how much people like to eat unhealthy foods. There are huge costs to insurers. There are other second order effects of related to injuries and heart complications and so forth. It's such a modern, important phenomenon that were there to be — and maybe it kind of looks like there is — this sort of straightforward way to reduce obesity, then it seems like the implications would be huge.
Tracy: (02:28)
Right. And I keep getting visions of like Star Trek in my head where everyone is kind of slim and dressed in tracksuits. It sounds great. And very athletically capable. And we all just wander around spaceships. That sounds great. Well, anyway, on a serious note, I think we need to dive into these new sets of drugs. What exactly are they, how do they work? And more importantly, more interestingly, what do they actually mean for the wider economy and the business environment?
Joe: (02:57)
I'm so glad we're doing this 'cause it does feel like beyond just the companies selling these drugs, which we know have taken off, we're recording this on August 9th, just yesterday, Novo Nordisk, the Danish company soared because they had another test showing that one of these drugs was very good for fighting heart disease. So we know that there's like the interest in the vendors, the sellers of these drugs.
But again, what does it mean all these second and third order effects, if these really become extremely widespread and it kind of looks like they're on that trajectory, feels very unexplored.
Tracy: (03:29)
Yep. So let's dive into those second order effects of miracle weight loss drugs. Uh, fun episode ahead. We have really the perfect guest. We are gonna be speaking with James Van Geelen of Citrinitas Capital, also known as Citrini on Twitter. So James, thank you so much for coming on Odd Lots.
James: (03:47)
Hi Tracy. Hi, Joe. Thanks for having me.
Tracy: (03:48)
So James, from what I remember, you actually have something of a medical background. Is that right?
James: (03:55)
Yeah, I worked my way through undergrad as a paramedic for a while in Bridgeport, Connecticut. And then when I transferred to UCLA, I worked as a paramedic in Compton, California. So I'm not a stranger to the medical field. And then for about four years, I co-founded one of Connecticut's first medical marijuana dispensaries. So I’m definitely not a stranger to the medical field. Now I do the hedge fund thing, and it comes in handy once in a while.
Joe: (04:22)
Investing in medical technology or biotech often it seems like this sort of like roulette wheel, and I'm always skeptical that anyone who is like not a scientist can actually have informed insights on new medicines and how big they could get, et cetera. Can you just sort of like, give your overview of like, how do you even think about these things?
If you're not like a scientist, how do you even begin to like, wrap your head around like how do these drugs work and how big they could be and which ones have more potential than others? What's your framework for like, sort of just like evaluating some breakthrough in the first place?
James: (04:59)
I mean, I don't do a ton of like, biopharma investing. I'm not a scientist, but I do have a busy network of channel checks. And I'm a big proponent of basically if you don't know something, ask. I'm always bothering them. And, you know, all it costs me is a couple dinners or something. But, you know, I don't do much, if any, investing in companies that are still clinical stage.
And, you know, a lot of my investing is kind of thematic investing. It's focused on these kind of paradigm shifts. These mega trends essentially. And when you see something like this, right, you know, all the feedback from Challenge X is good. And it's something that we've kind of needed in developed markets, at least for decades.
And you just see the kind of behavioral incentives that exist surrounding it. And I always come back to, basically, you look at like Viagra in the 90s and, you know, know you did not have to be a doctor to kind of see Pfizer just killing it, you know, just doing amazingly with this drug that solved the problem that people had that, you know, needed to be fixed. And it worked.
And, you know, honestly, that might be the reason that most of us know who Pfizer is, right? So, you know, whether it's buying Moderna when they're developing a Covid vaccine or buying Eli Lilly when they're developing, you know, a fat vaccine or Pfizer with Viagra in the nineties, it all falls under the megatrend looking for kind of these paradigm thematic shifts.
Tracy: (06:29)
I think people forget nowadays that Viagra was initially developed for something totally different to what it's used now. And that happened to be a sort of happy side effect of the medication, I guess. And then it became known for that. But just on this note, let me ask the basic question. So how did these drugs, GLP-1s, I'm not even sure what that stands for, but how did these come into being.
And how are they starting to spread through the market such that I meet VCs who will openly say that they're on Ozempic , and I'm pretty sure they don't actually have diabetes.
James: (07:05)
You know, so GLP-1 stands for glucagon-like peptide. And I don't wanna get like too scientific, but basically the peptide helps kind of prime insulin release, right? It allows the body to absorb glucose after a meal. And you have specific cells in your pancreas that can recognize GLP-1 through molecules called receptors. Right?
So essentially we've been looking into these drugs, you know, called peptides. The medical field has been looking into them, you know, since the seventies. And GLP-1's primary benefit was the fact that it was able to produce blood glucose levels via insulin release, which is, you know, very desirable in a patient with diabetes. And the thing was, you know, when it comes to peptides, normally you're trying to mimic the peptide that your own body produces. So the actual molecule, glucagon-like peptide one is only to able to create these effects for a very short time span.
And so what these genius engineers discovered was that they can essentially mimic these hormones and have these molecules that bind to the receptors. They're called agonists. And that can create an effect that lasts, you know, four hours or even weeks. And that was basically the basis of the initial development.
And the impetus for it was essentially to go after diabetes, right? If you have something that can regulate glucose that is possibly dysregulated in a patient with diabetes, that's kind of something that seems desirable, right? So they were kind of predicted to also prolong this feeling of, you know, fullness and slow gastric emptying. And they also provide a variety effects in the brain. And these drugs do cross the blood brain barrier. And the first GLP-1 drug that was approved by the FDA was Exenatide, it was marketed under the name, name Byetta.
So Byetta was approved in 2005, right? And primarily to be used in Type-2 diabetes. And while you have something like semaglutide right now, which is Ozempic, it's a generic name for Ozempic. And then Mounjaro, which is Lilly's drug it's tirzepatide is the generic. And the thing is, once you have a class of drugs that you can kind of anticipate what the side effect profile will be, it's not necessarily that you can, you know, anticipate every single side effect, but you kind of, you get an idea of the structure activity relationship, you get an idea of, you know, this dose-dependent curve and where side effects start becoming apparent.
And so with GLP-1s, they have side effects, right? They have some GI side effects, and these GLP-1s receptor agonists, like semaglutide, they can be pretty bad.
But what Lilly saw was essentially it was decided that they would try it to go after different receptors in the same system, right? Mounjaro is basically a dual GLP-1 receptor, and then GLP receptor agonist. So the way that that works is the GLP activity allows you to take a higher dose before experiencing the side effects, the GI side effects.
And we also kind of know, you know, these since these drugs, you know, Trulicity was a big one that was approved in I think 2014 for type two diabetes. It saw very wide use. So when you encounter someone and they're like, “Oh, you know, no, for sure these drugs are gonna melt your insides.” You know, I don't blame them for that. Because if you look at the history of weight loss medication, you think Fen-Phen which like basically melted your heart then, you know, Rimonabant, which was like this genius invention where the scientists were like, “well, you know, the cannabinoid receptors, basically the receptors that THC act on those make you hungry. So if we block those receptors, then it should make you not hungry. And it did, but you know what else the cannabinoid receptors make you is happy. So, I don't know how they didn't see this coming, but it made people very sad and increase the likelihood that they would commit suicide.
And that, so that drug was pulled very quickly. And, you know, you kind of look at the past of the weight loss industry, people taking, you know, tapeworm pills and just doing absolutely insane things. And it's kind of like, okay, now you have this drug. And the absolute worst concern, you know, that there's a warning on the FDA label is that it may, you know, it may result in thyroid cancer.
But the thing is, the only time that that's ever been observed with these GLP-1 drugs is in mice. And the thing about mice is when you're doing a trial with a mouse, the mouse is not gonna tell you, “I can't handle these side effects anymore. I'm gonna stop taking the injection.” Right?
No mice drop out of trial studies. So what happens is, you know, like, if you were to take the equivalent dose that caused, you know, these endocrine cancers in mice before you reached that point, you would be so sick to the level of not being able to function.
So the dose was much, much higher. And it has not been observed in humans. And the other thing is, this is probably a little controversial, but the fact is, like obesity is devastating, right? It is absolutely terrible the way that it increases mortality.
I mean, I'm gonna drop some statistics that Lilly dropped on their earnings call, which is that, you know, there are 236 obesity-related health conditions. Type-2 diabetes risk is increased by 243% in people with obesity, heart disease by 69%, high blood pressure by 113% high cholesterol by 74%.
And the contribution to all cause mortality is so significant that essentially, if I had a drug that would and again this has never been observed in humans, it's probably not going, to be because of the relationship that I described with the dose. But let's say I had a drug that a hundred percent, no matter what, in 40 years, you're gonna develop thyroid cancer from it. Even if that was the case, if it also 100% of the time made you not obese anymore, the net effect on your life expectancy would still be positive.
Joe: (13:30)
So you mentioned in the beginning that you as an investor, you like to think about people call paradigm shifts or mega trends and so forth. And one of the things that, thinking about it in this context, and I think there is a very good argument, I'm basically sold that the rise of these drugs will constitute a paradigm shift or a mega trend or something like that.
And I feel like many people buy that. But the other thing is that, like, betting on megatrends often is not trivial in terms of, even if you could predict the trend, you might not know what to invest in. And so, you know, a good example might be, say, the rise of Chinese industry or something like that over in the, you know, in the 21st century since it's entry into WTO.
And I don't think like buying like Chinese stocks have like, been like some like extraordinary winner or certainly like long stretches of time where that doesn't work. So like, what's the next step from identifying megatrend to then thinking about, “okay, these will be actual winners as public market investments?”
James: (14:31)
Well, let me talk a little bit about hype, right? You just had Dan Loeb talking about how it's more important to monitor, you know, Reddit boards than it is to monitor fundamental...
Joe: (14:44)
“Flows before pros” That's Tracy’s line on her Bloomberg profile.
James: (14:47)
Tracy's ready to to spin up a fund that takes advantage of that. What was that? The guy in the basement has the edge...
Tracy: (14:56)
Well, it's all about the story, all about the narrative, right? And the guy reading Reddit might have a better handle on that, but go on...
James: (15:03)
This kind of, you know, memetic investing. So yeah. You guys have heard of the Gartner Hype Cycle. For those who haven't, the way that it looks is you have this kind of parabolic rise between the technology trigger and then the peak of inflated expectations. And kind of the axiomatic way to give an example of this would be the.com bubble, right? You have the technology trigger, which is the internet, and then you, it kind of goes parabolic all the way up to the peak of inflated expectations, which would probably be, you know, in 1999 pets.com type stuff, where the things that are happening are absolutely ridiculous, right? The, the forecasts are insane. And the thing about a mega trend, or, you know, a theme that is persistent is it doesn't go unnoticed for very long. It can be a significant amount of time.
But you know, you speak about like Chinese industry in the 21st century, you know, like there was a period of time where you could have been early on that and you could have invested and made excellent returns that, you know, the peak of inflated expectations and then kind of exited before, I guess I think maybe, there was kind of a biphasic, so maybe it would've been the Asian currency crisis.
But then what happens is you get this trough disillusionment, right? Where it's like, this technology isn't real, everything is kind of hyped up. It was all bs, whatever, right? It was a bubble, right? And then that's what people always say. Exactly. It was a bubble. And then you get this, well, you know, the thing funny thing is people say it's a bubble while it's going up. Which it's kind of like when people say, you know, like, okay, you, it's, this is the difference
Joe: (16:35)
See this is the difference between a journalist an investor. We're like "This is a bubble!” And then other people are out making a fortune. I'm convinced this is why no reporter should ever, should ever get into trading.
James: (16:47)
I mean, you know, like, Bitcoin had an awful year, but like, how long was it going up for before, you know obviously it was a bubble, but like, you know, that doesn't mean that you, you have to like be a monk about it. You don't have to have this monastic view where “God forbid I benefit from a bubble. You know, those people are wrong.” Who cares?
So anyway, you get to kind of this disillusionment, and then the next phase is kind of the slope of enlightenment where, you know, he borrow a phrase from the VCs, it gets democratized. You know, you can go out in the street right now, if I go out on the street and I ask someone what the internet is, they're gonna look at me like I have five heads.
They don't necessarily have to know how it works, but they know what it is, right? And then you get the plateau of productivity in the prototypical Gardner hype cycle. The plateau of productivity is actually below the peak of inflated expectations. But I think most of the time in markets, it's actually higher. Obviously, there's a bit of survivorship bias on this. You know, nobody that owned pets.com benefited from the plateau of productivity.
But if you think about, you know, Facebook, Amazon, Apple, right? You know, these, you know, they, or even, you know, you look at like the Nifty 50 in the 70s, right? Like, so some of them have had very bad returns like IBM, but then, you know, Honeywell or Carrier Global, you know, you're, you get the uptake on the GDP effect. And essentially this is kind of the enemy of the mega trend, right?
Because it's very easy to recognize it in the beginning. And then if you're too late with it, you're gonna think that the peak of inflated expectations is just a pullback, right? When it's not, you know? So this is kind of something where it's good to continuously monitor whether your thesis is playing out, whether it is actually ha you know, whether it's artificial intelligence or, you know, like you said, the rise of Chinese industry or the Inflation Reduction Act.
And impetus of fiscal spending or, you know, GLP-1 drugs that as long as you are on top of it and you can see, you know, what are the earnings expectations like, and what are the actual, you know, like NVIDIA's probably going to, you know, beat and raise for the next couple years, but then you, you know, where is going to be the point where the expectations aren't sustainable? And when it comes to, you know, you said you wanted to talk about the knock-on effects. Which kind of, I mean, that's my favorite part of these things, right?
Like, like when you actually capture a theme and...you know, let me ask you a question. Do you think the knock-on effects are happening yet?
Tracy: (19:17)
I don't know what the takeup, so my impression is that actually we should ask how much do these drugs actually cost? 'cause my impression is that they're pretty expensive, and so they're not making huge inroads into the general population just yet. But that could easily change.
James: (19:35)
Well, you know, right now, as far as weight loss is concerned as an FDA on-label indication, Novo has monopoly, right? Novo has Wegovy, which is the drug that was, you know, just had the big headline, about 20% reduction in heart attack risk. And essentially when they, you know, they can pretty much charge what they want, right?
And the way that it's gonna develop is Lilly's drug Mounjaro, which is much more effective. And their other drug retatrutide which is still in clinical trials, but Mounjaro will be approved for weight loss by the end of this year. You know, that was reaffirmed by or within the next six months, right? That was reaffirmed by Lilly on their earnings call.
And let me get the answer to the question first, because I want to go into something that's gonna answer your question. But I do want to assess, right? So you think that the knock on effects aren’t happening yet?
Joe: (20:25)
So actually I've been wondering about this 'cause I actually was kind of under the impression, like, when are we gonna see a company crash on earnings? Because they say, you know what? We're seeing our sales collapse because...
Tracy: (20:38)
No one's eating our cheeseburgers
Joe: (20:39)
Right! Has it come up on any like, fast food calls yet? Has it come up on any like CPG company earnings calls yet? I remember last quarter Chegg, the textbook company, said like, ‘alright, we're running into trouble because AI is affecting our ability to sell this product that helps people with their homework.’
So have we seen that yet?
James: (20:57)
No one will ever say that again. you know that, right, Joe? Yeah. No. Even if it's happening, no one will ever blame AI again, right? They know what happened to Chegg
Joe: (21:06)
So is there other companies yet that are saying, you know what, in our customer base, we are seeing a change in consumption patterns of something because of these drugs?
James: (21:15)
A ton. Really a ton. Yeah. So just to go through a couple, right? And this will answer your question, Tracy, right? First off, yes, the drugs are expensive. These drugs cost about 800 to $1,200 a month, you know, which is a lot. And that is for Ozempic. And like I said, you know, you don't have anything that makes this much money that doesn't have competition, right?
So yes, Lilly will get approved for Mounjaro on weight loss, and then there will be a duopoly. And that'll probably last, I don't know, you know, anywhere from a year to three years or something like that. But to come back to Viagra, right? If you think about it, Viagra in 1998 cost $88 a pill. Okay? Now it costs $2.
Whether it's through generics, whether it's through competition, Cialis, what the way that it works is, you know, you have, you have competition, you have economies of scale, you have insurance coverage, you have, you know, the generic drugs, eventually GLP-1s, in fact, in 2031, will face mandatory discounting under the inflation reduction act.
So are they expensive right now? Yeah. But, and to come back to what we were saying before that still did not, you know, GLP-1s were mentioned a thousand times in the, in Q2-Q3 earnings calls. And only half of that was by pharmaceutical companies.
Tracy: (22:40)
I just did a transcript search and there's a Herbalife earnings transcript where they talk about GLP-1 drugs. So like, possibly impacting the business.
James: (22:51)
I will never short Herbalife, just because…
Joe: (22:54)
We all saw what happened with that.
James: (22:55)
I am always willing to learn from another person's mistake. Yes. And, you know, like, but best of luck to Ackman if he wants to go after it again. But, you know, if you have document search Tracy, you can look at Medifast. Herbalife didn't get hit as bad, whether, you know, I don't know if that's, I don't know what that was a function of, I think they tried to explain it.
I didn't really vibe with the explanation, but Medifast basically said that, we sell things that, you know, people use to lose weight. And they're like we cannot handle the competition from a drug that actually works. I think the direct quote was that, you know, ‘customer acquisition is being pressured by GLP-1s’, but you know, what they're doing now, their strategy is essentially, okay, let's do it too.
Tracy: (23:47)
A company like, didn't Weight Watchers do something similar?
James: (23:50)
Yeah, exactly. And that, you know, like, I love a company that is like torqued up levered melting ice price, like a melting ice cube, and then positioned right in the center of like a burgeoning, you know, huge trend, right? Because, you know, like a good example from another trend, artificial intelligence would be like Applied Optical Electronics, right? Which is like, like it was destroyed. And then, you know, with 800G and the data center demand for optical, you know, ‘We're so back’, right?, like Weight Watchers kind, “It's so over.”
Joe: (24:26)
I hadn't heard of Medifast, but I'm reading their descriptions. They talk about competition and among the things that they make are pretzels, puffs, cereal, crunch drinks, hearty choices, oatmeal, pancakes, pudding. So I'm basically... I don't know maybe the products are delicious, but I'm imagining the type of things that people who are sort of like really trying to lose weight are like, “oh, I'm going to eat these puffs and shakes because they're a little bit healthier than the alternative.”
James: (24:52)
I mean, you don't need to, that's the thing. You don't need to worry. You know, I was talking about my channel checks earlier. Yeah. And I have an endocrinologist, you know, like, Eli Lilly was one of my biggest positions from, you know, 2022, 2021 even. And it kind of got surpassed during the AI stuff. But I built up a basically, you know, like I would go to like an endo. Whenever you have a position that's super big, you know, you, you're on top of it, right?
And you can expense a trip to an endocrinologist conference. And you go there and like, I'm speaking to these people and they're like, I have a patient who's eating 5,000 calories a day, which is like a full-time job, right? Like 5,000. Once you get to like 5,000, 6,000 calories, that's like, I mean, that’s like eight full meals a day, right?
And he's like, I am, he's having issues because I have to recommend protein supplementation because he can't get above 500 calories a day. So if you look at a company like Medifast, that's basically, you know, selling this food that's a little bit healthier for you and, you know, maybe tastes the same so that, you know, you're kind of getting better macronutrients or something.
I mean, there might be an opportunity there for the protein shakes, but overall, like, you don't really need to worry about if you're taking this drug, you don't really need to worry about, “oh, you know, let me buy food that's like more, that's less calorically dense,” because like, it doesn't matter.
You're not gonna eat it anyway. And this is kind of interesting 'cause when you're looking at, when you're like monitoring social media, you know, like always monitoring like, you know, Google trends, Wikipedia trends, and for a little bit, I think this was like the middle of last year, you know, monitoring Google trends, and this Google trend comes up called “Ozempic Face.”
Tracy: (26:27)
When people get really gaunt from weight loss, right?
James: (26:31)
Literally I'm like, my finger's on the Sell Button. I'm like, ‘if it affects your face, I'm out.’ You know? And, and it turns out like people were like, “oh God, like Ozempic causes you to have like, you know, like a gaunt face or something.” And it's like, not really what's causing you to look gaunt is the fact that you're losing a ton of weight very quickly, right?
And you have another one where like, people are like worried about hair loss and, you know, that is a condition called telogen effluvium, right? Which is basically the same thing when you lose too much weight, your body is kind of like burning nutrients for energy. You're at a caloric deficit and you lose hair. It's totally reversible. And with like Ozempic Face, it's like you can't see wrinkles on like an inflated balloon, right?
That's just how, how it works. And it's kind amazing to me because you have this kind of impetus where people are like, “Oh, like this is that this is the side. Like, we gotcha. You know? Right? Like, this is, I knew there was gonna be a catch.”
And it's like, people are so unaccustomed to the idea of there being a weight loss drug that works, that they are confusing the side effects of the drug with the side effects of the effects of the drug, which is, you know, success being successful with weight loss.
Joe: (27:41)
Just for what it's worth, I'm sorry, I keep going back to this. I'm reading the Medifast transcript from earlier in the week, and one of the questions is Herbalife doesn't say anything. I'm paraphrasing, but one of the questions from the analysts is, ‘Herbalife didn't say anything about GLP-1 drugs affecting their business. What about you?’
And they're like, “Well, we're not gonna comment on Herbalife, but yes, we're feeling it.” So, yeah, it actually, it came up, they also cited higher customer acquisition costs. Again, they say pressured by less prospects being identified by coaches, impacted by competition from GLP-1 drugs, inflationary pressure. So it's coming up.
Tracy: (28:13)
Wait. So can I ask the basic question? Just before we go further, absolute. Can I ask a basic question, which is like, how many people are on these drugs now?
James: (28:23)
I mean, so I would rather not comment, right? I think that I would never be talking about something like this if I didn't think that it was early, right? So like, you can look at penetration like type two diabetes, right? You know, talk, talking about like penetration of a drug that's been approved for an indication for a year.
You know, it's like you're not really gonna get an accurate picture, you know, Mounjaro and also a drug where like, there's only been one approved for you know, and then you get also the fact that like, there are talking about, you know, mentions on earnings, there are significant supply chain issues with these drugs, right?
You know, like Novo is having trouble sourcing the drugs come in an auto-injector, right? Which is basically, if you think of an EpiPen, you know, take, you take it once a week. Yeah. And it's like a button that you push, but you look at like, like talking still about, like the earnings mentions. If you look at Stevenato or Gerresheimer or even Becton-Dickinson, the problem is that they can't produce enough of it, which would tell you something about demand, right?
Tracy: (29:23)
I knew this would turn into a supply chain episode eventually. Oh, it's
James: (29:27)
Only a matter of time. Please don't try to get me to talk about the supply chain, because I will seem very silly. But the thing is just even Lilly, right? Obviously they have to temper their optimism, but they're having to ramp up production at all, you know, five global facilities just because of the fact that like, they're like overwhelmed. They could not even have anticipated this level of demand. Right?
During Lily's earnings call, an analyst was asking a question that was basically like, Novo and Lily, you've been confronted by this demand that was like beyond what you could have possibly planned for. And with Lilly, you know, Mounjaro isn't even approved for weight loss yet. And so essentially it would be kind of premature to say, you know, what the penetration of these drugs is right now.
James: (30:17)
But what I will say is that, and I have a chart that I can, you know, send you, maybe you can put it up on the site, that essentially the obesity rate in the US in 1974 was 12%. Right? And now it's 42%. And for the past five decades, there have not been two sequential years in which the obesity rate has ticked down. It hasn't happened for 50 years.
So, you know, when you look at that, first off, I think it's not just reasonable, but rational to think that you can't have a society that has both advanced medication and then half of its populace affected by a disease and not think that eventually those two things will resolve each other, right? And if you look at the 68 week trial data on Mounjaro, and you adjust for, you know, the average compliance and you know, which patients drop out prematurely, and then, you adjust for the fact that after you drop out of the trial about half of the weight loss, you still maintain about half of the weight that you lost, but about half of it goes away, and you, so you adjust for all those things.
If Mounjaro 68 week trial data has a 30% penetration rate in the obese population, right? The obesity rate in the United States would be lower than it was in 1997. And, you know, like that could happen over the course of two or three years. And so, for a line that has gone up into the right to go down, you know, that significantly.
Joe: (32:03)
So I'm not surprised that, you know, mentions of GLP-1s are popping up on various conference calls, you know, some an obvious ways like the company that maybe makes the devices for its use or the companies that have some other weight loss solution that may be feeling pressure. But like, for example, today, again, August 9th, we got earnings from Wendy's, no mention of GLP-1 there yet.
I looked last month, we got an earnings from Pepsi. And, you know, if I were to think about like, ‘okay, in theory, in some future world where these drugs are very cheap and widespread, and who would theoretically be losers from drugs that reduce one's appetite for fast food, for salty foods, for high carb foods, whatever it is, in your mind’, is it obvious that a, some of these big consumer oriented companies are gonna be losers? So if it is, can you pick or predict a quarter when maybe this would come up on a Wendy's earnings call?
James: (33:07)
Well, so let's think, you know. So first off..
Joe: (33:10)
I mean if the question is totally off the mark, that's fine too…
James: (33:14)
I don't know, we're talking about second order effects. Sure. And this seems a little first order, Joe .
Okay. you're right, you're right. But I mean, it's a great point, right? And I think Wendy’s sells so much food, right? I love Wendy’s by the way. But the thing is, I think that if you wanted to be able to predict this, what you would have to do is you'd probably have to use all data or credit card data, and you would have to look at the company and maybe eat a lot of fast food for a month to figure out. But like, which of these companies done?
Which of these companies are willing to are basically making up for low margins with high volumes, right? Because it's not like these drugs are gonna automatically make you Jack Lalane right? You're not just gonna be like all all your habits are healthy now. Like if you're eating fast food every day, you will probably continue to eat fast food every day. You will just eat a lot less of it.
And let's say Chipotle, for example. Probably not gonna be that negatively affected, you know, like, like people, you know, they'll probably have the same order and they'll just finish, you know, a couple bites of it or something. I don't necessarily wanna speak to this, but just thinking of, like, Arby's, for example, I think is owned by a private company.
So I can, you know, talk about that without issue, but like the prototypical, let's just speak theoretically, there's, you know, an all you can eat buffet or something. Sure. They might do really well because people eat less, but at the same time, they might be patronized less because, you know, nobody wants all you can eat and you're not getting a good deal anymore.
So if you have a company and you look at the data, and basically the way that they make money is by selling a ton of food that they get very cheaply and make up for, you know, kind of lower margins by selling a ton of it, though, that company probably isn't gonna do too great. But, you know, it wasn't just Medifast, for example, you know, going beyond the idea of like food being impacted. Yeah. Like right now, Lilly has a trial for Mounjaro
Basically what these companies are doing is they are on this kind of blitz scale for like the data, right? Because the, like most of these things you can kind of rationally expect, like for example, with Wegovy headlines. Wegovy reduces heart attack risk by 20%. I mean, kind of like, duh. Like, if you go from being obese to not obese, you're gonna have a lower chance of heart attack. Right?
But what they have to do is, you know, have these, you know, rigorous trials that actually prove it. Like, so for example, Lily is going right now for obesity-induced sleep apnea or knee osteoarthritis. And so like a company like ResMed, right? ResMed was talking about it for like a while on the earnings call. And the response was essentially, you know, I'm trying to remember exactly what they said.
Oh, right. CPAP machine, the costs over a lifetime for a CPAP machine are like about $15,000. And then they did their own math, which was like, well, these GLP one drugs cost a thousand dollars a month. And if you multiple, if you have a 40 year old patient and you multiply that by 40 years, well really a GLP one drug's, you know, it's gonna cost you $480,000.
So obviously, you know, we're coming in at $14,000 $15,000, we're obviously the option, we're not gonna be really affected by this. And, you know, to take that into consideration, you say, why would people be taking this for 40 years? Right? Why would, if they, if someone, you know, 70% of sleep apnea is caused by obesity. If you have someone that's taking it and they take it for let's say 16 months, and they go from being obese to having a normal body weight, and then in all likelihood, at least for like 70% of them, the obstructive sleep apnea goes away.
I mean, how you have to adjust kind of the total addressable market for a company like ResMed or for the CPAP industry in general, it is going to shrink. Right.. And then when people say that, you know, “oh, this is a fad,” or, you know, this won't work again, you look at like, like when was the last fad weight loss drug that had Intuitive Surgical talking about on the earnings call, right?
Like Intuitive Surgical, they're not ready to speak to it, but they mentioned it on the earnings call. And then you have another company that I think this was my favorite one, right? And it wasn't even 'cause of anything. The company did it or said it was just because I'm reading the prepared remarks. And the exact text was basically, you know, it was the company's called Teleflex.
And it essentially, it's a company that makes devices for sleeve sleeve gastrectomy, like the bariatric surgery, weight loss surgery. You get the sleeve, and the thing is, you know a sleeve gastrectomy, I think the average weight loss over 72 weeks is like 26 or 27%. And with Mounjaro it's a little bit closer to, depending on the dose between like 17 and 19%. But Lilly's new drug, the triple agonist is showing like 24, 25%. Right.
So in the prepared remarks, they're basically saying, “we did see an effect from GLP-1s on the demand for bariatric surgery, which affected the demand for our device, the Titan Stapler. So if I ask you, Tracy, if you wanna lose weight, would you rather take a GLP-1 or get Titan stapled? Yeah. Like you wanna go with the Titan Stapler? I don't think so.
Tracy: (38:47)
Why did they call it, why didn't they call it like soft staple or gentle Staple Titan is just a terrible name for any surgical procedure. Okay. Wait, so one of the reasons talking about this is fun is because it is kind of a giant thought experiment of what a world of fewer obese people would actually mean. How far can you take it, James? Like to, what's your most interesting sort of second order trade idea based on a widely available weight loss drug?
James: (39:20)
Well, I think that, you know, if I'm gonna stretch this, you know, as far as it can go, the first thing is stretching it as far as it can go, gets pretty stretched because it, I mean, the direct medical costs this year from obesity are gonna be $370 billion. The indirect costs are gonna be over a a trillion dollars.
McKinsey in 2012, when the obesity rate was like, I wanna say seven or 8% lower, they estimated that obesity results in an annual global economic impact that is equivalent to 2.8% of the global GDP. So you think about like productivity, sick days, you know, workers' comp injury, life insurance, health insurance, workers' comp insurance. It the, something like the, when you have a, when you have a literal disease state that is affecting 42% of your population, it's kind of hard not to stretch this far , you know, like, like if that gets fixed. But in terms of the, the one that I would share on a podcast to be entertaining, I would say like Match Group or Bumble. Everyone...
Tracy: (40:21)
Feels physiological better about themselves. And so they go out and ready to advertise themselves...
Joe: (40:24)
As a product in the dating marketplace.
James: (40:29)
And you know what's interesting about this, you know, Match Group, I already think that the fundamentals look good here, but you know, if we're gonna like, stretch it super far, you look at like Match Group last earnings and like payers were flat or decreased a little bit for Tinder. But they increased significantly for Hinge.
And if you look at like, there are like, you know, social sciences studies about like, the effects of obesity on like how happy you are and how satisfied you are with your dating life and stuff. And I think, I don't wanna butcher the results or something, but it was basically across genders, right?
Like if you are a female or male, the effect of losing 10 or 20 pounds on your average, you know, satisfaction with your dating life and, and with just gen generally how happy you are, it's a lot more significant in females. So, you know, maybe, if you wanna like, be super early and stretch it super far, maybe the reason that like Hinge is getting more popular than Tinder, maybe it's because it's easier to lose weight. I would not say that in like an authoritative way, but you know, I mean...
Joe: (41:32)
You just say it on Bloomberg, it's fine...
James: (41:36)
The only thing I'm gonna get quoted on, right? Right.
Tracy: (41:38)
All the quotes are for thought all are gonna be like, this
James: (41:41)
This crazy guy thinks that like Match Group is gonna moon because of… No, I get it. Can I just say, I get, I get how the internet works though.
Joe: (41:48)
I know you do. It's funny. I keep reading through conference calls after you mention them. I'm looking at the ResMed one and they're...
James: (41:54)
Look at the Titan Stapler? So
Joe: (41:56)
No, but they're talking about, they're like, well, they're like, 'cause clearly this is a source of anxiety for them. So they're like, “Oh, well, like uptake and like adherence is not really that good.” And then a very funny thing they say, 'cause Biden had that mark on his face, they said, our biggest side effect is President Biden had a little mark on his face and he was asked about it, and it was from his CPAP. I think it's a good long road to play out here. I think it's frankly good marketing. So President Biden, because he had to put a device on his face for his sleep problems...
James: (42:25)
I mean, before I saw, I saw a photo of Justin Trudeau at Imax. Yeah. So maybe I should get long Imax,
Joe: (42:32)
You know, it seems like a big deal. Like just zooming out, it seems like a big deal. Even if we like, set aside what it's gonna do to Pepsi or what it's gonna do to like Frito-Lay or that's the same company. You know what it's gonna do to all the consumer companies. You know, health insurance, you mentioned that like obesity plus obesity related diseases are huge.
And so if they were to go down and you see, maybe you see some of that in sort of weak stock price of ResMed anxiety about this, what does it mean? Just like, for like health insurers and also just like healthcare utilization in general. Like, you know, generally we think of like healthcare as like a line that only goes up that if you're a healthcare professional, you're like gonna do very probably likely very well guaranteed demand. What is the effect on just sort of like the broader healthcare, institutional healthcare industry
James: (43:21)
Since you already got document search loaded up? Why don't you check out, um, Insperity, the ticker is INSP
Joe: (43:28)
This is a fun game. I like just hearing different names, and then I look at, look them up during the answer. But yeah, keep going.
James: (43:34)
Welcome to my life during earning season. Document search is my favorite feature. But you know, if you, Insperity, you can kind of see, I don't wanna misquote anyone, so I'll just pull it up very quickly.
Tracy: (43:47)
Oh look at the share price.
Joe: (43:49)
Wait, this is the company offers recruiting, employment screening, retirement business insurance. What is this company?
Tracy: (43:55)
It's down about 16%. That's what matters.
Joe: (43:58)
I can't figure out what they do and what their connection is here. So we're gonna find out provides
Tracy: (44:02)
Human resources and business optimization services.
Joe: (44:05)
So what's the deal?
James: (44:08)
So here, so here's the deal, right? They also offer, you know, employee benefit administration. Like health insurance. And so if you wanna boil it down to two things, like Insperity got hit on the fact that like, people want these drugs because they don't wanna be fat, and the drugs make them not fat.
And Insperity apparently thinks that, you know, that is a fad. They were saying something that was like, ‘oh, you know, the effects are gonna wane because of the side effects.’
And when you think about it, like, these drugs were originally developed for Type 2 diabetes, and it's like, oh, you know, there's never been a drug before that was developed for one thing and then ended up being really good for the other, you know, just like Tracy said with Viagra, and basically they said, you know, large claim activity accounted for approximately 75% of the higher costs with claims over $750,000.
And the remaining 25% is related to higher than expected pharmacy costs. As for higher pharmacy costs, we experience an increase in utilization of the specialty drugs, including a significant step up in the use of diabetes and weight loss drugs. And then they talk about behavioral health drugs too. Behavioral health drugs too, which is probably, you know, I mean, I don't know. That's a whole different conversation with Covid and behavioral health drugs and you know, like how people have emotionally reacted to the last three years.
But when you look at it for Insperity, it's probably bad right now because, you know, as long as these companies have a duopoly on these drugs, the cost will probably be high. Right? But that can only last for so long. You know, the, the eventually there will be competition, eventually the cost will go down. Eventually it'll be like Viagra where it goes from, you know, $88 a pill to whatever, $2 a pill.
James: (45:42)
Maybe it was bad quarter for Insperity. Maybe that continues for a little bit while they're still expensive and then eventually it'll get better. But when you think of it from, let's say Cigna or UnitedHealthcare. Cigna on their earnings call, they said, you know, ‘GLP-1s are definitely top of mind for many of our clients. There's been a meaningful uptick in utilization.’
And essentially what they said was, you know, there's a continued interest in behavioral solutions. You know, these insurance companies, they will like pay for you to get a gym membership, or they'll pay for you to get a meal plan or something. And the success rates of those things are dismal like absolutely awful. And, you know, it doesn't work.
And insurance companies are stakeholders in global health, right? And they're really good at anticipating how much it's gonna cost and making sure you know that they make more money than what's it, what it's going to cost.
But as an epidemic, this is still like a relatively new thing. The obesity rate has never been 42% before. And so how can we really accurately model what that's gonna look like in 50 years? I mean, maybe, probably if it continues the way that it's going unabated, I think that ultimately, you know, health insurance that it's gonna be a significant hit. So what you're seeing is these drugs, drug companies essentially going on these data campaigns, which is, you know, ‘We're gonna show you not just that it results in weight loss. We're gonna do a study, and a clinical trial on every single one of the beneficial effects of losing weight, right? We're gonna say obstructive sleep apnea, hyperlipidemia, hypertension, heart disease, type two diabetes, knee replacements, all of this stuff.’
And then eventually it is for Cigna or for UnitedHealthcare, it is going to be, they're gonna do what insurance companies do. They're gonna negotiate, they're gonna push down the price. There's gonna be pushback. There's gonna be what gets covered and what doesn't, especially after Mounjaro gets approved for obesity.
But at the end of the day, the thing is they're basically going to have to do a cost benefit analysis. And there is no way in my mind, I think really even if they were paying 150% of what Lilly is charging and didn't negotiate at all over the course of the next 20 or 30 years, they would probably make money. Like they would probably be a better situation than it would be without it, you know, not to get too, like insanely off the rails. But again, it's a podcast. So...
Tracy: (48:09)
Anything, let's say this whole thing is a thought experiment, so let's do it.
James: (48:12)
Let's entertain some people, right? Sure. Why shouldn't the government pay for this?
Joe: (48:16)
Well, you mentioned that, that the Inflation Reduction Act is gonna reduce the cost. This should be Biden's reelection. He is like, “Hey, I signed the bill that's gonna...”
Tracy: (48:24)
Make up Ozempic for all.
Joe: (48:25)
Ozempic for all. Yeah!
James: (48:26)
I mean, but seriously,
Joe: (48:28)
This is a good idea.
James: (48:29)
Let's look at this. We just had like the biggest public health experiment ever. You know, we had Covid, right? Like does anyone know off the top of their head how many people Covid? I mean, everyone got it. But what was the all cause mortality of like, Covid, during the peak of the epidemic? I don't know, it was probably high, but what I'll tell you is it probably similar to how many people are gonna die of obesity this year.
You know, I don't want to like speak without facts in front of me, but I would say, you know, if, if someone wants to go look that up and, you know, whether it's, “oh, how many people die of obesity this year, or how many in five years” I would say that they're probably comparable public health crises.
And also in terms of the impact on the economy, obviously nothing can rival shutting down the entire economy and having a lockdown. But if you look at it from an acute versus chronic perspective, you know, if obesity is gonna cost us a trillion dollars this year in indirect costs and we're running at a trillion dollars a year, I mean, over the next 10 years, like what?
It just seems like something where let's say that Lilly and Novo and all the other companies that eventually joined the fray, that they're effective in proving that the side effects are moderate and that the overall benefit is sustained. And it's good. Why would the government not cover it? Like if they'll cover Covid vaccines, then they should probably cover this too. Especially if it has a 20% reduction in like heart attacks.
Tracy: (50:05)
Well, I would never overestimate America's ability to make bad decisions when it comes to public healthcare. But
James: (50:11)
That's a good point...
Tracy: (50:12)
But James, that was a really fun conversation. Absolutely. A blast to have you on and go through the transcripts sort of in real time while we're talking to you. That was great.
James: (50:23)
Absolutely. And you know, if you, wanna learn more, you, you know, I've been writing about this since June at Citriniresearch.com. I go pretty deep into these.
Joe: (50:34)
It was a great read.
James: (50:35)
Yeah. Oh, you you read it?
Joe: (50:36)
Come on! We do a little prep.
Tracy: (50:39)
There’s some, believe it or not, there is some.
Joe: (50:41)
I read it this morning while coming in. I do real prep for this job.
James: (50:45)
I sent it to you like 12 hours beforehand and I know it's like 20 pages long. So, I would have forgiven you.
Tracy: (50:52)
Alright, well James, thanks so much for coming on. All thoughts. Appreciate it.
James: (50:56)
Thank you so much for having me, guys. Thanks
Joe: (50:58)
James. That was a blast.
Tracy: (51:12)
All right. Well, Joe, I for one, look forward to the future of publicly funded weight loss drugs.
Joe: (51:19)
I mean, I totally like, why not? If all the things seem to be true about this, what? Right. Many people seem to believe and there are, you know, it's like James is like totally right. Like I, you see a lot of people like poking. “They're like, there must be some catch here, right? There must be, it's gonna melt your insides or it's gonna do something.” And maybe one day you never know. But right now, anything I read about the side effects never seem like that compelling or anything. And he is pointed out the class of drugs for a while. It kind of feels like potentially like a legit miracle drug, right? Like it's kind of wild.
Tracy: (51:48)
Well, I think he makes an excellent point about the trade-offs, right? And at some point it might be cheaper for an insurance company to just provide this drug rather than treat someone for diabetes or heart problems. Or sleep apnea or whatever else for the rest of their lives. The other thing I was thinking throughout all of that, you know, I initially came into the conversation thinking like, “oh, well if everyone's consuming less, yeah, maybe that's deflationary.” Okay. But now I'm going back to that price over volume. Oh yeah. And James brought it up as well, which is, well if you're Wendy's and people just aren't buying as many cheeseburgers, then maybe you just raise your prices to offset.
Joe: (52:25)
It could be, I mean, there's all kinds of like other things that we could get into. Yeah. And so, another thing, and I saw someone on Twitter say this, they're like, “Well, what's the snack companies put even more salt and other addicting type of like, ingredients to counter this to offset it.”
So that people who aren't taking the drugs by even more in the future. Like, they're not gonna give up without a fight. If there's some drug that causes people… like everyone's gonna like try to like find some way. We didn't talk about gyms really, but I wonder like, like one way of thinking is maybe it's bad for gyms, but on the other hand, like if you...
Tracy: (52:59)
Feel more, maybe you wanna show off, you know?
Joe: (53:00)
That's exactly right. If you feel more confident, then maybe like, “you know what, I'm ready to, I don't mind being seen at the gym.” All kinds of interesting questions. Like, I like the idea of like, you know, a Match or Hinge is a ‘buy’ or it was like a winner here. So I thought that was a very fun thought experiment. Yeah. And it was fun in the context that he knew so many details so it was also kind of real, not just a thought experiment.
Tracy: (53:19)
Yeah. And I'm gonna spend I think the next like two hours or so, just going through some of the earnings transcripts and saying what people are saying about this. 'Cause I hadn't realized that people were already actually talking about it.
Joe: (53:30)
Well so I think the reason I didn't realize it is 'cause I was searching ‘Ozempic’ as just like the thing but just searched GLP-1, but you just search ‘GLP-1’ and then tons come up. Yeah. And so it's really interesting. I mean, it's a huge focus on a lot of these calls just from looking it up.
Tracy: (53:44)
Alright, well fun conversation. Shall we leave it there?
Joe: (53:47)
Let's leave it there.
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