Good afternoon, everybody, and welcome to the "Eye on the Market" podcast. This is the second of three podcasts linked to our 2024 Eye on the Market outlook. This second podcast is all about weight loss drugs and is entitled The Fats Dominoes.

Now, I know that some of you listen to this podcast, but some of you also watch it. So we've got some visuals I'll be describing in here. If you happen to be listening to the podcast, you can see all of these visuals in the actual Eye on the Market outlook.

And the cover page here shows a large, obese domino playing a piano, which is, of course, a reference to the famous piano player, Fats Domino, from the 1950s and '60s. And I thought about calling this the Fats Dominoes because I wanted to look at the impact-- the domino impacts of these drugs on consumer behavior and the stock market, as it relates to the weight loss drugs but also the price of stocks related to drugs that treat the adjacent conditions and stocks related to unhealthy foods. So let's dive in. Shall we?

So you can see here, whether it's TD Cowan, or Goldman, or JP Morgan, the projections for prescriptions for these GLP drugs as a general class are skyrocketing. They're still kind of low right now, let's say 4 million monthly prescriptions for type 2 diabetes and less than half a million a month for obesity. But there are 100 different pharmaceutical agents under development right now, in addition to the ones that have already been approved.

The general market size in terms of sales is projected to be about 100 billion by 2030. And I thought it was interesting that, recently, Roche pre-empted an IPO by a company called Carmot and bought them for $2.7 billion. And I think you're going to see more of the big pharma companies try to get involved in this space through acquisition.

So here are the big seven questions that we thought were important for investors to understand. First of all, who pays, because that impacts the size of the market. How well do these drugs work for weight loss, and what are their side effects? Do they really reduce comorbidity conditions as much as advertised?

How do they work, and what are the most important trials that could increase the size of the market? Can they be used to treat addiction? What about the issue of injectable versus oral drugs, and then lastly, and maybe most importantly, how do these GLPs affect consumer behavior and, therefore, equity markets linked to them? So we're not going to go through the whole thing. That's what the Eye on the Market document is for, but I just wanted to highlight a few of the main points.

The who pays thing, I started with who pays, because that's really going to determine the size of the market. And the biggest bucket is, of course, private insurance. A lot of companies are going to try to provide this. Around 40% of all employers have coordinated health insurance coverage. So it would make sense for the drug companies to work with them, rather than the 60% of employers that are self-insured, because they'd have to go company by company.

A lot of companies are saying things like, well, if you've already demonstrated that you've done the following other protocols, we'll provide it. We'll only provide it for a brief period of time. We'll only provide it if you are demonstrating progress. Right?

So because of the cost of the drug, I have a feeling that both the companies and the health insurance companies are going to try to put some roadblocks in the way. The big issue is Medicare, because Medicare is where you would presume a lot of older patients that are overweight and have severe comorbidity conditions would need this drug. Right now, legally, they can't.

The CBO analyzed it and still believes that it would be a net cost to the federal government to pay for this drug, and they've done an open solicitation publicly, asking for more information from the medical community to try to tempt them to change their minds. Like prove to us that Medicare coverage of these drugs would be a net reduction in taxpayer expenses. In other words, we will save money on all these other long-term conditions.

And so some of the most aggressive forecasts of GLP uptake are from analysts who believe that these drugs are not just going to be seen as obesity drugs but will eventually be branded as and consumed as and defined as cardiovascular drugs as well. We're a long way from there right now, but that's what some people are projecting over the long run. But the who pays thing is a big issue due to the cost of the drug, and I think a lot of these questions are still undetermined.

How well do these things work for weight loss? Obviously, it depends. There's been a lot of different trials. I would say, the trials generally ranged from 5% to 15%. General weight loss caps out at 15% ago, after around 40 weeks, and then flatlines.

That compares to 25% to 30% weight loss for bariatric surgery, but obviously, that is a much more complicated medical procedure to undergo that has all sorts of other complications associated with it. So most of the academic research I read, this is really the first wave of weight-loss drugs that appear to "work," quote, unquote. And so this is pretty impressive, and there's obviously a lot more of these compounds that are still being tested.

The issue is, as you might imagine, once you stop taking them, you generally gain almost all the weight back, and any of those other co-morbidity conditions that you were also benefiting from, those would also revert back to the baseline conditions that existed before you started taking the drugs. So so far, there may be some lingering behavioral benefits for people that get off the drug. But so far, this is not a cure, and this is the kind of thing where you are on these drugs forever, if you choose to take them.

The side effects so far are pretty modest, in terms of nausea and things like that and vomiting in some people. Around 10 to 20% of the people in some of the trials dropped out because it was uncomfortable. There are rare instances of inflamed pancreatitis and things like that, and I would just generally caution people that some of the weird interactions of these drugs don't really get discovered until after the drug is approved, and it's being used in the general population. But again, the point is, that if you're taking these drugs, you're on them forever. That's potentially good news for the drug companies in terms of sales but also bad news, because it means that certain people are just never going to be able to afford the kind of treatment.

So do GLPs reduce comorbidity conditions or not? There's a lot of work being done to study this. In the big study that came out last year, they tested for two or three years, double-blind, randomized trial, a placebo group, and then the other group was taking Wegovy. The molecular compound is semaglutide.

And the results were interesting, because when I read the Sell Side Wall Street research, it was like, wow, a 20% improvement, that's amazing. And then when you read the academic research and the research from the scientific drug development community, they were like, well, yeah, it was 20%, but the incidence of these cardiovascular events dropped from 8 to 6 and a half on a cumulative basis, over the entire trial. So a 1.5% incidence reduction from 8%, yeah, it's 20%, but in absolute terms, it's modest.

And it took three or four years of the drug treatment to develop this benefit. So there's still a lot of questions here about the comorbidity benefits. It's not clear to me that the Wegovy trial is going to be enough to convince the CBO to change its mind about the long-term net cash flow benefits to the Treasury for covering these drugs.

They did show much greater success in terms of early onset diabetes, reducing those kind of risks. So we'll see, but the important thing to note is that the first set of trials here did, specifically measuring cardiovascular outcomes, did not generate a massively positive result. They were kind of OK.

There's a lot of trials-- pardon me-- a lot of trials ongoing for all sorts of conditions, not just cardiovascular ones-- sleep apnea, kidney disease, liver disease, osteoarthritis. To me, the interesting one is that these drugs appear to work not just through your stomach, by slowing gastric emptying and making you feel less hungry, but they're also doing things to your brain pathways to reduce inflammation. And if that's the case, there may be some other benefits for Alzheimer's and Parkinson's, and so these drugs are being tested right now for those kinds of things as well. So those studies will be really interesting to watch. Any single breakthrough on any of those trials that would end up with the GLPs being categorized not just as weight loss and diabetes drugs but also to treat some of these other conditions would be would be kind of remarkable.

They also show some promise, believe it or not, in reducing addiction. So these experiments must be insane to carry out. But they do things like they take two groups of monkeys, and then they give one of the groups of monkeys access to alcohol for four hours a day-- like I can't imagine the protective gear that you'd have to wear in order to be carrying out these experiments-- but they give one group of monkeys access to alcohol for four hours a day, and then the other group of monkeys they don't. And then after about two weeks, they start treating the one group of monkeys with a placebo and another group of monkeys with these GLP drugs.

And what they find is that the monkeys that had been treated with the GLP drugs have significantly reduced inclination to consume alcohol. Which is amazing, because I didn't think you could you could really convince a monkey to reduce its consumption of anything. And they carried out the same experiments and found reduced cocaine seeking in rats, oxycodone seeking in rats, and binge drinking and mice, if you can imagine.

We have a chart that shows that the more GLPs the mice consumed, the less alcohol they consumed relative to their body weight. So again, fascinating experiments to carry out. In terms of humans, there were some positive results on a study that looked at GLPs combined with nicotine patches to reduce smoking. So I thought that was interesting.

The whole injectable versus oral, obviously, in pill form, they're easier to take. They're easier to distribute. They're easier to store.

The problem is you need more of the active ingredient, and that's common to a lot of different drugs in the oral version versus the injectable version. And the incidence of side effects and the efficacy in terms of weight loss was not quite as big. That said, the projections from the medical community is that, within the next few years, eventually, oral GLPs will be about a third of all of the GLPs out there.

So the important part is, what do these things do to consumer behavior to patients with different medical conditions and, therefore, to the equity markets? And so there was a study that JP Morgan equity research did in coordination with this with this consulting firm, and it was interesting. They, instead of just asking people-- because people have insufficient recall-- they actually, for some period of months, aggregated people's supermarket checkout bills and scanned them in with all the codes and things like that. And so they had a good read on about 500 families about what kind of stuff they were consuming and how much of it they were consuming.

And then they split the group to see what happened to the group where people, family members, started to take GLPs. And as you can see here, massive declines, 20 to 30%-- crackers, popcorn, meat snacks. Meat snacks is I think like a synonym for Slim Jims, which may possibly be one of the most unhealthy snacks you could possibly eat.

And then 10% to 15% declines in cookies and soft drinks and and deli foods and things like that. So that's pretty remarkable, and so it was it's not surprising that, once these kinds of studies got out there, you saw a knee-jerk reaction last year, in the late fall, where beverages, food retail, different sugar, not just sugar but alcoholic beverages, the stocks really started to underperform the market pretty substantially. Fast foods and stuff and the GLP companies skyrocketed.

And then, towards the end of the year, some of the sectors that sold off started to recover and, in particular, insulin pumps and things like that. And so it's hard to say. I think it's possible that the market just moved too fast.

And at the end of the fall, the markets were effectively pricing in an even more aggressive and rapid uptake of these drugs in the population than even some of the Wall Street forecasts, and it seems like that some of that changed. I think what's important is I do think that it pays to watch the beverage and caloric fast food space closely, but coincident with changes in coverage. And I know the market's a discounting mechanism, but unless we can see some kind of distant pathways for higher insurance coverage and Medicare coverage, I think some of these things are premature.

And then the last thing, which I think is equally important, is there's a lot of concern that the stock prices of companies that have drugs and treatments for the things that are adjacent to obesity, whether sleep apnea, osteoarthritis, things like that, that those stocks are going to get pummeled. And I think it's important to understand that the universe of people that have osteoarthritis, for example, or cardiovascular problems, only a small subset of those people are obese. So even if the GLP drugs are taken by all the obese people, and even if the GLP drugs are perfectly curative, like so everybody that takes them is cured, there's still a very large group of people that have cardiovascular risks, osteoarthritis, fatty liver disease, things like that, that are not obese that the drug companies will still be treating.

And so we've seen, over the last three four years, examples of when the markets, whether it's renewable energy or hydrogen or things like that, where the markets price in adoption rates that are way more rapid than what ends up turning out to happen, and I think there may be some examples of that here. So I think it makes more sense to have long positions in the drug manufacturers because of the market size growing. I think that makes more sense than to try to speculate on the shorts at this point, because there's not enough information available about coverage. Anyway, that's the end of our second of the three podcasts, and we'll be back next week sometime with a podcast on the top 10 list that we included. So long.