GLP-1 Hype vs. Reality: Analyzing the Winners and Losers

During their latest episode of the VALUE: After Hours Podcast, Taylor, Carlisle, and Pavese discussed GLP-1 Hype vs. Reality: Analyzing the Winners and Losers. Here’s an excerpt from the episode:

Chris: So I’d love to talk. If you guys don’t mind, I’m going to use this time to pick your brand a little bit too. We’ve been head down for a good two weeks, three weeks now. So this is technological change. It’s somewhat pharmaceutical change, but looking for opportunities to fade the GLP-1 craze, which seems to be almost as extreme as the AI hype in both directions. Both the perceived winners and the perceived losers. Going back to relative valuation and the relative extremes in the market, it’s mind boggling. Wondered if you guys have spent time there.

Jake: Do you guys know that meme that’s from Mad Men, where-? I forget which the guy was, but he’s in the elevator with Don Draper and he says like, “I feel bad for you.” And then Don Draper says, “I don’t even think about you at all.” Then someone took that meme, and then they put GLP-1 is like, “I feel bad for you,” and then McDonald’s like, “I don’t even think about you at all.”

[laughter]

Chris: Jake, you got to send me that because I may need it for our letter, if we want to do this.

Jake: Yeah. It’s hilarious. I guess, McDonald’s reported pretty strong this last quarter. I haven’t looked at it, but I think that was the takeaway of the joke.

Chris: Yeah.

Tobias: I actually haven’t spent much time thinking about it. I don’t think you can tell even which way it will impact—Say, GLP-1, I know that it has these properties where it makes people eat less and evidently it makes you able to study better and do a few other things like it gives you a little bit of a little bit more will or something like that, which is interesting. I just don’t know that you can tell necessarily whether it’s going to be a net negative for junk food or a net positive. Like if you can get the weight off really easily, why would you be disciplined about your diet?

Jake: Yeah.

Chris: Right.

Jake: Let’s lever the system up, right? Yeah. [laughs]

Tobias: I feel like you could go a lot harder through the winter months now.

Chris: I like. It.

Tobias: Halloween, Thanksgiving, Christmas run through there. Just don’t worry about it.

Jake: Yeah. There’s a pill for that. Yeah.

Tobias: January, feast of [crosstalk]

Chris: I hope you’re right, Toby, because I’m ramping up in that same spot right now.

[laughter]

Tobias: Yeah, it kicks off tonight. Silly season kicks off tonight.

[laughter]

Jake: You want to get nuts? Let’s get nuts.

Tobias: Yeah. I don’t know. What do you think? What’s your view? What do you think there?

Chris: So we’ve spent more time on the healthcare side of the equation. It’s probably been 10 plus years since I’ve looked at this space. But historically, a lot of these big medical device companies have been viewed at, or at least at one time or another were viewed at high-quality businesses with secular tailwinds in terms of growth drivers, operating depending upon what market, and relative oligopolies limited competition. Some of them are starting to look interesting. You’ve got businesses– I’m going to try to shy away from mentioning names because we’re actively doing work and beginning to establish positions. There’s medical device businesses that traded at historically mid-20s type multiples that are approaching double digit cash flow yields. I just don’t know, it’s really like–

So this is another example where it’s tough to model out because even the GLP-1 data is still so early. We don’t know the long–term implications. You see forecasts for this being like $100 billion market in six years effectively. You can back into that based on pricing and what that implies with population, and then back into the impact on the addressable markets of those related companies. It’s like doing that. It’s hard to get to how hard these businesses have sold off.

Jake: Really. Even if it was pretty bad for them, it wouldn’t be as existential.

Chris: It’s also not clear. Everything else, there’s positives and negatives, and I’ll give you an example. So we haven’t spent any time up until recently on some of the companies in the dialysis market, one of which is Berkshire owns 40% of.

Jake: Yeah.

Chris: That is treatment for kidney failure. And historically, that market has grown, I think, at 2% to 4% annually in terms of population of kidney failure. Let’s just look at the US. GLP-1 has a great impact on reducing type 2 diabetes, which is one of the leading causes. It might be the leading cause of kidney failure. But you know what? It’s not the only thing. It’s really only about 40% of the people that need dialysis, right? So first thing you can do is go, “Okay, let’s just cut that growth rate in half, and let’s just say they fix type 2 diabetes.” But there’s still the other half of that volume growth that has been there that has been unrelated to type two diabetes has nothing to do with anything that GLP-1 is going to address.

So right off the top, you can just say, “Okay, what’s it worth if the volume gets cut in half?” That’s worst-case scenario. But then there’s other factors, like, during COVID, these businesses got hammered because mortality surged. This is all coming from my knowledge of the healthcare system and pharmaceutical space. I’m not at all qualified to talk about this, but we’ve had this conversation with our Director of Research–

Tobias: It’s a podcast, you’re allowed to do it.

Jake: Yeah. [laughs]

Tobias: PhD in organic chemistry, worked for Big Science, worked in clinical diagnostic labs. This is where I geek out on financial, she geeks out on this stuff, and I have to back her up and be like, “Okay.” So, it depends like that. What does that actually mean for the stock?

Jake: Yeah.

Chris: But the reality is, GLP-1, in addition– So it’ll keep some people out of dialysis, which is a good thing. I learned this recently. Kidney failure isn’t something you fix. So if they’re on it now, they’re not going to come off it. Even if they came off it temporarily, they’re going to come back on it at some point. So that’s one thing. The second thing is, I think the mortality rate is something around like 18%. And so if GLP-1 can keep those people alive longer, the back end of keeping people on dialysis longer may actually be more of a tailwind to volume than the slowdown on the front end, if that makes sense.

Jake: Right.

Chris: We don’t know any of this yet, but that’s the point. You can model out different scenarios, and you can back into what’s implied by the stock. Davida[?] dropped, what, 25% on that last Novo test a few weeks ago? Literally, it wasn’t that. It was trials. They stopped short, because it was clear that their endpoint, it was better than expected. And so there were stocks that dropped 25% on that day, but not a whole lot of information about what that patient population is going to look like 10 years, 15years, 20 years from now. We’ve had people on these drugs for a few months.

Jake: Yeah.

Chris: I just think it’s super interesting. There’s other impacts too. I don’t know, obesity is a massive problem in the US. So we start cutting that back. What’s the first thing someone does after they cut 10 pounds, 15 pounds, 20 pounds, or 30 pounds, 40 pounds, 50 pounds? They probably look to tighten up some of that extra weight. Maybe go to the gym. Maybe start giving– [crosstalk]

Jake: I was going to say divorce attorney. Sorry.

Chris: [laughs] We haven’t gone there yet. Are they publicly traded–?

Jake: Second order effects. You got to look a little deeper into the– [laughs]

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