Barron's Streetwise - The Next 2 Obesity Drug Stocks? Plus, Bitcoin’s Bounce

Episode Date: December 8, 2023

A top biotech analyst looks beyond Eli Lilly and Novo Nordisk for weight loss investments. Jack talks stocks, bonds, rates, and crypto. Learn more about your ad choices. Visit megaphone.fm/adchoices

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And they're both up, I don't know how much, over 300% both of them in the last five years or so. Investors look at that and they say, how can I participate in it? Did I already miss it? Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe. And the voice you just heard is Jay Olson. He's a biotech analyst at Oppenheimer. And in a moment, he'll talk about investing in the obesity drug revolution without just jumping into shares of Eli Lilly and Novo Nordisk, both of which are already up a lot. Jay has two different ideas. One is big and cheap, and the other is comparatively tiny.

Speaking of which, listening in is our audio producer, Jackson Cantrell. Hi, Jackson. I'm not going to accept the moniker comparatively tiny. So I didn't say I didn't say who was who. I mean, you could be big and cheap. It's been a little while. I can't remember how tall are you? I'm 5'11 on a good day.

I'm 6'4, but I hold my own at the rec basketball courts. You should see my hook shot. I can't wait, Kareem. Before we get to the obesity drugs, how about we say a few words about some stock stuff, some bond stuff, but firstly, some Bitcoin stuff. The price of Bitcoin started this year at $16,000 and change. It topped $20,000 by the end of January. It hit $30,000 in April.

Just this month, it has blown through $40,000, recently flirting with, let's call it $44,000. And my email box is filling up with Bitcoin pitches. That's what happens when you write about Wall Street for a living. You get a lot of pitches saying, write about this or interview this person. Here's one pitch from a person saying, Bitcoin in acceleration phase of cycle. Significant upside when this pattern occurs. Okay, I guess, I don't know how you tell. Maybe we start with why Bitcoin is moving. And I think the number one contender for an explanation is expectations of rate cuts for next year. Suddenly inflation is coming down under control.

And if you look at futures markets, investors now expect one and a quarter percentage points of rate cuts next year. That's five quarter point cuts. I guess it could be two half point cuts and a quarter point. Could be one. You see what I'm saying. This is even though Fed Chair Jay Powell recently said, quote, it would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when

policy might ease. That's Fed speak for don't bet on cuts just yet, but investors are doing just that. And lower interest rates would eventually do what? A lot of things, but one of them is probably make investors a little more speculative or a little more willing to buy, let's say, shares of companies where you have to wait some years into the future for those cash flows to begin to roll in, or companies that are carrying high prices relative to their cash flows today. So you can look at the market, you can see that those big tech stocks have been moving nicely since the end of October. The leaders in the group, Nvidia up 11% and change. Apple up more than 12%. Tesla, 19%.

They're all up nicely. So as you might expect, the S&P 500 index, which has a heavy weighting in those stocks, has done nicely since the end of October. If you've held the SPY, the SPDR S&P 500 ETF, you're up 8.7%. But it's not just about big tech. iShares Europe ETF is up about a percentage point more. Why would that be? Well, one reason might be that the rate of inflation seems to be coming under control more quickly in Europe. So their expectations for rate cuts might be just a little

bit ahead of those in the US. And small caps, the Vanguard S&P small cap 600 ETF, that one is up 11% since the end of October, a couple of points more than the S&P 500. And so if you're trying to speculate about why that is, you might say, well, small companies are more dependent on the level of interest rates for their financing. They don't have the same levers to pull to raise capital as big companies. So the thought that rates might come down would be particularly good for small companies. Stocks aren't the only thing jumping. So are bonds. The 10-year treasury yield is recently about 4.1%. And if you go back to late October, it was pushing 5%. Remember, bond yields fall as bond prices rise. So investors have made out nicely on their stocks and their bonds.

Remember those people who were talking about the death of 60-40? Nothing's working. After last year, they said stocks got hammered, bonds got hammered. Neither your 60 nor your 40 performed well. So it's the death of 60-40. It never made sense because you think, well, if nothing performed well, that means the prices are lower. That means they become more attractive, not less attractive. It means if 60 40 died,

maybe one of the hibernation at the beginning of last year, and maybe it came back to life at the beginning of this year. It seems to be about what has happened. Okay, back to Bitcoin and its rising price. I guess I don't love that potential rate cut explanation. It feels a little bit like shoehorning Bitcoin into traditional investment market thinking. Anyhow, after a strong jobs report on Friday, investors are starting to rethink just how likely those rate cuts look next year. look next year. Another leading contender is speculation about a Bitcoin ETF that the U.S. might allow the first really ETF that buys Bitcoin at spot prices and holds them. There are some products on the market that attempt to track Bitcoin prices, but nothing is really like a simple and clean Bitcoin ETF. BlackRock, the big ETF company, filed with the Securities and Exchange

Commission in June to launch a Bitcoin ETF. So investors might expect that that would sharply increase demand for Bitcoin among investors who, I suppose, are interested but just haven't bothered to set up a cryptocurrency account or get their hands on Bitcoin some other way. But you have to wonder if that's driving the price, how much of that future demand is already priced in at this point. There's also, I guess, the hodling effect.

Hodl, H-O-D-L, is an intentional misspelling of hold. And it stems from, Jackson, give us a whole history of hodling. Where does it come from? People making generally poor investment decisions. Yeah. Commenting on it, about it on the internet. Yeah, yeah. Internet crypto people saying things on message boards and someone in a frenzy misspelling something and it just took off. And now the cool people say it. So, but the point of hodling is that I saw recently that more than 70% of the outstanding

Bitcoins have been held for more than a year. So if you don't have many sellers, I guess it puts upward bias on the price. And then there is the halving. Are you a halving person or a halvening person? It's a really awkward word. It just sounds like you're saying halving person or a halvening person? It's a really awkward word. It just sounds like you're saying halving. It sounds like that stuff you see at the health food store. It's not like a candy bar. It's called halva. Anyhow, what we're talking about here is not the halva. It's the halving,

which is when the reward for creating Bitcoin using computing power, when that reward gets cut in half and it happens once every several years. And it's going to happen again next year. And there have been cases of price spikes around past halvings. This is all part of the preordained decline and eventually disappearance of new Bitcoin creation. That's the whole point of Bitcoin. It's a digital currency. I mean, we can argue about what it is and what it does,

but one thing we're pretty sure of is that we will reach a point where no one will make more Bitcoin. I tend to think that Bitcoin is going up because Bitcoin is going up. And I realize that's not a terribly sophisticated view, but I see it as the perfect speculative vehicle because there's nothing but speculation.

I mean, we could say it's the future of money, but there's not a lot of Bitcoin changing hands for store purchases and things like that. I think that would probably be bad for Bitcoin if it became a utility, just an ordinary means of exchange. It would make it boring and maybe people would stop buying it and hodling it. I guess it's a little like gold, which also doesn't pay a dividend, doesn't have any cash flows, which people have made arguments in the past about it being a hedge against inflation or a store of value and so on. Gold recently, by the way, hit a new high price.

by the way, hit a new high price. But if you adjust it for inflation, the price has recently been still about 20% below its peak in 1980, back when Jackson was how old? Negative 16. When Jackson was negative 16. I was learning how to drive a car backwards. Deutsche Bank has some long-term facts on gold and they're not very flattering. It's only about 15% above its peak during the American Civil War. If you bought gold in 1800 and you've hodled it ever since, you've made adjusted for inflation 0.3% per year. It's not great for the godlers. Not great for the godlers. Especially the ones that are 220 years old. Right. Presumably on a fixed income by that age.

You could have gotten 3% a year in 10-year U.S. government bonds. You could have gotten 6.8% a year in U.S. stocks. Deutsche Bank points out in a recent note, you can be a long-run inflationist, but still be a bit overwhelmed by gold as an investment. And they say, maybe Bitcoin has diluted its allure. That is gold's allure. But that's a story for another day. Anyhow, that's stocks, bonds and Bitcoin.

And I can't, of course, tell you what to do with your Bitcoin or where it's headed next, because I don't know why it's doing what it's doing in the first place. Although that's not the way you're supposed to do things. You're supposed to pick one of the theories and just state it confidently. It's entered an acceleration phase. Jackson, let's do odds or even. Stick out one finger or two. Ready? One, two, three, shoot. What do you got? I got one. I got two. That's odds. That's a hodl. My proprietary model says hodl.

Let's take a quick break and we'll come back with obesity meds right after this. Welcome back. We've talked a lot about the Magnificent Seven. That's the name people use for those big tech companies that are dominating the weighting in the S&P 500. But look who's riding up behind the Magnificent Seven. It's the Obesity 2. Here they come. They are Eli Lilly and Novo Nordisk, of course.

Eli Lilly just had a diabetes drug approved for obesity. So now Eli Lilly is suddenly the number nine U.S. company by stock market value. It's worth close to $600 billion, and that's up from less than $100 billion just over five years ago. And its top competitor in obesity drugs is Novo Nordisk. That's a Danish company, so it's not in the S&P 500. But if it were, it would have recently been at number 13, replacing JP Morgan. The market value there is around $450 billion. And that stock has multiplied more than fourfold

in five years. So that raises the question among investors of whether these share prices are justified or whether this is a bubble in slimmed down stocks. Here's what I can tell you. There are a billion people worldwide who are too heavy, either obese or overweight. And these new medicines really work. Lilly has a drug called Terzepatide. It's already sold for diabetes as Manjaro. And it just received regulatory approval for obesity.

For that, it's going to be marketed as Zepbound. And there was a 72-week trial. And in that trial, those on the highest dosage of the drug lost an average of 22.5% of their body weight, or 52 pounds. These types of medicines have to be taken indefinitely. And Lilly says that ZepBound is going to list for $1,059.87 for a month's supply. It calls that 20% cheaper than Novo's drug. If you have a drug plan, you might pay significantly less than that. But even so, obesity drugs are now on track to be one of the biggest commercial drug categories ever,

many tens of billions of dollars per year. And Lilly and Nova are expected to make a heck of a lot of money from their medicines. That means that earnings are seen ramping up quickly from here, and it makes it difficult to gauge these stocks. For example, Lilly recently traded at 90 times this year's earnings forecast. That's a high price. But if you look at distant forecasts, it's only 20 times projected earnings from five years from now. For Novo, it's 39 times near-term

earnings or 18 times distant earnings. So you could say, well, if you're a patient investor and you buy now, maybe those stocks could work out once the earnings ramp up. But what happens if the growth estimates don't pan out? Thus the difficult decision. And that's why I wanted to get in touch with Jay Olson at Oppenheimer, who has identified some alternative ways to invest in obesity drugs. Let's hear that conversation. You've got two leaders that have already staked out their ground, you know, starting from diabetes

and moving into obesity and just thoroughly dominating the market at this point. How is this new group of entrants into this market going to differentiate themselves? Because that's what they'll need to do. And my hypothesis is that you've got to segment the patient population. And the best way to segment the patient population is in the exact same way that it's already segmented. Comorbid diseases. So these comorbidities such as obesity plus diabetes or obesity plus heart disease. There's a chart in your report. It comes from one of the, one of the big pharma companies and it sort of outlines, um, as you say, many of these other diseases that go with obesity. So sleep apnea, which is, you know, related to snoring,

heavy people, you know, snore and that, and that's, that's bad. If you're missing out on that sleep, you're waking up during the night, that's bad for your health. Hip and knee replacement. There are higher rates of hip and knee replacement for the obese population. Asthma, COPD. They have cancer. They have diabetes. They have heart failure. There's one here, NASH and cirrhosis.

NASH is- Yep, that's fatty liver disease. Fatty liver disease. I went once years ago for a checkup at the doctor and they took my numbers and he said well you know you're in pretty good health but your liver numbers are a little high he says are you a heavy drinker i said no not really he says well you might have you know fatty liver which is exactly right about it and i thought i've got kind of a fatty everything why are we singling out my liver he said no it's it's it's an issue but you got to

take care of that because if you don't it it can, it can, you know, you can cause liver problems down the road, just as though you were a heavy drinker. You could, you can create liver problems. So, you know, and to your point, you know, too much fat in the liver is toxic to the liver, just like alcohol is toxic to the liver and you don't have to be overweight to get fatty liver disease or NASH. And a lot of people, when they hear of cirrhosis, they just assume alcoholism, but cirrhosis just means scarring in the liver or liver damage. And then there's, in addition to all those that you listed, there's some that aren't even on here. Like we're just now figuring out that obesity is a huge risk factor for Alzheimer's disease. So there's all of these terrible things that happen to patients

as a result of obesity. And that's why it's so important to segment this enormous patient population because every one of these patient groups is unique in terms of what sort of disease is going to be the primary manifestation of the obesity. It's not just to differentiate for marketing purposes, it's to differentiate for medical purposes. Because what you're doing by running a clinical trial in a patient who has obesity, plus any other condition, let's call it heart disease for the sake of argument, condition, let's call it heart disease for the sake of argument, what you're doing is you're setting up that population to maximize the clinical benefit. So meaning the treatment outcomes. Okay. So if you have patients that have obesity plus heart disease and you treat them with the right

drug, you can actually show an enormous clinical benefit in those patients. And that means things like preventing heart attacks or preventing strokes or preventing death. And that's what drives reimbursement. And that's how these drugs get paid for. Let me jump in here. Jay mentioned comorbidities and reimbursement. Reimbursement by insurance companies will obviously be important for the future level of demand for these obesity drugs, which are quite expensive. And if you have a patient who says, I want to lose weight because I want to look better, I want my clothes to fit better, I want to feel better, then an insurance company might

say, maybe you should try some other things before you go for this pricey medication, lifestyle changes, diet, exercise, that sort of thing. They might be reluctant to pay. medication, lifestyle changes, diet, exercise, that sort of thing. They might be reluctant to pay. But if that same patient has a comorbidity, something like heart disease or liver disease that goes with their obesity and that really threatens their health over the long term, then the insurance company might be more willing to pay to prevent a costlier problem down the line.

And you can expect many trials to come to study the effect of these medicines on not just obesity, but on comorbidities too. And that's one way that future contenders in the market for obesity medicines might segment the patient population. They might say, well, okay, Lilly and Novo have a stronghold on those patients who have the combination of obesity and diabetes, but we have treatments for patients who have other combinations. And Jay has identified two such companies. One of them is the drug giant Amgen. The ticker there is A-M-G-N. Amgen is a big blue chip company. It's valued at more than

$140 billion. It generates a lot of free cash. It faces some expiring patents on part of its portfolio, but its shares seem modestly priced relative to Lilianova. They traded recently at a little over 14 times this year's projected earnings. Amgen has a drug on the market called Repatha that is used to treat high levels of the bad kind of cholesterol. That drug is already a big seller and it's growing quickly. And Amgen also has an obesity drug under development. The second company is called Viking Therapeutics. That company is not yet profitable. It's a small company, $1.7 billion. The ticker there is VKTX. Viking also has an obesity drug under development, and it has another drug under development

for NASH, the liver condition. Okay, let's get back to Jay. So now, who's going to come in and go after some of these other patient segments. And in my opinion, Amgen is set up perfectly to move in on obesity plus cardiovascular disease. And Viking is set up perfectly to move in on obesity plus NASH. They have two drugs, one for obesity and one for NASH. They're both oral, and they can both be once daily. And then going back to the larger cap side, Amgen is a pioneer in cardiovascular risk reduction. They have a drug called Repatha that can be injected once a monthly to lower LDL cholesterol. Now, LDL cholesterol is an

independent risk factor for heart disease, totally separate from obesity. So if you can imagine combining a drug that lowers, a combination of drugs that lowers LDL cholesterol and obesity, now you're talking about a really potent cardiovascular risk factor reduction combination. That's the beauty of this, is that Amgen has a drug that is currently in phase two. It's in injectable form. So it's injected just like Mojaro, which is Zepbound for weight loss, and Ozempic, which is Wagovi for weight loss. Okay, so Amgen has a drug that's in phase two testing. So it's early. And that's why you're not getting the obesity valuation premium in Amgen shares that you are like Lily

in stocks like Lily and Novo is because it's not really fully baked in yet. There's a, there's a hint of it in there, but it's absolutely not, not all the way there yet because it's very early in development. Now, in a small phase one study, Amgen's drug showed 14.5% weight loss at 12 weeks. That's very impressive for only 12 weeks of treatment. It's a small number of patients. All of the other weight loss drugs that have been studied usually achieve that level of weight loss after about a year of treatment. So you can imagine that if Amgen can achieve that level after 12 weeks, hopefully it can do better than that in a year. And we'll find out towards the

end of 2024 for Amgen's injectable AMG-133, as it's known now. It also has the advantage of potentially only being injected once a month, which is why I'm kind of pairing it up with Amgen's existing LDL cholesterol because that drug is also self-injected once a month. So in my view, now the company has not indicated that they're doing this, but in my view, those two drugs could be combined in a single once a month injection that would lower both weight and LDL cholesterol. And that's kind of a ideal setup for reducing cardiovascular disease risk. So that's Amgen. So there's really two things that could go right from here for Amgen on this, which is they could have a very successful obesity drug on its own, and they could also be in a unique position to pair their LDL cholesterol drug with their own obesity drug and have sort of a unique treatment for those patients who are both obese and have to treat their LDL levels. Do I have that right?

That's exactly right. And Amgen also has an oral obesity drug in development. That is only in phase one, and we have not seen the data yet. That data will be available early next year. So those are two important catalysts for Amgen. That's phase one data for their oral obesity drug in the first half of next year, and phase two data for their injectable obesity drug. That's in the first half of next year and phase two data for their injectable obesity drug that's in the second half of next year. And that's part of my investment

thesis here is that investors are going to want to get in front of those two data readouts because those are going to be important catalysts for Amgen shares. Okay. How about Viking? Yes. So Viking actually has a very similar setup in a very small company. So Viking has already had phase one data for their injectable obesity drug. And it showed, I think it was about 7% weight loss in just 28 days. So that was very rapid and very impressive. So that was very rapid and very impressive. And they're going to have their phase two data also at the end of 2024. And Viking also has an oral formulation of that same drug. And that's going to have data in the first quarter of next year. And by the way, an oral obesity drug is really important here because we know that patients do not like to inject themselves, especially if they don't

have diabetes. So they're not accustomed to injecting themselves with insulin. You don't need a medical background there to understand the appeal. Do you want to get a needle or do you want to take a pill? I'll take the pill, thanks. That's exactly right. Now, you know, they're one of the leaders in terms of NASH research. They're behind another company that has phase three data in NASH and they have an FDA decision coming next year. So they won't have the first NASH drug, but they do have one of the more advanced

NASH drugs in development. It's starting to sound to me like we could have a bunch of successful and potent obesity treatments on the market within just a few years. Yes, that is exactly the case. So let's start with Lillianovo because they themselves have very large portfolios of obesity drugs in various stages of development. And the key to the obesity game thus far has really relied upon showing a greater degree of weight loss, showing more rapid weight loss, showing fewer side effects.

We haven't talked about that, but the existing weight loss drugs do have a number of side effects, including nausea, vomiting. They also, by the way, as a result of the side effects and the expense and the injections, a lot of patients discontinue. And you have to keep taking these drugs in order to keep the weight off. If you interrupt or discontinue your treatment, you gain the weight back. So that's what we're looking for here in terms of improvements are faster weight loss, greater weight loss, durability of weight loss, easier tolerability. Those are the key objectives in developing new weight loss drugs. And both Lilly and Novo

are very successful along those lines. So the two leaders themselves have more drugs coming down the pipeline. Now, the other angle to this that we haven't spoken about is that our healthcare system was not designed to pay tens of billions of dollars on weight loss drugs. It's a category that did not really exist. It's not in anybody's budget. And so payers by nature will push back because they have to. It's just not budgeted for. So what's going to happen is there are going to be a lot of different forces at play here that are going to lower the cost of these drugs. They will get cheaper because of increased competition and they will get cheaper because payers will force them to become cheaper.

And that's where I like, again, Amgen, because Amgen is a company that their entire strategy is based on making affordable drugs that are accessible to very large populations, which are the kind of populations you need to treat in order to achieve the types of benefits we're talking about. Think about it like a vaccine. If you give people a vaccine, you need to give a lot of people a vaccine in order to really prevent an outbreak of a disease, right? Well, if you're trying to prevent a cardiovascular event, whether it's a heart attack or a stroke or a death or bypass operation, you do need to treat a lot of people in order to achieve those outcomes. And so it gets expensive.

And that's where a company like Amgen comes in because they're all about volume driven growth. They've already been there and done that with their drug Repatha that I mentioned to reduce cardiovascular risk. So your sense is that Repatha, they brought that out at a relatively reasonable price and did a lot of volume with it. And that's a strategy you think they could repeat with obesity. Is that your sense? Well, so what they did with Repatha is they brought it out at a price that was similar to a drug that launched right before them. And then they proceeded to lower the price so much that they dominate the market share right now. So I think it launched at a price of around $15,000 a year, which is right where the obesity drugs are. And right now, Repatha has a price of only around $6,000 a year.

I want to thank Jay, mostly Jay Olson at Oppenheimer, although I guess there's also Fed Chair Jay Powell. Mr. Chairman, your comments that I read earlier on achieving a sufficiently restrictive stance, they were spellbinding. Jackson Cantrell is our producer. He's not little. He's 5'11 with a hook shot. And a 30% free throw shooter. Don't send him to the line.

He's going to make you pay three out of every 10 times. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen. And if you listen on Apple, please write us a review. Thanks and see you next week.