Novo Nordisk (Ozempic)

Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)

Ben: All right, first episode back. Let's see if I can do this sleep deprived.

David: You and me both, man.

Ben: Welcome to season 14, episode 1 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David: I'm David Rosenthal.

Ben: We are your hosts. Today's episode is on the company behind these sensational Diabetes and weight loss drugs, Ozempic and Wegovy. The company is Novo Nordisk. When I first learned about Ozempic a few years ago, I thought of course this is going to be amazing for a lot of people and could also completely destroy the market for Insulin. Those Insulin companies, better watch out.

Here is the fascinating thing, listeners. Novo Nordisk is the company behind Insulin, or at least one of the few big ones. You might say, well, that's okay, because they're probably a big Pharmaceutical company that's very diversified with lots of different drugs. No. Novo Nordisk is unique in that the vast majority of their revenue is concentrated in the category of metabolic health. They have been the Insulin and Diabetes company for the last 100 years. Perhaps even more surprising, this pharma giant is unique in that they are owned and controlled by a non profit foundation.

The stats around weight, Diabetes, and its impact on our society are staggering. There are 38 million Americans with Diabetes. That's 1 in 10 people. Globally, that number is over 500 million with the disease. Diabetes costs the US alone more than $327 billion a year.

On the other side of things, in the weight category, around a billion people suffer from obesity worldwide, including 40 percent of the U. S. population. If you expand that from obesity to overweight, 75% of Americans are technically overweight. It is really hard to imagine a bigger market to go after, which is why Novo Nordisk has become Europe's largest company, surpassing even LVMH last year, David.

David: Yeah, it's wild. There are no other disease and drug categories besides Diabetes and obesity that this could be possible to have a company of this size, to have a pharma giant pretty much just focused on this one area. This is the Hermes of the pharma industry.

Ben: Yeah. Why is today in the early 2020's the moment in human history for these new GLP-1 drugs? The crazy thing is, Semaglutide, the molecule in Ozempic and Wegovy, was pioneered back by Novo Nordisk with the first trial in 2008 for Type 2 Diabetes treatment. It was built on research started in the early 90s. But here we are in 2023, almost three decades later, talking about it as a weight loss drug that magically appeared out of nowhere, or that's at least the public perception of it.

Incredibly, the fact that GLP-1 drugs could be used to reduce food intake was actually discovered way back in the mid 90s in the first scientific publication about it, but only in 2021 did we finish the clinical trials that truly show how effective it can be.

David: As we'll see, that's just the tip of the iceberg. This company is 100 years old. The history goes way back and is way more interesting than I think, just about anybody knows.

Ben: Yup. Pharmaceuticals is without a doubt the most complex industry that we have ever studied. To fully understand Novo Nordisk, we need to go back to a simpler time before the Food and Drug Administration, before all this industry consolidation, healthcare oligopolies, and before there were treatments for everything we take for granted today, antibiotics, vaccines for polio, tetanus, measles, mumps, you name it, that is where we will start our story.

If you want to know every time an episode drops, you can sign up at acquired.fm/email. These will also contain hints at what the next episode will be and follow up facts from previous episodes when we learn new information. Come talk about this episode with us after listening at acquired.fm/slack. If you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts often as follow-ups to the topics on these episodes.

Ben: With that, this show is not investment advice. David and I may have investments in the companies we discuss, and this show is for informational and entertainment purposes only. David, where are we starting our story?

David: We start in 1921, over a hundred years ago, in Toronto, Canada, with the discovery and extraction of the pancreatic hormone, Insulin by a laboratory group at the University of Toronto Medical School. Insulin, of course, as most of you know, regulates the absorption of glucose from the blood into the body. It's the main anabolic hormone in most, if not all animals in the world. Insufficient Insulin production in the body, of course, leads to the disease Diabetes.

This group, if you could call it that, at the University of Toronto, is comprised of the physician Frederick Banting and the medical student, his assistant, Charles Best, along with a chemist and the head of the laboratory there and assistant medical school dean, John Macleod.

There's a whole bunch of controversy around who actually deserves credit for the discovery of Insulin. The historical consensus at this point now being that it really was Banting and Best who did all the work. But nonetheless, two years later when the Nobel Committee awards them the 1923 Nobel Prize in Physiology or Medicine for the discovery of Insulin, it is Banting and Macleod who get the award, not Best. This will come back up in a minute.

Ben: Yeah. To set some context for the time period here, 1921, the public is not aware of what Insulin is. The public is, however, aware of what Type 1 Diabetes is. This is the juvenile form of Diabetes. Only 5% of Diabetes sufferers have Type 1 today. But back then, this was the dominant form of Diabetes. It was families whose kids had a death sentence, and there was basically nothing that could be done.

There were lots of rumors of people trying to figure out what substances you could inject, eat, or anything to cure this mysterious, horrible way to die. People were so convinced in the late teens and early 20s that scientists were on the verge of a breakthrough, that the common wisdom was to go on a diet of 2-500 calories a day and starve yourself so that you could live long enough. Even though you had a terrible quality of life, you could live the months or a couple of years long enough when the treatment did arrive to finally get it.

David: We can't overstate how important this was and how terrible, awful Diabetes was. It was truly a death sentence. That treatment that you were referring to was the official, American and globally accepted treatment for Diabetes. It was literally called the starvation diet, and it was just an attempt to prolong your life as long as possible. But you are going to die unless a treatment is found.

When we say that this group won the Nobel Prize in 1923, this isn't just like a Nobel Prize. This is one of, if not the most important advancement in all of modern medicine that they're discovering here.

Ben: We're just not that many decades after snake oil salesman, patent medicine. We talked on the Standard Oil episode about John D. Rockefeller's father literally selling snake oil, and that's just barely in the rearview mirror. This is one of the earliest breakthroughs in modern science. We were still years away from antibiotics and certainly decades away from the popularization of antibiotics as a treatment. This was the big breakthrough.

David: Yup. All right. What did Banting and Best do? Scientists had known, even going back to the 1800s, that Diabetes was caused by the malfunctioning of some type of hormone that was created in the pancreas. But until Toronto, nobody had been able to actually isolate what that hormone was, let alone extract it.

Ben: To put a finer point on it, Banting and Best didn't even know what the hormone was. Even when they did figure out what to extract, they thought it was this soup of a bunch of different chemicals mixed together. They wouldn't figure out for years and years and years, oh, this is like one very pure specific hormone that we are isolating here.

David: By experimenting with dogs and dog pancreases, they're able to extract something that comes to be known as Insulin. Not only extract it, they then experiment with it and inject it into human Diabetes patients who are at severe end of life stages. It's miracle. The human body is able to use this extract from dog pancreases, and these patients have miraculous recoveries.

Ben: Yeah. I spent a bunch of time reading this book Breakthrough by Thea Cooper and Arthur Ainsberg, and they go way into this. Basically, this team was the first one to figure out  that you could target the pancreatic islets and isolate the extracts in a relatively pure form. Pure, by their standards, is not certainly by today's standards. But you're right, totally crazy extracting from these dogs and injecting in humans in extremely limited quantities.

Once they figured it out, it was still hard to then go from there to getting it to people because they're like, well, okay, we did this thing that worked once from one dog into one person. So where do we go from here?

David: Importantly, this new Insulin substance, while it is a miracle, it's not a cure. Injecting patients with it doesn't magically restart production of Insulin in their own pancreases or cure the disease. It only works until your body uses it all up, which is pretty quickly. These Diabetes patients, they finally have a new lease on life, but it's also just that, a lease. In order for them to survive, they need to regularly inject an appropriate amount of Insulin. By regular basis, especially in these early days, that's every couple hours.

Ben: You can imagine the incredible high-wire act in the early days, where they've extracted from literally one dog. They've written down the process. Strangely enough, somewhere along the way, the process was forgotten. Someone else had to replicate it, and then they took his notes, combined them with the original researchers, and then figured out a path forward. We discovered the process for refining Insulin enough to put it into humans, then lost it, and then found it again. This was the state of medical science.

You have people ringing off the hook, newspapers reporting. The breakthrough is here, the breakthrough is here. They've got single digits or dozens of vials of usable Insulin, each of which needs to be injected into a single patient every few hours in Toronto. There's not enough to go around, the path forward is super unclear.

This is foreshadowing a little bit, the era that we're in here in 1921, there is a firewall between industry and medical science, and it was perceived to be unethical to make money on taking your medical breakthroughs and turning them into companies. There's this extreme culture at the University of Toronto around we have to protect anyone from making too much money off this thing, so we got to be really careful and potentially even slow down its development and be really thoughtful about how we distribute it to the world so that nobody takes it and makes too much money.

David: Yeah, Banting, Best, and Macleod, today, they would go start a company around this. That's not going to happen back then. All of a sudden, the world needs a lot of this animal Insulin and in a supply chain that can't go down, because once you start patients on this, they need it forever.

What the University of Toronto does do is they license production and development rights to a large American drug company based in Indiana, Eli Lilly. They give Eli Lilly a one year exclusive development license to try and mass produce this substance. Again, like you said, this is a big step for the University of Toronto to do this, but the need in the world is so great that they're willing to work with industry here.

Ben: You literally have presidents and secretaries of state trying to call in favors and successfully calling in favors to get access to the limited vials that the University of Toronto has.

David: Yeah. It wasn't Elizabeth Hughes, one of these famous first patients, the daughter of the Secretary of State of the US, right?

Ben: Charles Evans Hughes. yeah.

David: Yeah, wild. It's obviously not practical or maybe not ethical that's beyond the scope of this podcast to use dog pancreases for scaling mass production here. But it turns out, there actually is an abundant ready supply of animal pancreases that happen to be just lying around in the American heartland and just about every human food production center in the world. And that is cow and pig pancreases from all the meat that we eat.

Ben: Indiana's got a lot of cow farmers. The clever, really startup Eli Lilly, the company had been around for a while, but this idea of taking on real R&D risk was a new concept. The startup Eli Lilly is going around hiring salespeople to bang down the door of slaughterhouses all over Indiana and say, hey, I know your waste product includes pancreases, do you think you could ship those to us?

David: We'll pay you for those. Yeah.

Ben: It's actually not an easy sale because those farmers are like, it's going to slow down my process if I have to figure out how to separate the pancreases, and this is already a really tight ship. There's a real entrepreneurial tale of Eli Lilly convincing large, large numbers of slaughterhouses to do this.

The other interesting thing to note about the Eli Lilly license, David, which I thought was really clever, is it's a one year exclusive license where there are two conditions, and the conditions are a trade. (1) Eli Lilly has to report back any advances that they make to the University of Toronto. It's almost like little Operation Warp Speed going on, kind of analogous to Covid.

As they figure stuff out, they have to share it back with the University of Toronto to improve the manufacturing yields of whoever else will be developing the drug. In exchange, the thing that Eli Lilly does get to retain and protect on their own is a brand. Eli Lilly saw it really important early to say, hey, we want to build a brand around Insulin so that people know it's coming from us, that it's of a certain quality. Even when we lose our one year exclusive license, and even when we stop contributing the manufacturing IP back to you, the brand actually stays ours.

David: Yeah, we're going to talk a bunch more about Eli Lilly here as we go. This Insulin moment is what really turbocharges them and makes them into one of, if not the first leading American and international pharmaceutical company, which it still is to this day, still bigger than Novo Nordisk, although not by too much.

Ben: Much more diverse, but not too much larger by market cap.

David: Back to this whole Nobel Prize thing, which as we said, was awarded to Banting and Assistant Medical School Dean John Mcleod. Now, how did Macleod end up being the guy who shares the award with Banting and not Best? Years later, actually, the Nobel Committee would basically admit that they messed that up.

It turns out that the answer to that is the key to the first chapter of our story today, because the actual nomination, I don't know if you knew this, Ben, for that prize was put forth by a previous Nobel Prize winner in physiology or medicine, the 1920 Nobel Prize winner from the Copenhagen, Denmark, an animal biologist named August Krogh, who also happens to be the founder of Novo Nordisk.

Ben: Is that how Nobel Prizes work? A previous winner nominates the current nominees? Or it certainly helps their case if a previous winner?

David: Yeah. I do not think it is a requirement, but certainly a previous winner and a recent previous winner in the same category, you would imagine, carries a lot of weight.

Ben: The guy who would go on to found Novo Nordisk is the one that nominated Banting and Macleod for the Nobel Prize before starting the company.

David: Yeah. Here's the wild thing about August Krogh, founder of Novo Nordisk, the world's premier Insulin company focused on Insulin and Diabetes for a hundred years now, world's premier GLP-1 company, he's not a physician. He's not even a human biologist.

Ben: Yeah, he was an animal biologist, right?

David: Yeah, he was an animal biologist. Fun fact though, this is maybe my favorite sidebar in the episode, he studied at the University of Copenhagen. His advisor was a guy named Christian Bohr. That name might sound familiar to some people.

Ben: Descendant of Niels Bohr?

David: Father of Niels Bohr. That Niels Bohr, father of atomic physics, also winner of the Nobel Prize, major contributor to the Manhattan Project. August's PhD advisor was the father of Niels Bohr. Everybody's winning Nobel prizes. There must have been something in the water in Copenhagen at that time.

Ben: Also, that tells you how long ago this was that in my head, Niels Bohr is someone from a long time ago, so it would be a descendant. But actually, this is his father.

David: Yeah, right. Back to August Krogh. How the hell does he end up going to Toronto, getting involved in all of this, starting Novo Nordisk? In 1920, the same summer that he wins the Nobel Prize, his wife, Marie Krogh, is diagnosed with Diabetes. This starts weaving together this whole crazy chain of events that leads to Nordisk. Novo comes a little later.

Marie herself is actually a pretty incredible person. She is a physician. She's the first woman in Denmark to earn a doctorate in medicine. Denmark, I suspect, has always been pretty progressive relative to the US. But even still, we're talking about like the 19-teens. A woman to earn a doctorate in medicine and then be a practicing physician was obviously unique.

When she's diagnosed in 1920 and basically self-diagnosed as she knows what's going on, she knows exactly what this means. She's going to die. This is horrible. But given that they're both very, very active in the scientific and medical community in Europe, they are able to get her the best care possible.

At this point in time in Denmark is a young Copenhagen based physician named Hans Christian Hagedorn, who is widely respected as the best endocrinologist in town, even though he's very young, is up to date on all the latest workings of the starvation diet, how to maximize quality of life, and prolong life as long as possible. Fortunately, Marie diagnoses herself very early. He puts her on a closely monitored starvation diet, and they stabilize it enough after a year or so.

Back to August, ordinarily, after you win the Nobel Prize, you go on a major international lecture tour. Of course, he's invited all over the world, particularly to the elite universities in America to come give speeches on his Nobel Prize winning research. But because Marie fell ill at the same time, he had to delay his trip until 1922. In 1922, August and Marie set sail for Boston.

Ben: Which is, by the way, amazing that a Type 1 diabetic has made it this far in life and is in the early 20s doing transatlantic travel.

David: Totally amazing. August is going to give a delayed series of lectures here at both Harvard and Yale. While they're in Boston at Harvard, they meet with a guy named Elliott Joslin. He's actually the inventor of the starvation diet. He is the world's foremost Diabetes physician and researcher at this point in time. Elliot tells them about what's going on in Toronto. This is the world that we're living in back then. News of the discovery of Insulin hadn't really yet reached Europe and certainly hadn't reached Denmark at this point in time.

Ben: It was a competitive advantage to be a Nobel Prize winner on an international lecture circuit, because you got better, faster information about brand new medical advances.

David: Yes. Particularly, competitive advantage like life advantage. They're just concerned about Marie's life at this point in time. Elliot says, I know the guy who runs the lab up there, John Macleod. Let's write him a letter and see if while you're in America, you can go up and see them, see the lab, see what's happening, and maybe get some of this Insulin.

August and Marie write to Macleod. Marie also writes back home to Denmark to Hagedorn and tells him about what's going on and about this discovery of Insulin. She suggests in that letter that since Hagedorn is the leading Diabetes physician in Denmark, maybe while they're in Toronto, they might be able to secure some rights or ability to bring Insulin back to Denmark.

Macleod in Toronto gets the letter. He's like, of course, come on up, you and Marie both come. Stay in my personal home. Sadly, unfortunately Marie falls ill, and she can't make the trip up to Toronto. August goes alone, but he stays with Macleod, observes the Insulin production process, sees everything that's happening.

They become close and friendly. Most importantly, Macleod takes August to go meet with the Insulin Committee and talk about what Marie had suggested to Hagedorn of like, hey, maybe these are the right people to bring Insulin to Europe, essentially, but at least to Denmark.

Funnily enough, at this particular point in time, it turns out you actually can't patent drugs in Denmark. Any blessing or patent licensing from the Insulin Committee to the Krogh's and Hagedorn for Denmark is pointless, because it's not legally binding in Denmark anyway. But the Insulin Committee says, well, you're really the right people to do this. How about we give you rights for all of Scandinavia? Norway, Sweden, Denmark, you have our official blessing and any rights that you need.

Ben: This is a pretty similar deal that they cut with Eli Lilly. That was for North America. They basically gave them the same thing for Scandinavia.

David: Yes. August and Marie set sail back for Europe. They arrive in Copenhagen, they go tell Hagedorn the news, and immediately they all go get to work. By get to work, they go buy cow pancreases at the local livestock market in Copenhagen.

Ben: This is something. You read more about the Novo Nordisk history than I did. Was it cows or was it pigs? Because I know that Denmark has an abundance of pigs, which actually made it pretty well suited to be an early Insulin manufacturer.

David: Interesting. It was both. I think pigs may have come later, but certainly it was both cows and pigs that Nordisk and then Novo were using. They were just basically trying to get their hands on any animal pancreases that they could.

Ben: Right. If it got islets, we want it.

David: Yup. Using the Toronto method, they get a bunch of pancreases. They go to August Crowe's lab at the University of Copenhagen, run them through a meat grinder, pour hydrochloric acid over them, they extract Insulin, and then they test it on rabbits and mice. They confirm, yeah, we've got it. This is Insulin, certainly for the first time in Scandinavia. I think maybe also for the first time in continental Europe, at least, Insulin is extracted here in Denmark.

This leaves just one obvious problem, just like Insulin in Toronto. This is not going to scale. Maybe you could do this to treat Marie, but they want to treat the whole country, the whole region.

Ben: Right. This is a very real problem for Insulin all the way up until the 1980s, which is you are scale constrained by the number of dead animal pancreases you can get your hands on. I found this wild stat. It takes 8000 pounds of pancreatic glands from 23,500 animals to make a single pound of human Insulin.

David: Yeah, that's wild. To put that in more real numbers, that means that even by 1980, with all the advances, it took one million animals annually for 30,000 Diabetes patients. There are a lot more than 30,000 Diabetes patients in the world in 1980.

Ben: We'll talk about who the pioneers were and how we eventually got out of using animals to create Insulin in the 80s. That was also the moment in time where Type 2 Diabetes really took off.

David: Yes, you're foreshadowing.

Ben: It's been a 45-year massive issue, but we basically could not have continued to use animal based medicine to treat Diabetes once it really exploded.

David: Ben, we're going to get to this in two hours.

Ben: Sorry, foreshadowing.

David: All good. Back to the Krogh's and Hagedorn in 1922-1923 in Copenhagen, they need to scale production. They go to the Løvens Kemiske Fabrik. I majorly apologize to all Danish people out there. I talked to some Danish folks in research for this episode, and thank you very much. I realized in those conversations, I need to give up on trying to pronounce things correctly.

Ben: Stick to French.

David: We'll stick to French. Yes. That translates to English as The Lion's Chemical Factory, and it is owned and run by another man named August, August Kongsted. They partnered together. By the summer of 1923, the very same summer that the Nobel Committee is debating on the award for that year, and of course Krogh at this point has nominated his buddy Macleod along with Banting, the combo of the Kroghs, Hagedorn, and The Lion's Chemical Factory have produced enough Insulin that they can complete trials with eight human patients with great success there in Copenhagen. At this point, H.C. Hagedorn, who was originally Marie's physician to help treat her Diabetes, resigns his medical post and decides that he's going to focus full time on this project.

Ben: So the founders are Hagedorn and August and Marie Krogh?

David: And Kongsted from The Lion's Chemical Factory. These are the founders of the project, but there's no Novo Nordisk yet.

Ben: We should say around this time, I believe Eli Lilly was further along in terms of the volume that they had developed. I think they were making hundreds of vials a week of usable Insulin.

David: Absolutely. Eli Lilly had Insulin on the American market available to patients at this point in time. How does this actually turn into a Nordisk? Before we do that, I want to pick up the thread that we left earlier with our new friends at JP Morgan Payments.

Ben: Yes.

David, the founding of Nordisk, how does it happen?

Ben: The Lion's Chemical Factory at this point has established a new production line for Insulin. But it's unclear, do they own this production line, do the Kroghs, does Hagedorn, is the University of Toronto involved? Krogh and Hagedorn are consulting on it. When Hagedorn makes this decision to go full time, what actually happens is he becomes an employee of Lion's Chemical, which isn't really what he wants. August Krogh steps back, and he returns to his other research at the University of Copenhagen.

Once Insulin starts rolling off the line later that summer under the brand name Insulin Leo, like Lion's Chemical Factory, they use the brand name, that would continue to be Nordisk's Insulin brand name for the next 60 years, I think. Pretty quickly, demand is just off the charts. They are, like talked about, essentially the first mover in continental Europe. So there's a pretty enormous opportunity here.

In 1924, Krogh, Hagedorn, and Kongsted, who owns Lion's Chemical, all come to an agreement. They're going to set up a new, independent, and self-owning institution to produce and distribute this Insulin throughout Europe.

Ben: What does that mean?

David: Still not a company, because other than Kongsted from Lion's Chemical, Krogh and even Hagedorn at this point, are not particularly commercially minded.

Ben: No, it's a biologist and a physician.

David: Yes. What they do is they set it up as an operating company, because that's what they have to do to have employees, make sales, and whatnot. This operating company is 100% owned and controlled by a foundation that they also set up. The three of them are going to be board members of this foundation, and Hagedorn is going to run it day to day.

Ben: This is really important to know and really crazy how much this impacts in the future. This is still the corporate structure of the largest company in Europe. We're going to get to this hours from now in playbook, but this governance structure massively affects the incentives and the way that this company ends up developing products going to market with them. The future blueprint of the next hundred years is laid right here in this corporate structure.

David: Foreshadowing, there is a moment much later in history, where absent the control of this foundation, Novo Nordisk would have ceased to exist. It is only because of this structure, that Novo Nordisk survived and that we have GLP-1s in everything we have today.

Ben: It's fascinating. By the way, this is not that uncommon in Danish companies. Lego, same structure. Maersk, the shipping company, same structure.

David: I dug into this a little bit. Yes, this is a very common structure in Denmark, mostly for tax reasons, because Denmark has very, very high taxes. This is a common generational transfer mechanism. We'll talk about Novo in a sec. Novo actually has this type of structure that you're talking about.

The Nordisk foundation is not just a foundation of convenience. It really is a charitable foundation with a dual mission. They give it two missions. The first mission is to produce Insulin and sell it at (1) Cost in Scandinavia in the original territory mandate, in order to maximize access and humanitarian public health benefit.

(2) Export it elsewhere in Europe and around the world at market prices and use the profit from those exports to fund further Diabetes research and development. No profits allowed in Scandinavia, profits are allowed from export activities, and then all of those profits, literally by contract, get shipped 100% to the foundation to then be used for grants and research about Diabetes and supporting Diabetes patients in Scandinavia.

Ben: Fascinating. I did not know that.

David: Totally fascinating. More or less, as you said, that is the same mission and structure that is still in place today. It obviously changed a little bit.

Ben: Yeah, there are some caveats that I'll get to when we get to it today.

David: Yes. The operating company is now publicly traded, but still that foundation controls 77% of the voting shares of Novo Nordisk and 28% of the economic shares.

Ben: Yeah. No shareholder activism in this company, or at least no one's effective in doing so.

David: Yes. The name that they choose for this new institution or really dual institution is fittingly Nordisk Insulin, which Nordisk in Danish means Nordic Insulin. It's the Insulin manufacturer for the Nordics.

Ben: Very creative.

David: Very creative. If you're listening here, you're probably like, okay, that's Nordisk. What's the Novo piece of this? It turns out that that is quite the story too, because among the very first employees of the Insulin project, even before Nordisk gets created, are two brothers, Harold and Thorvald Pedersen.

The Pedersens, you got to remember the time we're in, they're prototypical 19-teens, 1920s engineers and tinkerers. We're not that far removed from the Wright brothers, Henry Ford, and that kind of stuff here. They're cast from that mold. The older brother, Harold, had been working in August Krogh's lab doing all the mechanical engineering stuff to carry out the experiments. You need to build devices, contraptions, and set up experiments. Harold was in charge of doing that.

Once the Insulin project gets going, Harold naturally shifts over. He's the one going out and building, buying, modifying the meat grinders, figuring out how to pour hydrochloric acid over it in the right way, and all that sort of stuff.

When Lion's Chemical gets involved and they're spinning up mass production. Harold goes to Hagedorn, August, and Kongsted and says, hey, you're setting up an actual production line. I've got just the guy to help you set it up and run it, my brother Thorvald, because not only is Thorvald a seasoned factory operations manager, who's currently running a large soy factory, he is also trained as a pharmacist and studied chemistry. He's the perfectly qualified person to be an early employee of this new operation.

It turns out there's just one problem. Hagedorn thinks he's in charge. Thorvald, who's just been hired, thinks, hey, I know what I'm doing here. I'm in charge. Hagedorn, you're this pompous physician. What do you know about running a factory?

Ben:  So this schism happens in the first year of Nordisk's existence?

David: Yes. In the first six months after Thorvald is hired, he and Hagedorn were constantly fighting. One day, they get into a huge, huge argument, and Hagedorn fires him six months in.

Ben: Guess we know who's in charge.

David: Yeah. When that happens, Harold, the older brother, resigns in solidarity, and they're super pissed. They go to see Krogh. They're like, hey, August, I've been working for you for a while. Clearly, we know what we're doing here. Why is this happening? Krogh sides with Hagedorn. He's like, no, no, he's my guy, he's Marie's physician, he's going to run this thing. They say, well, al right, fine. As you know, here in Denmark, you can't patent drugs.

Ben: That's why this is important.

David: We're just going to go down the street and make Insulin too. The legend has it that supposedly, August looks at them and replies, but you're not capable of that, to which Thorvald yells at him, we will show you.

They storm out of the building, go down the street, and they found a new Insulin company, a Novo Insulin company there in Copenhagen, Insulin Novo. That is the beginning of Novo. For the next 65 years, these two companies would compete in bloodsport, head to head, absolutely hated each other until they finally merged in 1989.

Ben: Crazy.

David: Yup. This is such a key part of the Novo story that certainly, Krogh but then Hagedorn develops into this amazing scientist as we'll talk about, the advances that Nordisk is able to bring to market in the science of Insulin and Diabetes is huge. But certainly without the bitter competitive motivation from down the street, I don't know that they would have moved as fast, and Novo ends up building its own scientific research capabilities. These two companies in this unlikely small country in Northern Europe end up leading maybe the most important drug development of the 20th century.

Ben: It's amazing. It's the local and better competition. It's Ferrari and Lamborghini. It's Aldi and Trader Joe's. It's Adidas and Puma. You create the seeds of competition early, and you can really infuse that into a company's DNA for decades.

David: I think it's worth a quick pause here. We've already talked about some of this, but just to clarify why Diabetes and Insulin is such an interesting market and large market potential. (1) Even with just type one at this point in time, it's still a very large and widespread disease in the world. It's a large patient and potential patient market size. (2) Unlike many other diseases and drugs for those diseases, it's chronic, you don't cure it.

What Insulin is doing is it is enabling these Diabetes patients who often are diagnosed as children to live essentially normal, long lives. You're talking about decades, 40, 50, 60, 70, 80 years of patient lifespan here, where they're injecting Insulin daily, if not, in most cases, multiple times daily.

Ben: There's basically nothing other than food that you can sell someone for their entire life. But for diabetics, Insulin absolutely has that scenario with a customer.

David: Yup. There's also another aspect that makes it particularly interesting commercially. There's also a motivation to constantly improve the Insulin product. It's not like Insulin is Insulin is Insulin. There are so many new products and improvements, both in the drug itself, but also in the delivery systems.

This early Insulin, as we've alluded to a little bit, was barbaric by modern standards. Yes, it saved lives, but it didn't last very long, so you had to inject a lot of it very frequently. It wasn't super clean. There are tons of impurities in it so there's swelling, there are infections.

Ben: There's allergic reactions to all the impurities.

David: Totally. It wasn't shelf stable in liquid injectable form. This is wild. I don't know if you knew this, Ben.

Ben: No.

David: Everything we're talking about in these days and what Nordisk was originally producing were solid Insulin tablets. Until recent times, you can't take Insulin in tablet form. It doesn't get absorbed by the gut. You have to inject it. What patients had to do was take these solid tablets, dissolve them in sterilized boiled water, measure and draw that solution into a syringe themselves.

Ben: Like a glass syringe with a big needle. No pens, none of this fancy stuff we have today.

David: Yeah, big ass needle. Now you've got patients doing this multiple times a day, and it's really important that they get the right amount of Insulin for them. This makes it really hard.

Ben: Yup, and there's no measurement. There's no one touch pinprick. We get to see what your blood sugar content is right now. We're so far from that existing that you are guessing, you're throwing darts.

David: Totally. Actually, a side note to the story, but it's Novo in the 1980s that invents the Insulin pen.

Ben: I didn't realize that wasn't Nordisk, but Novo.

David: Yeah, Novo invented the pen, and Nordisk focused on pumps. They were one of several companies, but one of the leading companies innovating in pumps.

Ben: I see. We should say, listeners, and David, you know this, this is a topic that is super personal to me. A huge number of my family members are diabetic, actively suffer from the complications, and actively benefit from all the advancements in it. This is something I've just had present around me my entire life with family members, as I'm sure many of you have too.

David: I'm quite certain that almost everybody listening right now either is diabetic themselves or has a close family member who is.

Ben: Or is pre diabetic. When I was doing research for this episode, one of the people I talked to, and we'll thank a bunch of folks at the end, but pointed out, we're all pre diabetic in some way. It's basically the idea that, look, your A1C levels, if you live long enough, will eventually enter Diabetes territory.

Especially with the food system today and all these foods engineered to leave us very unsatiated, all of our natural inclinations that we had as hunter gatherers, farmers, and imagine the paleo life long ago, all the things that served us evolutionarily to stay alive are now the very things that are killing us. Everyone's on the path, it just depends how long you live.

David: We also weren't really designed to live this long either.

Ben: Careful with the word design, David.

David: When Novo gets established, this starts the competitive race that really leads to a hundred years of R&D pipeline that changes all this. The Pedersen brothers know right off the bat that they can't really just go clone what Nordisk is doing. Technically, legally, they can in Denmark, but what physician and what patients are going to buy Novo Insulin when right down the street, you've got Nordisk, which has a Nobel Prize winning scientist, the best Diabetes endocrinologist in Denmark running it and the explicit blessing of Toronto and the Insulin Committee?

If Novo just sells the same thing, nobody's going to buy that. But they do have a pretty significant advantage that Nordisk doesn't have, which is they've got their engineering and tinkering skills. They go to work and pretty quickly, actually, they come up with shelf stable liquid Insulin. What I was just talking about, about how Nordisk produced these tablets, you had to boil them, Novo comes out with liquid Insulin. You don't have to do that.

Not only that, because the process for producing liquid Insulin that they come up with is so much more efficient, they can sell it effectively cheaper per dose than what Nordisk is selling their solid form as. Novo goes to market with their Novo Insulin as Insulin at half price, because it's so much more efficient. This is so antithetical to the Ivory Tower scientists over at Nordisk. You're marketing Insulin at half price. Does this liquid stuff work? Is this safe and all this stuff? The Pedersen brothers are like, yeah, whatever, we're going to crush you.

Ben: All right. Novo, scrappy upstart, counter positioned, and competition drives innovation. So they create better product.

David: Yes. Then Nordisk strikes back with a new longer lasting form of Insulin called protamine Insulin Or NPH as it is patented and come to be known around the world, which stands for Neutral Protamine Hagedorn.

Ben: Really? Hagedorn is in the name?

David: Because H.C. Hagedorn led the research developing this, and he puts his own name on it. It tells you what you need to know about him. This is much more stable and needs to be injected fewer times per day, which is a huge benefit for patients.

Nordisk, rather than building up production facilities around the world, what they decide to do is license it back to basically any interested pharma company, Eli Lilly back in the states, other companies in continental Europe. It's the new, widely accepted, most advanced treatment for patients, except there's one company that they refuse to license it to, and that is Novo.

Ben: Amazing.

David: Novo, undeterred, go and work around Nordisk's patents on this. Again, I'm not sure at this point if the laws have changed and you can patent drugs in Denmark, but it doesn't matter, because it's clear that Denmark is not a very large country. By far, the bulk of the market is in exports at this point, and certainly in other countries, you can patent drugs. Novo works around Nordisk's patents, and they come out with an improved version of protamine Insulin that they claim is both better and doesn't infringe on the patents.

Ben: Which the pharma industry has a rich history of figuring out exactly how to do this. The thing about pharma patents, which is interesting, is they're fairly narrow. You can patent a molecule. I don't think this is quite true at the time. But the way it works today is you patent a molecule, which is extremely specific. It's different than other industries, where it's a system and a method for blah, blah, blah, and you can be very broad with it.

If you can accomplish a similar biological or chemical reaction in the body with a different molecule in basically any way, then unpatented. There's a rich history in pharma of doing exactly this what is slightly next to the patent, but does basically the same thing.

David: Yes. To your point though, it is still quite scientifically difficult. It's not like software here. We're like, yeah, yeah, yeah, I write some code. It's like, no, no, you still got to find a molecule that does what you say it does. This leads to a whole bunch of lawsuits.

It actually ends up going to the Danish Supreme court, where Hagedorn represents Nordisk himself. In the lower courts, they had lawyers. I think they lost the case in the lower courts, and Hagedorn's like, screw this, I'm going to be my own lawyer.

Ben: At a Supreme court case?

David: At the Supreme court.

Ben: Wow.

David: Yeah, amazing. And they win. Nordisk has won here. This is a huge, huge blow for Novo, you would think. But then, literally right at the same time, World War II starts. Denmark is invaded by the Nazis shortly after they invade Poland. In April 1940, the Nazis now occupy Denmark. This infighting between these two Danish drug companies...

Ben: Much less relevant.

David: Much, much less relevant. But what is still super relevant is, how is Europe going to get Insulin in the middle of World War II? This is a major, major turning point, both for the two companies vis-a-vis each other, but also I think really what sets Novo on the path to becoming Europe's dominant producer of Insulin and then ultimately the dominant producer of Insulin in the world.

Ben: So Novo, not Nordisk, became the globally dominant. Really? I did not know that. I actually don't know the terms of the 89 merger, so I'm excited to listen just like everyone else, David.

David: What happens is Denmark is relatively unscathed during World War II. It's a small country. The Danish army was quite small. When the invasion happens in April 1940, there's basically no fighting. Germany just takes over the country. There's no destruction, which means that Insulin production continues unabated in Denmark.

Nordisk, remember, like I just said, once NPH comes out, their strategy becomes really like we produce domestically, and then we make our revenue and our profits internationally by licensing, not by production. With World War II, most of. The dollars for their licensing revenue is coming from allied countries.

Germany just took over Denmark, so all of that revenue, all of those profits, go to zero overnight. Nordisk, for the duration of the war, basically just gets put into hibernation mode. They're still producing a little bit to help supply Denmark, but there's really nothing going on there.

Ben: They basically cannot address the market of any allied countries anymore.

David: Yeah. Novo is the complete opposite story. They had been scaling production all throughout Scandinavia, all throughout Europe. When Germany takes over Denmark, Insulin Novo is now—the ethics of this are really complicated.

Ben: Because it's Danish owned, which is Nazi occupied at the time.

David: Yeah, they are now essentially the official Nazi sanctioned Insulin provider for all of Nazi occupied Europe. The German government basically directs Novo to massively expand production and supply Insulin not only to Germany, but to France, to Poland, to Austria, everywhere in continental Europe, basically.

Ben: Just to make sure I have it right, it sounds like Nordisk is only making a small supply for Denmark. Novo is supplying all of Nazi occupied Europe, and the Allied countries no longer have access to anything Novo or Nordisk makes, so they're relying on their own suppliers like Eli Lilly.

David: Yes. They're fine, they can get Insulin, no problem, because Nordisk has licensed all the technology and production to them. They just keep doing that. The only problem is for Nordisk that Nordisk can no longer get the payments from them because obviously, transfer payments from allied countries are now blocked.

Ben: Right, fascinating.

David: Totally fascinating. Again, we said the ethics of this are quite complicated. There is no doubt that Novo's fortunes massively changed and expanded by the German occupation and the Nazis during the war. On the other hand, literally the Nazis ordered them to expand production and provide Insulin for Europe. If they hadn't done it, all the diabetics in Europe would have died.

Ben: It's unquestionably a good thing. Again, I'm learning about this from the first time from you, but an evil person commanding me to make more life-saving drugs and distribute it to more people is fine. It's the other things they command you to do that are not fine.

David: Right, I definitely agree. It is important to note though, after the war, the Danish state did require both Novo and the Pedersen brothers personally to repay most of the profits that they made during the war back to the Danish state.

Ben: Fascinating.

David: Again, the ethics are complicated here.

Ben: Very, yeah. Wow.

David: Regardless, after the war, Novo emerges as now both a scaled pharmaceutical company generally and the largest producer of Insulin in Europe. As part of that now, they have the resources to really build up their own scientific and R&D divisions and become a real powerhouse to rival what Nordisk was before the war.

Shortly, after the war ends, they develop a new product called Lente Insulin, which is slower acting Insulin, which means it's thus longer lasting. This can now be used for diabetics as a basal or background Insulin. They'll still take fast acting Insulin around meals to help process blood sugar from meals, but a normal human pancreas is also producing Insulin 24/7 throughout the day. This now is a new background Insulin that diabetics can take to help stabilize when you're sleeping or not eating. This is a pretty big breakthrough.

Ben: What you're seeing here is Novo and Nordisk having decades of experience researching mechanisms to slow the absorption or lengthen the effects of their drugs in the human body and really developing this incredible competency around, how do we finely tune how we want injections to react in your body over a long period of time in a very complex environment?

You've got the human immune system wanting to react to anything for when you put into it. You've just got a lot of systems that you have to make sure that you're interacting well with to achieve something simple, like we'll make it dissolve slower. I know that's not technically right but that is the blunt way to think about it.

David: Yeah, hopefully it's obvious, but this isn't quite like software. Oh, just you add some new code, and you ship a new feature. No, this is very complicated stuff. You got to make sure that the side effects are not going to kill people. This is really the first major scientific advance that comes out of Novo.

Eli Lilly licenses this Lente Insulin from Novo, rebrands it, and makes it part of their flagship Insulin offerings in the US. They were doing this with NPH Insulin before the war from Nordisk. Now, it's Novo that's taking up this mantle.

This will come back up later in the episode, but Eli Lilly, although Insulin wasn't still is a huge part of the business, what they basically decided is to be a technology follower and license from all the innovation coming out of Novo and Nordisk, license that into their sales and distribution channels in the US.

Ben: I'm really curious if the Eli Lilly folks would agree with that characterization. You read that great history of Novo Nordisk book, and I'm sure that's the way it paints it. But at some point we should dig into Eli Lilly a little more and see if that's how they think about it too.

David: Yeah. That is going to change in a big way in the 1980s. But during this post war period, at least that's how Kurt Jacobsen's book makes it sound. We got to give Kurt a big shout out. He wrote this great history of Novo Nordisk that just came out last year for the company's 100th anniversary. Unfortunately, you can't buy it in America. I emailed him a couple months ago and I said, Kurt, is there any way we could buy a copy of your book? Very, very graciously, he just sent it to us. Very, very kind. Thank you, Kurt.

This is basically the way things stay for the post war era up until the 1980s. Novo follows up Lente Insulin in the 1970s with MC Insulin or non-immunogen monocomponent Insulin, which is the first 100% pure zero antibody potential Insulin that also becomes the new widely accepted best product in the market internationally.

This is the general state of play after the war. Novo is now a scaled pharmaceutical company. Nordisk is mostly in rough shape. If production capacity has gone down to basically zero, minimal at this point in time, they have resumed the licensing business, and eventually they do get back payments from all the allied countries that they were owed during the war. They're not insolvent or anything, but they're the much, much smaller company.

Novo, interestingly, they're now a large pharmaceutical company. They want to add a second leg of the stool, a new business line. So they get into the enzymes business. This is laundry detergent enzymes and other industrial uses. They add that on alongside the Insulin and Diabetes business. That's all well and good to be a diversified industrial conglomerate, except the enzyme business is both capital intensive and not that profitable.

Ben: Those don't mix well.

David: Yeah, those don't tend to mix well. It's still a viable business. It actually stays part of Novo and then Novo Nordisk all the way until the year 2000 when it gets spun out.

Ben: Is this Novozymes?

David: This is Novozymes, yes. It is still majority controlled by Novo Holdings, which is the holding company of the Novo Nordisk Foundation.

Ben: Interesting. Just like Novo Nordisk is majority controlled by the foundation's holding company, Novozymes still is also...

David: Novozymes as well. But when we get to the 1970s, right as MC Insulin is coming online, and Novo needs to undertake a huge amount of capex to redo its production lines and expand them around the world, the enzyme market crashes. This enzyme business that they tried to add as a diversification, hedge to the company, and expansion, all of a sudden it's bleeding cash. They don't have enough capital resources to do the capex upgrades that they need for the main business in Insulin.

Ben: Interesting. If only they had a cash rich partner without a lot of capex needs.

David: Goodness. If only there were such a natural partner right down the street, it might make sense that maybe they could merge with. Here we are in the early 1970s, Novo approaches the old bitter rival Nordisk. Here's the situation. This is a perfect marriage. Let's get the band back together. Everybody's basically dead at this point from the original days. Let's let bygones be bygones.

Nordisk just gone through a pretty rocky succession period after Hagedorn retired. They're now on their third CEO in seven years. The new CEO, Henry Brenham, isn't from the pharma industry at all. He's not a scientist. He was previously the head of a lumber company. This merger makes perfect sense.

Ben: But they don't merge for another decade and a half, so what went wrong?

David: It's not what happens. Instead, contrary to all what you would think on paper, the new CEO, Brenham, actually turns out to be an amazing leader and CEO for Nordisk. The lumber guy. He is the wartime CEO for Nordisk.

He rejects Novo's overtures to merge. Then he goes and convinces the board, both of the operating company, Nordisk and the foundation that this new MC Insulin generation, which remember Novo innovated that this actually represents a golden opportunity for Nordisk to get back in the game, because it's going to be a complete reset of all the Insulins on the market. Whether they're fast acting or long lasting Insulins, they're all going to move over to this MC highly purified method and type of Insulin. But Novo's in this spot where they're going to be delayed for several years in making the transition in their actual factories, because they don't have the capex.

Ben: It's like, they're coming to us hat in hand, why don't we just put the pedal down now that we realize we have the advantage and press?

David: Brenham convinces the board that rather than merging, they should use their capital reserves to rebuild up Nordisk's own production capacity, go hire a global sales force. Brenham's really ambitious. He says, we're going to go enter America directly as this forgotten Nordisk company.

He goes and hires a global sales force, because he knows Eli Lilly is going to have the same dynamics as Novo. Everything's going to have to shift over to MC, and Eli Lilly's this big, large, diversified giant. They're not going to move as fast as he thinks Nordisk can. Even though it's unrealistic that Nordisk is going to overtake Eli Lilly in America, If they can get even a small percentage of the American market, that's huge. Nordisk is a small company, and America is by far the largest market for Diabetes in the world.

Ben: You got to remember too, in the 70s, there was still a functioning healthcare market. There wasn't massive consolidation yet, so every level was super fragmented. Manufacturers were fragmented, insurance companies were smaller, little doctor's offices existed everywhere, neighborhood pharmacies were there. Entering the American market, you didn't necessarily need huge scale to do it.

The other thing to note is it wasn't yet the heyday of drugs of pharma. There weren't that many drugs that people had high demand for. It wasn't like today where everywhere you look, there's some amazing drug that could save your life depending on what conditions you have that are on TV commercials.

The federal government with, and we'll get into this later, but Medicare Part D wasn't even a thing yet. Drugs were not plentiful enough and good enough yet for the government to cover them as an insurance benefit for people over 65. That's the era we're in, where if Nordisk wants to enter the American market, they can without too many barriers.

David: Yeah, this is the right window. I don't know how Brenham convinced both boards to do this, but he does. My God, he's right. It works. For the entire decade of the 1970s, Nordisk's sales grow at 30% compounded annually, which is amazing. They're still small.

By 1980, Nordisk is still only about 1/10 the size of Novo overall, but they're a third the size of Novo's Insulin business. They've moved from being this licensing company to now an actual production company with capacity all around the world. This is a huge win from basically, they were going to be taken over for cash by their old rivals, and now they're back in the game. Novo in response, they need to do something to get capital. They actually do a small IPO on the Copenhagen Stock Exchange in 1974 to raise the capital they need for the transition to MC Insulin.

By the time we get to 1980 and just to set some scale here, Novo's annual global Insulin sales are still much larger. They're about a hundred million dollars annually, and Nordisks are about $30 million annually. That makes them the number two and number four producers in the world by market share behind Eli Lilly in America, who's first, with about $160 million in sales.

Ben: By the way, these numbers are staggeringly small. These are Series C startup.

David: This is exactly my point. You might be wondering like, wait a minute, if you add all that up, the whole global Insulin market is about half a billion dollars here in 1980. That's not exactly tiny. Like you were saying, the drug markets themselves weren't that huge back in this era. But what is the path from here to Novo Nordisk today being the 15th largest company in the world? What gives? What happened?

Ben: Yeah. Just look at pictures of people in the 70s and look at pictures of people today.

David: Yes. The answer is (1) What you just said, we all got fat, and the Diabetes market and specifically Type 2 Diabetes exploded. (2) This is going to be such a fun story to tell here on Acquired, because it's a huge part of Silicon Valley history that we've never touched. Genentech happened, which totally revolutionized everything. Launched the biotech market, made drug development and production vastly more scalable, and it all happened right here in San Francisco, venture backed by Kleiner Perkins. It changed everything.

Ben: Former Kleiner Perkins employee.

David: Yeah, and was a co-founder of the company.

Ben: Yup. Okay, David, the 80s are here. For some reason, in the early 80s, the world starts becoming more overweight. Addictive foods being the cause of this.

David: Yes, more metabolically unhealthy.

Ben: Correct.

David: Just to put some numbers on that, the number of Type 2 Diabetes patients quadruples from 1980-2016.

Ben: Yeah, and population growth was a lot slower than that. Definitely, the share of the population is massively expanding. At this point in time, we are still using pigs and cows to harvest pancreases, their islets, and their extracts in order to make Insulin, even with this incredibly refined process until Genentech.

David: Yes. Specifically, what that meant using animals to make Insulin, was that Type 2 was not treated with Insulin. Actually until this point in time, Type 2 used to be called "non-Insulin dependent Diabetes", because you didn't treat it with Insulin, because there wasn't enough Insulin. There weren't enough animal pancreas in the world to do it.

Ben: I had no idea.

David: It wasn't necessarily that Insulin didn't help Type 2. Lots and lots of Type 2 diabetics these days use Insulin. It was that there just wasn't enough of it.

Ben: Wow.

David: In 1980, Genentech and Eli Lilly as their partner, changed everything with recombinant DNA and genetic engineering of drugs. I suspect many people don't know this. I vaguely knew this before researching the episode. The first drug that they genetically engineered and that started this whole revolution was Insulin.

Ben: Absolutely. It was the founding first application of the idea that Genentech had of commercializing recombinant DNA. The first implementation was Insulin. To just paint a little bit of a picture of why this is so amazing, it's not just that we now had a way to not rely on animal pancreases. It's that for the first time, we actually had human Insulin. It is Insulin that is chemically identical to the Insulin that naturally is produced by your body rather than injecting something slightly different from a pig or cow.

David: Yes, because you couldn't really extract human Insulin from humans before this point, and people thought that human Insulin would be a lot better to use than animal Insulin. It turns out that that's debatable.

Ben: Yeah, it's interesting that this ended up being more of a manufacturing and scale advantage than an efficacy advantage.

David: Yes, but at the time, nobody really knew that. In 1980, which is when Genentech and Eli Lilly announced their partnership together that Eli Lilly is going to be the go-to market partner for Genentech's new recombinant DNA bioengineering revolution, and they're going to make human Insulin, people go nuts. It triggers this race for human Insulin.

Novo gets swept up in it. They're like, oh, no, Eli Lilly. They're going to come back into the research game. They're going to innovate in product. We had the chance to work with Genentech, Genentech had actually approached them about being a partner in Europe.

Novo had turned them down, because they didn't think the science was ready yet, and they were wrong. They're like, shoot, we got to scramble. They find a team of Japanese researchers who have shown that you can actually chemically modify a pig Insulin to make it chemically identical to human Insulin.

Ben: What? Really?

David: Yeah, you can't make this stuff up. Novo is like, great, we're going to race to market. We're going to beat Eli Lilly with human Insulin. It's not going to be genetically engineered. We're just going to take our pig Insulin and modify it. It turns out to be a huge boondoggle. It works, but it's not any better than pig Insulin. It's a big flop for Novo.

Ben: The timing lines up to really be a nail in the coffin for them. If this is right after everything you just described with Nordisk scaling up production, compounding at 30% per year, and massively growing share, this is not a good use of Novo's precious dollars right now.

David: It's funny you say that. When the Genentech and Eli Lilly announcement happened in 1980, truly, this was a bombshell. It's hard to remember now. We weren't even alive, but this was one of, if not the most important announcement to come out of Silicon Valley ever still to this day. Investors went nuts. Anything that even you could squint and look like a biotech was suddenly the hottest thing in the world.

Genentech goes public in the fall of 1980. This is well before Humulin, the product that they create with Eli Lilly, comes on the market. They go public, and it is, I believe, the largest venture-backed IPO ever at that time, until it eclipsed two months later when Apple goes public. But investors are just mad for biotech companies.

When Novo announces that they're going to be first to market with human Insulin, and just ignore that it's actually pig Insulin that we're modifying, they use the hype on the back of that to do a US IPO with Goldman Sachs and raised a hundred million dollars.

Ben: When your currency is expensive, sell it.

David: Right? There are a number of analogies that we could make from the past few years that I'll refrain from here. As you say, this is a nail in the coffin for Novo, it's not good for the underlying business.

Nordisk, meanwhile, remember, they're in the midst of this aggressive expansion plan and scaling based on MC Insulin. They're like, I don't know that human Insulin in and of itself is all that much more effective. We're going to take a wait and see approach. We are going to recombinant DNA and genetic engineering capabilities, because it's clear the whole industry is moving this way for production reasons, if nothing else. And Novo is doing this too in the background. But Nordisk is like, we're not going to get caught up in the specifically human Insulin hype, and this really works out for them.

In 1984, Nordisk passes the German company, Hoescht, to become the number three global player in Insulin. Hoescht, I think that's how you say it, today is part of Sanofi, the large international pharma conglomerate. They're the only other player left besides Novo and Eli Lilly.

Ben: Yeah, Sanofi today, the three of those companies are essentially the entire Insulin market.

David: Yup. In 1984, Nordisk passes them. On the back of that, they do their own share listing on the Copenhagen Stock Exchange. They changed the structure of the operating company, and still the foundation controls the majority of the votes. But for the first time, outside investors can hold shares in the operating company of Nordisk. By the end of the 1980s, Nordisk is now up to 20% global market share in Insulin. That's really all come at the expense of Novo, which is down to 30% global market share.

Ben: Whoa, so they're close to matching them.

David: Yeah, they're pretty close. This brings us finally to the summer of 1988, when merger discussions begin for real between these two companies, now on much more equal footing than the last time. This time, there actually is a really compelling reason for both of them to merge and combine scale, which wasn't true before when it was really just like, hey, Novo had a problem and needed cash. Now, with genetic engineering and the way the whole industry is headed, scale is becoming much more important. It takes huge capex to do this stuff.

Ben: Scale becomes important for R&D, scale becomes important for trials and approval, scale becomes important for negotiating with actually getting the product sold. Scale becomes important for everything in health care starting around this time, the late 80s, early 90s, and obviously went nuts till today.

David: A big part of it is the production and infrastructure side of things, but the other part is the go to market. Pharma almost becomes like the enterprise software industry. At the end of the day, there only are a few companies at scale that have the infrastructure and the go to market to operate. Yes, you can build a big company on top of or underneath Microsoft, Oracle, Amazon, Salesforce, or Google. They're the ones with the infrastructure, they're the ones with the channels.

Ben: Yeah, it's an interesting analogy. I hadn't thought of it that way. Yeah, this is a good place to try to understand the pharma value chain as it exists today. I think first off, we should say, you basically can't. I'm actually not sure there's a human who can hold all of it in their head, and we won't promise to make this comprehensive. But it is worth knowing a few key concepts and the players involved.

I should say, this whole thing only applies to the US market, which many of you listening in other places will be laughing and saying, why is this so complicated? But yes, this is how the US market functions. I wrote a sentence, David, that I thought would be a fun way to break it down. That simple sentence is, a patient buys a drug. But really, actually that's not how it works.

David: That's like a butterfly flaps its wings. A person doesn't merely buy a drug. Let's actually name all the parties, starting with the manufacturer. A manufacturer like Novo Nordisk develops a drug. They sell it to distributors like McKesson or Cardinal Health, who then sell the drug to pharmacies like CVS or your local neighborhood store. The pharmacy then charges a price at the window to a customer. So far, there's nothing different about how this is working from any retail supply chain, but here's where it gets weird.

In healthcare, when a consumer goes up to the pharmacy window, they typically don't pay their own money for the price that the pharmacy actually puts on the register, their insurance company does. The insurance company doesn't want to pay whatever price the pharma manufacturer picked for their drug. They have huge scale to throw around, so they go negotiate with the pharma manufacturer to try to get some kind of discounted rate. But rather than do that themselves, insurance companies outsource that task to a new type of company called a Pharmacy Benefits Manager or a PBM.

The PBM negotiates with the pharma company for a discount, often in the form of a rebate, that the pharma company pays back to the PBM. They then take that discount. They keep some of it for themselves, and then they pass some of it back to the insurance company, who can then choose to share it with the employer in some way. As you can imagine, when there are these many middlemen in a transaction...

David: Yeah, so that's four middlemen?

Ben: The PBM, the insurance company, the distributor, and for some reason employers are involved.

David: We're talking about a six-sided market.

Ben: I don't think it's a sided market. There are two good diagrams that I'd found in the research that we'll put on the acquired twitter account and the threads account to get access to these visuals that I think are pretty good illustrations of the way the dollars flow and the way the product flows. You can imagine when there are this many middlemen in a transaction, it's really hard to have a functioning market to actually interpret demand signals and have them clearly flow all the way upstream and for the end consumer to really be treated as the customer versus just a statistic in a large aggregated basket. We've lost the plot in being able to actually have a functioning free market.

Anyway, I want to do a little dive into each of the parties to understand what they do. The drug manufacturers like Novo Nordisk do all the R&D, and they do all the production. They also own the responsibility of the clinical trial. They work with partners to do this, but proving that the drug is safe and efficacious is up to them.

There's the distributor wholesaler that does exactly what you think they do. They buy all the drugs from all the pharma manufacturers. They warehouse and distribute them. They actually do take risk. When I say they buy, they actually do buy them and hold them. They end up distributing them to the pharmacies.

Pharmacies do exactly what you think they do. Those companies have gotten merged into PBMs in some cases. Thinking of CVS as just CVS is not really right anymore. It's CVS Caremark, so they're with PBM. There's the Walgreens Boots Alliance, which the way they named it is all you need to know.

The way to think about pharmacies is that there are a few big ones and that is what matters, even though there are many people interested in keeping a thriving, independent set of pharmacies out there. Then there's the PBM. Why does the PBM exist, the Pharmacy Benefits Manager?

David: That's a good question.

Ben: Yeah. In the old days, there were lots of drug companies and lots of insurance carriers. It would be nice if every little insurance company or every employer didn't have to go negotiate directly with every drug company to get all the best prices. So PBMs provided value by doing that on everyone's behalf.

PBMs created what's called a formulary, which is basically a big ledger or a big list of drugs and the prices. Obviously, today, that is less necessary, because there's less fragmentation given all the mergers that have happened, but the PBMs still establish themselves as a key immovable piece of this puzzle.

David: Are they agents? Is that the right way to think about them?

Ben: Agent implies that the principal can sort of make a decision to go elsewhere. You're not going elsewhere.

David: The PBMs are the ones actually setting the prices.

Ben: That's the key question. Maybe a little more context on PBMs, and then let's try to answer your question, David. They're huge. PBMs manage pharmacy benefits for 266 million Americans, and that number is old. That's as of 2016. Think about like basically all Americans get their prescription drugs through a PBM.

Despite there used to being hundreds of PBMs, there's now fewer than 30. There's essentially three that cover about 80% of the market, and those are Express Scripts, CVS Caremark, and OptumRx, which is actually owned by United Health Group. Interesting to know that Caremark, that PBM, is corporately bundled with CVS, a pharmacy, but OptumRx, corporately bundled with an insurance provider.

David: There's vertical integration happening here too.

Ben: Yes. If you want to be a little bit cynical about it, you can say they've really become the gatekeeper for consumers getting access to drugs since a doctor is not going to prescribe a drug if only two of the three big PBMs have it on a negotiated agreement there. Each PBM individually has control or almost like a veto.

If a PBM says, we're not going to work with that drug or that drug manufacturer, doctors aren't gonna keep a big list in their head of what insurance companies work with what PBMs that have what drugs. As a pharma company, you need all three big PBMs to come to some terms with you to be on their formulary and handle the reimbursement for your drug.

One other way you can think about it is a PBM is like a health insurance company, but they just do it for the pharmaceutical benefit and not all the other stuff that the health insurance companies do. You talked about prices. A major mechanism for the way that these prices are negotiated and set is the rebate mechanism that the PBM negotiates. Manufacturers usually have to pay the PBM a rebate, which lowers the net price of the drug, even though the list price stays the same. There's a sticker price, but then there's a rebate that once the PBM pays the sticker price, actually, the drug manufacturer...

David: How does any of this get past the DOJ?

Ben: Great question. Initially, the rebates worked well for drug manufacturers since there were a lot of PBMs, and they could negotiate. But now that there are three big PBMs, the pharma manufacturers have essentially lost all their leverage in most cases. I'll say in most cases, and we should come back later to see what are the exceptions.

Rebates are extremely high. Eli Lilly has publicly claimed that the cost of these discounts and rebates accounted for 75% of the sticker price of Insulin. If you're getting a rebate on 75% of the total price, the sticker price is not the price.

David: Wow. Wait, so who gets the rebates? Is it the PBMs themselves or the consumers?

Ben: PBMs say that they tend to pass most of the rebate along to the health care plan.

David: Yeah, consumers are far away from any of this.

Ben: The health care plan says they share it in some fashion with the employer, in some part of their agreement, to be the health care provider, the insurance provider for the employer, but this is a quagmire of a debate that is out of scope for this episode. My favorite quote from one source that we talked to described rebates as a game of hide the sausage.

David: Gosh. Wow.

Ben: Yes, you're right, David. Nowhere in there did I say, oh, the patient gets the rebate. You can see how demand signals from patient and actual clearing prices of a patient and what they're willing to pay for a drug, all that signal just gets lost in all of this middleman mania.

David: Wow.

Ben: That is the current state of what happens when many people or most people go and fill a prescription.

David: Bringing it back to when the Novo Nordisk merger finally happens, this is the background on the go-to market side, at least in the US, and then there's also the background on the infrastructure side, thanks to genetic engineering, where scale now really matters. Both companies are now on much more of an even footing.

In January 1989, the Novo Nordisk merger is finally announced. It's a dual merger of both the operating companies and their respective foundations. The two foundations merged into one, and the two operating companies merged into one as well.

I had to dig a bit to figure out the exact economic splits. I believe that the final ratio was 62% Novo and 38% Nordisk. Novo was still the larger majority institution here, but this is a far cry from when discussions first started 10 years ago and Nordisk was this little. Hey, we're buying you for cash, essentially. No, now it's like, this is really a 60/40 merger.

Ben: It's crazy. The two guys that split off, went to be cowboys, and start their own little competitor, even though they didn't have the license, ended up creating the bigger company.

David: Yeah, wild. They drove each other to create all of this innovation over the years. The new combined company has roughly a billion dollars in Insulin revenue and 50% global market share with Eli Lilly just behind at 45% and Hoechst at 5%. That tells you right there how much the market has grown just during the decade of the 1980s. That puts the total market size at roughly around $2 billion for Insulin. Ten years ago, the total market size was $500 million.

Ben: Wow.

David: Yeah, wild. The enzyme and other businesses within Novo stay with the company for now. They would get spun out later in the year 2000, and that contributes another roughly half a billion in revenue, but with lower margins as we talked about. The Novo CEO and Henry Brenham from the Nordisk side remain as co CEOs for the next couple years. Brenham notes that they are still a dwarf compared to the increasingly consolidated pharma market out there, but we are "a specialized dwarf that will probably create a certain fuhrer on the global stage."

What they're referencing here as we were talking about, this is the era when just huge pharma mergers start happening. Glaxo and Wellcome merge around this time. Astra and Zeneca merge around this time. Sanofi buys Hoechst. These are all multi, multi billion dollar, tens of billions of dollar transactions. That makes Novo and Nordisk look like small potatoes at the time.

Actually, Wall Street and the investment community believes that this is really just the first step. This is Novo and Nordisk, the leading Insulin business in the world, preparing itself for a further merger or sale into one of these new, diversified, global pharma conglomerates.

Actually, this is crazy to think about in retrospect, but Novo Nordisk Management agrees with that. That's actually their plan. There's no rush here, but they think that they do need to merge into a larger organization.

Ben: They think the writing is on the wall, where we need scale in order to function in this changing marketplace, so we're going to merge in. What they didn't realize was that the market that they were on top of would actually, sadly, be a tailwind that gets them to scale without merging with anyone else.

David: Yes. Basically, all throughout the decade of the 1990s and into the 2000s, management is in constant merger or sale negotiations with one of these Big Pharma giants or another. Luckily, none of them come to fruition. In the meantime, without anyone including them really noticing, the combined company just keeps compounding on these tailwinds of the expansion of the Insulin market, Insulin treatment of Type 2 diabetics, and all the supply that's unleashed by genetic engineering.

Revenue and profit compound again at 20%, sometimes 20%-plus annually for 15 years there. They're firing on all cylinders. In the year 2000, they signed a huge deal with Walmart. They land a supply agreement with the VA hospital system for the first time, the Veterans Affairs hospital system in the US, which is enormous.

By the end of 2003, annual revenue for the company is now over $4 billion, and that's pretty much just on Insulin alone. Remember, they've spun out Novozymes. All the subscale pharma businesses that Novo had are all gone. That's when management finally decides to sell the company.

In 2004, they have a deal on the table to combine with the Swiss company, Serono. Management is bought in, they've got the operating company board bought in. They're ready to do it, they just need to go get approval from the foundation board.

Ben: Which is the only shareholder that matters.

David: There's never been a conflict between the foundation board and the management board. Everybody's always been aligned here.

Ben: This is like the whole C Suite of Meta, deciding to sell the company to Apple, and then they just have to go get Zuckerberg's approval to do it. It's literally that scenario.

David: Yes. There's a clause in the foundation's agreement with the company that there must be a "convincing business argument" from the company's board of directors to the foundation board of directors that any merger or sale is a necessary precondition for the business to maintain and expand its position as a competitive business at the international level.

In management's eyes, like we've just been talking about, there's so much consolidation happening in the industry. Of course, it is a necessary precondition given everything going on that we need to get to a larger scale. That's why we have, after 10-plus years, finally found the right deal.

They go to the foundation board expecting that everybody's going to see the light and just agree here. The foundation board is like, yeah, I hear what you're saying, but have you looked at our revenue and profit growth over the last 15 years? Are you really telling me that we need to do this in order to maintain and expand our position as a competitive business? Are you really, really telling me that?

The management's like, yes. Isn't this what we've been working to? Why did we spin off the enzyme business? Why did we do all this if we weren't just preparing for a sale? The foundation board is like, how about you come in and present to us with your financial advisors?

Ben: My rubber stamp's feeling like it's not working right now. I'm not sure.

David: My daughter loves to say when something doesn't go her way these days, she says, not working. Foundation board is like, not working. What ensues, the management comes in, they present in two board meetings, first in August, 2004, and then a second one in September, where they get a do over, and they fail to convince the foundation board, so they block the merger. This is like the opposite of what happened at OpenAI, where the foundation here is saying, no, you must continue as an independent commercial entity.

Ben: It's a fascinating analog. This is I think one thing that makes this company really, really unique. But for having foundation control with a very specific charter and mission, this company gets rolled up.

David: Absolutely, 100% percent chance. If this ownership structure were not in place, we would not be doing this episode today.

Ben: I don't exactly know what the deal terms were, but basically in public company land, if anybody comes to you and offers you 25%-30% higher than your shares are currently trading, congratulations, they get to own your company. And that didn't happen

David: That didn't happen here, which turns out to be, unbeknownst to pretty much anyone at the time, and I'm sure not even the foundation board, a very prescient decision, because there is a small group of researchers within Novo Nordisk led by a woman named Lotte Bjerre Knudsen, who is working on a pretty incredible project that is showing a lot of promise, and that would be GLP-1 agonist drugs.

Ben: That is a mouthful, David.

David: That it is, but I'm pretty sure many of you know what that term means. Even if you don't, you've probably heard the marketing names for the current class of those drugs that Novo Nordisk has on the market, which would be Ozempic and Wegovy.

Ben: Or Rybelsus, which just got FDA approval pretty recently.

David: Yes, indeed.

Ben: David, glucagon-like peptide 1 receptor agonists. What is it and where did it come from?

David: It really is the story of Lotte Bjerre Knudsen. She started at Novo in 1989, the same year the merger happened. Right out of undergrad, as a scientist, actually in the enzyme division, which I didn't realize until you sent me an article last night about this.

Ben: Yeah. Remarkably, there is this paper called Inventing Liraglutide, a Glucagon-like Peptide 1 Analogue for the Treatment of Diabetes and Obesity that was published in 2019. It is a first person account by Lotte of the entire journey, her career, and how all the research went down and where it came from, that is published in ACS Pharmacology and Translational Science, publicly available to everyone. She has just told the story. It's very academic and scientifically written, but it's super cool that she's the hero of this story and got to write how it all went down.

David: Yeah, super cool. We'll link to it in the sources. Eventually, after a couple of years, she switches from the enzyme division to the Diabetes business. Specifically, remember this is not long after the genetic engineering revolution has happened, she gets put on the team that is screening new potential compounds that they could create for treatment of Type 2 Diabetes.

Right around this same time, oral anti diabetic medications are becoming a big thing in the market. These are drugs like metformin. If you've ever heard of that, that's the most commonly used one for Type 2 diabetics. They're the first line of defense for Type 2 Diabetes before you progress to Insulin treatments.

sNovo doesn't have a drug in this category. Despite being the Insulin leader, Novo and Novo Nordisk never had a viable oral anti diabetic. Lotte is part of this group that's looking for new candidates.

In the early to mid 90s, Lotte starts digging into the academic research. There's new work coming out that in Type 2 patients, a big part of the mechanism that messes with actual Insulin production is a hormone called glucagon-like peptide 1 or GLP-1, Ben, as you were talking about.

The thought is that if you could somehow get more GLP-1 into these patients' bodies, you could stabilize their Insulin production and thus treat the disease. Seems pretty straightforward. You could imagine that you could now just use the same recombinant DNA techniques to genetically engineer more GLP-1, just like you engineer human Insulin. No big deal.

Ben: Seems pretty straightforward. In fact, why don't you just go eat some GLP-1? Just get it into your body however you want. I'm sure it'll work out.

David: Right, no big deal. The problem is GLP-1 only stays active in your body for about five minutes before your body completely metabolizes it and breaks it down. In a normal healthy person, you're just producing GLP-1 all the time, and it's regulating your Insulin production, et cetera. In Type 2 Diabetes, that gets disrupted. You can't just put more regular human GLP-1 in the body, or it's going to go away immediately.

A whole lot of people across the industry bang their heads against the wall. Nobody can figure out how to make this work. The industry and the academic research community pretty much abandons it as a drug candidate. But Lotte is like, if we could make it work, this would really, really help people and be a great drug.

She faces a lot of pressure inside the company, outside the company. Why are you still hanging on to this? Why are you still pursuing this path? Finally, a few years later in the mid 90s, the management actually gives her an ultimatum. They're like, you either need to crack this and get an actual drug candidate in the pipeline within a year, or we're going to shut down this whole program.

Remember, Novo Nordisk, the world class most focused on pure play Diabetes research company in the world. Even they are like, yeah, we're almost ready to abandon this whole thing.

Ben: Crazy. What year is this?

David: This is 1995-1996.

Ben: All right. She's been doing research on this since 1991, I think it is when her and the team started cranking away on GLP-1 research inside Novo.

David: Around that, so a few years with nothing to show for it. She keeps tweaking the GLP-1 molecule. Again, you can do this with recombinant DNA. You can tweak any molecule. Eventually, she develops a GLP-1 analogue, analogue being similar type molecule, called liraglutide that includes a fatty acid grafted onto the molecule that helps prevent the body from breaking it down. This is the big breakthrough. Liraglutide ends up having a half life in the human body of 13 hours compared to a half-life of two and a half minutes for straight up GLP-1.

Ben: That will help.

David: Yeah. That satisfies management's ultimatum.

Ben: The mechanism by which it does this is totally fascinating. You mentioned that the fatty acid gets attached to the GLP-1 to create this GLP-1 analogue. The way it basically works is it has to bind in a very specific location, such that the receptor is not blocked, but it is grafted onto that molecule so they can travel together.

The fatty acids then make it so the GLP-1 can bind to another protein, which I believe is pronounced albumin, which is this really large protein that is very common in the bloodstream. It protects the GLP 1 molecule from the degradation by enzymes, and it protects it from being quickly cleared in the kidney, because that bound molecule is now too complex, too large to be filtered. It makes it like a big truck bouncing down a small highway in that the molecule is protected.

David: Yeah. I think that's how she phrases it too, when she describes it as protecting the molecule.

Ben: Yup. The fatty acid makes it big and stick to stuff.

David: Sometimes it's good to have a layer of fat around you.

Ben: Okay, 13 hour half-life, this liraglutide can become basically a once-a-day drug instead of an every-five-minutes drug.

David: Yeah, eventually. Here's the thing with this stuff. To get a whole new class of drugs to market takes a really long time. This is a big breakthrough in 1997-ish timeframe. Novo's like, great, we're going to invest in this. This is promising. We'll see in a decade if we can get this to market.

They start the clinical trial path first with animal trials for several years, then many phases of human trials, et cetera. That brings us to 2005 when the world's first GLP-1 analogue drug finally comes to market for the treatment of Type 2 Diabetes. Of course, I'm talking about the world famous, well known Byetta from Eli Lilly.

Ben: Not from Lotte's work and developed in a completely parallel way.

David: Not Ozempic, not Victoza, not Wegovy. It's something completely different. This might be the most random occurrence that we've ever had on Acquired.

Ben: David, if I called you and said, ship me a lizard, this is important, would you do it?

David: Knowing this context, I would actually say yes, an actual lizard.

Ben: Is that where you're going?

David: Yes.

Ben: Yes. Okay, great.

David: During this time, in parallel to Lotte's of work at Novo, two American researchers in the VA hospital system, the Veterans Affairs hospital system, government employees somehow discovered that a hormone contained in the venom of the Gila monster lizard, literally the lizard called the Gila monster, which has poisonous venom, one of the hormones in its venom also was a GLP-1 analog acted similarly to GLP-1 in the body and didn't break down within five minutes.

Ben: David, go get that poisonous lizard venom. Take all the poison out and inject it into me, please. That's what I'm asking you to do. Let's see if that works. I have no idea how this got proposed and why people thought this was a good idea, but incredible that it worked.

David: Incredible.

Ben: In 1995, Daniel Drucker had a lizard shipped from Utah to his lab, and he started experimenting with the deadly venom. David, aside from the research done at the VA, do you know where Daniel Drucker was a researcher?

David: I know one of the scientists at the VA was a guy named John Eng, and I believe he was at the VA hospital in the Bronx.

Ben: I'll give you a hint. Daniel Drucker was not a researcher at the VA. He was at a university. Daniel Drucker, and I believe still to this day, was a researcher at the University of Toronto.

David: Amazing. It comes full circle.

Ben: And he owns the domain, glucagon.com to establish some extra credibility.

David: I love it.

Ben: Yeah. It seems best I can tell that there were parallel research efforts being done on the early GLP-1 and place to find GLP-1 in the world to eventually turn it into a product.

David: The naturally occurring GLP-1 analogue as opposed to the engineered liraglutide, it actually does become a drug candidate. They license it to Eli Lilly. Eli Lilly develops it into Byetta, and Byetta hits the market in 2005. It's FDA approved and it works. It's not poisonous. It doesn't kill people. It is the world's first GLP-1 analogue to come to market.

Like it is effective, it's not like overwhelmingly more effective than traditional anti diabetic orals like metformin and the like. More importantly, the half-life is not as good as liraglutide. Byetta requires two injections per day, which if you're a Type 2 diabetic, and you're not yet at Insulin treatments, you're like, well, I could stick with oral antidiabetics like metformin. I could go try this new thing, but that's going to be two injections per day. Do I really want to do that versus stick with orals, and then transition to Insulin injections when I need it?

Ben: I can barely remember to take my multivitamin orally once a day. Asking anybody to do something especially invasive twice a day is a big behavior change.

David: Big behavior change, totally.

Ben: It's important to remember what these GLP-1 agonists are actually doing. It's just generally raising the baseline of your body's own ability to secrete Insulin. It's making you behave more like a person without Diabetes than you otherwise would.

David: Yes, correct.

Ben: But many people still would need Insulin on top, depending how far along the spectrum you are.

David: Yes. That's 2005. In 2007, Lotte and Novo Nordisk's liraglutide, GLP-1 agonist, enters phase 3 human clinical trials.

Ben: Yup. For those who have heard these phrases before, phase one, phase two, phase three, and never knew what they meant, phase three is the really big, really expensive one. I'm gonna quote Alex Telford who wrote this really amazing, long blog post explaining how the clinical trial process works, why drug development has gotten so expensive, and all that. We'll link it in the show notes. It's one of my primary sources

He says, "Typically, phase one trials focus on safety and finding an appropriate dose, often in healthy volunteers, phase two on establishing preliminary evidence of efficacy in patients, phase three on confirming efficacy in a larger sample of patients and collecting robust safety data."

It is worth pointing out when I say the expensive one, 29% of all R&D for a drug is spent right here. Phase one is 9%, phase two is 12%, phase three is 29% with the rest of it coming from that early basic research, drug discovery, preclinical studies, and a little bit later with the regulatory review. But almost a third of the entire spend of the whole R&D pipeline for a drug is here, so big freaking deal to go through a phase three trial.

David: My understanding is that most drugs never make it to phase three. If you make it to phase three, that's very promising. It's not automatic that you're going to get approved and it's going to work, but it's promising.

Ben: It's a great question. Thanks to Alex, we have the data right in front of us. Here's the probability that a preclinical study even makes it to the phases. That's 69%. You're a little over two thirds once you enter a preclinical study to graduate to phase one, two, and three. But in phase one, two, and three, about half of them get weeded out each time, so 52% make it through phase one, 36% through phase two, and only 62% through phase three. Once you get into regulatory review, then there's a 90% chance that you get approved, but each one of these gates filters out about half of the drugs that enter.

David: I guess if you look at the lifetime risk of approval for a drug, by the time you make it to phase three, you're pretty far.

Ben: Of the 69% that even make it into clinical development, you've got 36% left graduating phase one, then 13% left graduating phase two, then all the way at the end, 8% graduating at a phase three. It gets pretty winnowed down over that course. But to your point, it's a big deal to enter phase three, because it shows that you are one of the 13% that have made it this far.

David: Yup. Cool, okay. As they're in trials, and Novo knew this, but it's starting to get confirmed, that (1) Liraglutide is going to be more effective than biota. (2) More importantly, it's only going to need to be injected once per day, because the half-life is longer. (3) It's also now starting to be observed and confirmed in these human trials, something that Lotte had noticed all the way back in the animal trial phase, that rats who were injected with very large amounts of liraglutide would stop eating. It seemed to have an effect on appetite. If these rats had very large amounts of it, they would literally starve themselves to death and refuse to eat. This effect is persisting in humans here in the phase three trials.

Ben: Which wasn't a guarantee, because there's lots of rat behaviors that then don't replicate in human trials. While they were not specifically studying it in this trial, they were studying the effects on Type 2 Diabetes, the early reports of this might be replicating in humans was promising and surprising, but it wasn't happening to huge degrees. With the dosage of liraglutide that they were planning to make the approved dose, it's not like you were seeing this crazy dramatic weight loss. It was just like, oh, that's interesting. You also eat a little bit less when you're on this liraglutide drug.

David: But nonetheless, it's a pretty interesting thread to pull on, especially because many other anti diabetic drugs up until this point had actually caused patients to gain weight.

Ben: Right, which, of course, compounds the problem.

David: Lotte and her R&D team push Novo Nordisk to consider also pursuing a parallel FDA approval and commercialization path for the same molecule, liraglutide, as a weight management drug based on this evidence that they're seeing in the trials.

Ben: Which then FDA speaks as an indication. You're trying to get it approved for a second indication.

David: Yeah. This was truly an out-there idea. There is a huge, huge stigma around weight loss drugs, enormous.

Ben: Yes, the stigma is real, but there's also an interesting product efficacy thing here. Vox.com put it really well. They said, not only do weight loss medications have a dangerous history, but there is also a persistent bias and stigma against the disease that now afflicts nearly half of Americans.

Obesity is still widely viewed as a personal responsibility problem, despite scientific evidence to the contrary. History has shown that the most effective medical interventions such as bariatric surgery, which is stomach stapling, effectively the gold standard in treating obesity, often go unused in favor of diet and exercise, which for many don't work.

This is proven over and over and over and over again. You can't just tell people, change your lifestyle. Most people literally can't. There are too many things working against it, including their own biology. Additionally, this is pretty interesting, researchers thought it was actually impossible to create a weight loss drug that was both safe and effective.

David: Are you talking about Fen-Phen?

Ben: Yes. It dates way back even before Fen-Phen to the amphetamines in the 70s. People are taking speed, because that's the accepted weight loss drug.

David: Yeah. Fen-phen was a combination of a drug with speed. One of the phens is speed, I believe.

Ben: In the 90s, was it heart attacks?

David: Yeah, it was major heart damage.

Ben: Yeah. That scared the crap out of the FDA, out of companies that are pursuing weight loss drugs.

David: Yeah, this was a disaster. It was like a grassroots thing that built up and the two phens were independently approved for separate use cases. A physician got the idea to combine them. Since both drugs were approved, Big Pharma was like, oh, wow, weight loss drug, miracle drug. Let's commercialize this.

They pushed the FDA to rush the process, which they did thinking again, both of these drugs are approved. It turned out that when used in concert, it caused major heart damage. I think something like 6 million Americans took this thing, and a large portion of them ended up with major cardiovascular issues.

Ben: It's awful. That was the worst one, but there are seven or eight over four decades of these either dangerous or just completely ineffective weight loss drugs. Most pharma companies completely steered clear of the black hole budget item that was weight loss research and development.

David: It's going back to the beginning of the episode in Rockefeller's dad and the snake oil salesman. This is the stigma around this stuff.

Ben: Totally. To illustrate this numerically, the annual obesity drug sales were only $744 million. Up until 2020, the market for weight loss drugs was just tiny, because basically nothing worked and everyone was scared of it. That $744 million included the commercial sale of liraglutide for weight loss, which had already been on sale for six years.

Why is everyone freaking out about Ozempic now? Does it feel like basically nothing worked before? It was true. Nothing worked before in a safe way. There is this like magic number around. If you can actually safely enable someone to lose 10% of their body weight or more, then there's a market. Otherwise it basically rounds to zero, because people just don't think it's worth the trouble and neither do the companies.

David: Yeah. It's like you need the appropriate amount of activation energy for the reaction to catalyze.

Ben: Exactly.

David: Just to put a really close to home even a finer point on the stigma, as recently as 2005, the same year Byetta came out, Novo Nordisk's own official position on the obesity category as articulated by the then CEO, Lars Sorensen, was "Obesity is primarily a social and cultural problem. It should be solved by means of a radical restructuring of society. There is no business for Novo Nordisk in that area."

Ben: Imagine here, Lotte and her team trying to get the company to release a liraglutide for weight loss when that is the company's official position. You're like, look I'm looking at these humans who are eating less.

David: Right. What's going on here? Why is Lotte pushing for this? She's a great scientist, well-respected, and at this point she's made her career on the development of liraglutide and GLP-1 against all odds just for Diabetes. Why is she pushing this? This is a very, very different situation than what happened with Fen-Phen.

Ben: Totally. We still don't know the super long term effects of it, but we certainly know that months after taking this thing, large populations of people are not having heart attacks.

David: Yes. Lotte knows this too, obviously, because liraglutide, the drug, the same drug, the same thing, has now been through 12-plus years of super rigorous trials starting with animals, now with humans, international approval processes. There were issues along the way like there are with any drug.

Ben: Dude, the 2010 trial was 9000 patients across 32 countries. This is a big, expensive, almost two year trial.

David: Yup. She's like, yeah, we're pretty sure here, this is about as safe as any drug possibly could be. At least in the medium to short term, this is not a cause for worry in terms of safety. It's just that all that testing and everything was done for a different use case, but it's the same drug.

She eventually convinces the company to push forward with this. In 2007, only two years after the CEO made that statement, Novo enters a slightly higher dose version of liraglutide into human trials for weight loss. Why do minds change quickly on this? The commercial opportunity here, if you can get approved, if you can get it to work, if it's safe, is unlike anything else the pharma industry has ever seen, if you could really crack this market.

At this time back here in the mid 2000s, already, about a third of the US population is medically obese, defined as a body mass index over 30. Two-thirds are medically overweight. The world health organization estimates that 500 million people worldwide are obese. That's a total addressable market here of 100 million people just of medically obese people in the US alone, half a billion plus, probably more like a billion worldwide, there are no other drugs and diseases that affect this many people, not even Diabetes.

Just like Diabetes, it turns out that in most cases, obesity also is a chronic disease. Yes, you have this huge team of people, but it's also people that are then going to be taking the drug probably for the rest of their lives.

Ben: Which is just like a statin, or there are a lot of treatments for chronic diseases that we give people that are drugs, that you have to take for the rest of your life. Yeah, you're right. It's totally different than making a vaccine, making a hepatitis C cure, or something like that. It really is a for-better-or-for-worse, a durable, ongoing, recurring revenue stream.

David: This is annual recurring revenue here. Yeah. In early 2010, Novo gets final approval for Victoza, which is the marketing name for the Diabetes version of liraglutide. Five years after Byetta, Victoza is finally officially hitting the market in the US. Remember, this is just FDA approved for Diabetes.

Of course, everybody knows about these trials going on for weight loss and the ability to lose weight. It hits the market. It is an enormous hit. It doesn't just overtake Byetta as the leading GLP-1 drug on the market for Diabetes, it massively expands the market.

Year one in the first year that it's on the market, Victoza does roughly 300 million in sales. The next year, the first full year it's on the market in 2011, it does over a billion dollars in sales just in that year. There's this concept in the pharma industry of a "blockbuster drug", and these are drugs that achieve a billion dollars in annual revenue.

Ben: Like the tech industry calling it a unicorn where you have a billion dollar valuation.

David: Yeah, exactly. It's the pharma version of a unicorn.

Ben: These are like Lipitor, Humira, Advair. There's a bunch of examples that really are a huge breakthrough, address a large enough population. There's a bunch of ways to slice it, but usually they're drugs you've heard of.

David: Yup. Victoza hits it in its first full standalone year on the market, which is super fast. What's going on here, obviously, is that people are not using Victoza just for Diabetes. People are using it for Diabetes, but people are also using this for weight loss.

Ben: You might be asking yourself, how does that work? If the FDA has only approved it for Diabetes, what's going on there? It is actually at the doctor's discretion if they want to prescribe an off-label use. If a doctor does enough independent research or reads a study, technically, I don't think the drug companies can provide any marketing materials or sway the doctors in any way. The information can't come from the drug manufacturer, but should the doctor believe that this drug would be good for their patient, even though their patient doesn't have the FDA approved illness, or I guess whatever the indication is?

David: The FDA sanctioned indication.

Ben: Yes, the doctor can prescribe it for an off-label use.

David: Right, and that's not illegal. Let's be honest here. Some of this is doctors, but a lot of this is patients going to doctors and being like, hey, I heard that this Victoza thing could help me lose weight. What do I got to do to make you prescribe it for me?

Ben: I saw an ad that said, ask your doctor if Victoza is right for you, so I'm asking you if it's right for me. We should say, everything in healthcare has a modifier of sometimes. Everything I just said is true sometimes. It's not always true that the doctor has complete control to prescribe off-label, but I think it's a reasonable way to think about it. David, it's not that effective. You can lose weight taking Victoza, but it's not necessarily a life-changing thing.

David: Right. At the end of 2013, Novo submits Saxenda, the official weight loss version of liraglutide, to the FDA and EU for approval. It's a slightly higher dose version, and expectations are at an all time high for this. Novo's market cap has already been running. It now passes $100 billion on the anticipation of Saxenda's performance, and it's not that big of a hit.

It's a hit. It has good sales. To be fair, I think a large amount of the early adopter GLP-1 weight loss market was already just using Victoza. Clearly, a lot of the Victoza revenue was actually Saxenda revenue that was pulled forward, so to speak. But Ben, like you're saying, the big issue is that even with the slightly higher dose of liraglutide, it yields long term on average across populations about an 8% BMI reduction, which is meaningful, but it's not that meaningful.

Ben: In research, it is crazy. I heard over and over again, physicians and other people in the industry echo this magical 10% weight loss reduction number. There was always this belief in the industry that if something could reliably help you lose 10% or more, then it tips. Saxenda just didn't get there.

David: Regardless, the next year 2015 is a record year, total company revenues for Novo Nordisk hit $16 billion, which is incredible for a pure play Diabetes and now Diabetes and relatedly obesity pharma company, but the stock flatlines.

Ben: Yeah. Right around the same time, you've got the Insulin pricing scandal, where America is waking up to the idea that Insulin is getting more and more expensive, and it's becoming more and more essential for a huge population of people. This is across the whole industry. It's Sanofi, it's Novo Nordisk, and it's Eli Lilly. Everyone's Insulin has gotten more expensive, and they come under fire in the public eye, the Saxenda not being the blockbuster drug that expectations had trumpeted it up to be, plus this increasing pressure around Insulin, and I think a CEO change.

David: Yeah. The CEO change, I think, was a result of this. What you're leading up to is in 2016, the stock takes a 40% hit, which is wild. Today at the beginning of 2024, this is a half a trillion dollar company. A few years ago, it was a well less than a hundred billion dollar market cap company.

Ben: Yep, but there was that really dangerous narrative that these GLP-1s aren't going to be as crazy as everyone, at least everyone in the know, thinks. Also, their only franchise of Insulin is suddenly under fire.

David: In September 2016, the then CEO Lars Sorensen resigns. Current CEO Lars Jorgensen takes over.

Ben: Amazing. So wonderfully Danish.

David: Sidebar, this is wild. Right now, today, as we record this, Novo Nordisk is the 15th largest company in the world by market cap. When I was doing research for this episode, I of course googled Lars Jørgensen. When I did, the results that Google gave me results one through six were for the University of Kentucky swimming coach, who is also named Lars Jørgensen.

Ben: Talk about below the radar.

David: Who I'm sure is a great and storied NCAA swimming coach. It wasn't until number seven when I actually got the CEO of Novo Nordisk. That is how underappreciated this company is.

Ben: It's crazy.

David: Anyway, right around this same time, Novo begins phase three trials with their new, next generation, improved GLP-1 analogue, Semaglutide. which I think is pronounced Semaglutide. We've also heard Semaglutide. We did an obscene amount of Research on this and don't have a good answer. So if you know, get in touch with us.

Ben: The most reputable source we could find seemed to say Semaglutide.

David: Yes.

Ben: Which makes sense coming out of liraglutide, and I believe there's a Dulaglutide, so we're rolling with Semaglutide.

David: Acquiredfm@gmail.com if you disagree. Semaglutide has several benefits over liraglutide. (1) It is much, much longer lasting in the body, so it only needs to be injected once per week instead of once per day. Massive benefit just on patient convenience there with the half-life being so much longer. (2) Much more important for the near term, it is twice as effective as liraglutide for weight loss. We're talking 15-plus long term BMI reduction, which is well beyond, Ben, as you were saying, the 10% magical threshold.

Ben: Yup. It moves from the domain of irrelevancy to the domain of, is this a miracle drug, in the press.

David: There are some more potential benefits that we'll talk about in a little bit here. This compound, this GLP-1 agonist Semaglutide, is, of course, Ozempic and Wegovy. All the same thing, all Semaglutide, Ozempic is the Diabetes marketing product, and Wegovy is the weight loss marketing product.

Ben: Yup. A few words on how it affects weight, the natural GLP-1 produced in your gut travels to your brain. This is a hormone that moves throughout your body much like many other hormones. It triggers a response to tell your brain, hey, I'm satiated. It tells you that you've had enough, that you feel full, and it can cause you to stop thinking about your hunger. If you're someone that's constantly fixated on food and restraining yourself from indulging, it can quiet that impulse, or at least reports are that that is what people feel.

It can also slow digestion. Not only does your brain think you're full, you literally are now full since the food takes longer to move through your digestive system. David, you mentioned that 15 % weight loss. They're still studying exactly why it works, but it's believed to be that it's these two mechanisms working in action together.

As you can imagine, food taking longer to move through your system can make you feel gross. The side effects naturally include things like nausea, vomiting, constipation, and things like that. But these reports of side effects are pretty widespread. I listened to a bunch of things, one of which was a Tegus call with a professor of cardiology that cited about one out of six patients have side effects that are so severe that they discontinue the drug.

It's this, we don't exactly know why it works. We have studied a bunch, so we know that it works. But you can imagine why the side effects might be linked to the idea that if you're eating really calorie dense food, really fatty food, hard to digest food...

David: And it's moving slower.

Ben: Right, I wouldn't want food either. The thing that's really fascinating to me about Semaglutide as a weight loss drug is that you can't just sit around eating pizza and ice cream and lose weight. The laws of thermodynamics in the universe still apply. Your body will always retain the difference between the digestible calories that you eat and the calories that you burn.

The reports from those who are taking it. It's really more like you just don't want to eat large quantities. You don't want to eat really calorie dense food. It just changes your habits without you trying, or at least you having to try as hard as you did in other attempts to lose weight. It solves the debate that had been going on for decades of, is it a behavioral problem, or is it a medical problem? If you're taking medicine that changes the way that your body chemistry works, but also literally causes you to naturally change your behavior, it really actually addresses both concerns.

David: Right. In 2018, Ozempic finally hits the market for Diabetes. In 2021, Wegovy gets approved for weight loss. Ozempic does over a billion dollars in revenue in 2019, it's first year on the market. It's clear it's going to be a huge hit, and it's even more than that. This is even more than Victoza back in the day. It does a billion dollars in revenue, but it's massively supply constrained. It could have done a lot more. These drugs still, Ozempic and Wegovy, could do a lot more revenue than they are doing right now.

David: By the way, on earnings calls, the company says, yeah, that's going to be true for a long time. The demand for this drug will continue to massively outpace our supply. We will be here on earnings calls over and over and over again, telling you that no matter how many factories we build, we are supply constrained still.

David: Yes. At this point, it's funny. I think for most people that are discovering Novo Nordisk now, us included, I didn't know anything about this company until a few years ago.

Ben: Thirty-two years after Lotte and her team started this research.

David: Right. If anything, we think of this company as like, oh, it's the GLP-1 company, it's the weight loss drug company. No. For a hundred years, it was the Diabetes and the Insulin company. But it's clear at this point now that no, this is now a GLP-1 company. That grew naturally out of the Diabetes, the Insulin research, Lotte's work, and in this organic fashion that is so different than the rest of the pharma industry. But the net result of this now is that yes, Insulin is still a large business within Novo Nordisk, but it is a GLP-1 company.

When Wegovy finally launches in the US in 2021 as the official FDA sanctioned weight loss version of Semaglutide, it gets the same number of prescriptions written for it by doctors in the first slightly over one month than Saxenda had in its entire drug lifetime. People were already "misusing" Ozempic for weight loss before this. Ozempic supply was fully exhausted, and then now Wegovy supply fully exhausted.

Ben: In February of 2021, after the clinical trial finishes on Semaglutide for weight loss for Wegovy to hit the market in the US, the New York Times runs a story and just calls it a game changer. They say, for the first time, a drug has been shown to be so effective against obesity that patients may dodge many of its worst consequences, including Diabetes. With the biggest megaphone you could possibly point at people, they're being told that this thing freaking works and it's a miracle drug.

David: Yeah. We'll talk a lot more about pros and cons, all of that, and everything around that in a minute here in analysis. But just to wrap up the story, the company's market cap basically goes vertical. In 2020, right before all this hit and as Ozempic was coming online, the market cap had climbed back up above $100 billion. Summer 2021, it hits $250 billion. By the end of 2022, it hits $300 billion, which mind you, is against a market and macro backdrop of massively rising interest rates and stocks and equities being down across the board. Novo Nordisk is up during this period.

This past summer in 2023, it passes $400 billion market cap, and it is currently flirting with the half a trillion dollar mark. Revenue goes from $20 billion in 2019 to $25 billion in 2021, $30 billion in 2022. In 2023, so far and the first three quarters that they've reported, it is up another 30% year on year, of course, with Ben, as you said, years worth of supply constraint demand pipeline.

Ben: Yup, that is pretty crazy. David, you mentioned it as the GLP-1 company already and that transition has already occurred. You're totally right. Looking at the numbers, 51% percent of their revenue comes from Diabetes focused GLP-1 drugs and an additional 18% from obesity related GLP-1, so 69% of their revenue comes from Semaglutide or liraglutide. It's crazy. That happened in a decade.

David: Yeah, totally wild.

Ben: Insulin has become, to your point, still a part of the business, a smaller share of the business. Again, this is of revenue, not of profits. But 22% of their revenue today comes from Insulin. That leaves about 9% from the other efforts that they're putting energy into, rare diseases, things like hemophilia. They continue to be a ridiculously concentrated company. They make about $10 billion a year in net income. They're also a very, very profitable company among the most profitable and all of pharma, the 55,000 employees. So it's a huge international company at this point.

I want to talk briefly about margins. Later, we will talk about why margins are actually not the most interesting measure to look at, but it's worth knowing them, because we talk about them on every other episode. Gross margins are better than software. They run about 84%. Lilly is also a very high margin company running about 80%. For context, Microsoft It has a gross margin of 70% and Google is 56%.

David: How is Google's gross margin 56%? They must be stuffing a lot of other revenue besides search into the top line.

Ben: I assume all the billions they pay Apple comes out of cost of goods sold, all the traffic acquisition costs.

David: Probably also for their infrastructure and for Google Cloud.

Ben: Yup. At 84% gross margins, you should know that they're 10% points higher than your average successful Big Pharma company. They're concentrated in terms of what they actually focus on, but they're enormous and more profitable than everybody else. They've threaded a needle that if you were pitched a blank canvas, you would say, well, it's impossible. You need to make a trade off somewhere.

If you're going to be so narrowly focused on just one or two conditions and really one singular interrelated condition of metabolic disorders, either you can't have all the revenue, or you can't be so ludicrously profitable. It turns out that the thing that they picked, they can be both.

David: Yes, and also it gets better. Because Semaglutide has such a long half-life relative even to liraglutide, it's a once weekly injection, so the half-life in your body is days, it's staying in there for a long time, remember, natural human GLP-1, your body processes that in five minutes. Having GLP-1's active in your body for so long, it's reaching other tissues in your body that normally GLP-1s wouldn't. Indications are showing that that is beneficial for those organs.

Currently, Novo has clinical trials going for Semaglutide like same drug, same GLP-1s, use case in treating cardiovascular disease, in treating Alzheimer's, in treating kidney disease, and many others. Again, this is all for a molecule that through FDA processes and EU processes has been deemed safe enough to be on the market for the accepted use cases. The same drug now is showing evidence that it can also attack these other major disease areas. This is the gift that keeps on giving here.

Ben: It could be. Everything is really early, but it really might earn the title of miracle drug.

David: It really might. Not a scientist at all, this is just my thought looking at this. Yes, it could be a miracle drug for humanity and certainly already is a miracle drug for Novo Nordisk in terms of financial performance. No doubt about that one.

Ben: No doubt about that. This is a very good place. I've got a couple of broad topic areas that I want to hit here. Let's start with the general state of affairs of GLP-1s today. The first thing to know is sticker price. The price of Ozempic to treat Diabetes is north of $1000, and Wegovy for weight loss is north of $1300 per month before insurance. This is in the US. Expensive, right? That's a lot of money.

In Canada, of course, Ozempic is $147 a month. In the UK, it's $93 a month. Everything that I'm about to talk about is a uniquely American problem, much like most problems in our healthcare system.

How do these drugs get paid for in the US? That depends. Rich people, just out of pocket if they don't have coverage. We've seen all the headlines about it being rampant in wealthy New York neighborhoods or around Hollywood, but let's segment that away for a moment and say, well, okay, outside of that.

First, let's talk about private insurers. You might have coverage by your company's insurance. This is a good place to talk about the two most pernicious issues in the entire US healthcare system that are deeply intertwined. (1) Incentive alignment. (2) Time horizon.

The average American in the private sector holds a job for 3.7 years That means that on average, insurance companies are going to churn you every 3.7 years or sooner if your company changes the insurance plan. Their incentive is to cover you only in two categories of things. (1) Things that pay themselves back in less than 3.7 years. (2) Things that have such an overwhelming demand from employees that their employers think that they absolutely have to cover them to stay competitive.

You're sitting there thinking exactly the right thing, which David, you already acknowledged. But if I lose weight today, I'll benefit in the long run, but will my insurance company lower their costs in some way? If I'm obese, I'll almost certainly have complications later that'll cost hundreds of thousands or millions of dollars once those become acute conditions, but those costs won't be realized by your current insurance or your current employer.

David: Oh, man. If I'm an insurer, I'm like, great, I'm going to offload all that onto Medicare.

Ben: Exactly. The insurers are not really holding the bag for this class, these chronic conditions. This is the crux of the incentive problem in our health care system. There is just a mismatch in time horizon. You are invested in your own health for your whole life, but your insurance carrier is not.

David: They're invested in your health for your planned life with them.

Ben: Exactly. What is the exception? The exception is if your carrier is the US government. Let's talk about Medicare. Medicaid is a whole different discussion that involves states and is unbelievably fragmented, so we'll just not actually talk about it right now. But let's talk about Medicare.

Medicare is through the US federal government. It is a health insurance for people who are over 65, basically. The US federal government funds that plan with taxpayer dollars. A while back, which is actually not that long ago, just 20 years ago, Medicare did not cover prescription drugs at all. Medicare Part D was passed into law in 2003 and took effect in 2006. It allowed Medicare to cover drugs, not just hospital and doctor visits, which was Part A and Part B.

Today, Part D, interestingly enough, is legally prohibited from paying for a weight loss, and it is specifically called out that it is legally prohibited. There have been efforts to change this, but there was a bill introduced in 2013 that basically has never been passed to try to get through.

David: Interesting. Do you know if this was a result of the Fen-Phen debacle?

Ben: That's part of it, but I think a lot of it is really just this stigma of like, well, you really should be taking care of that yourself. You really should be making lifestyle changes.

David: Yeah, I could see the argument of like, why is the whole taxpayer base covering people who should just be exercising more? Even though it's definitely been proven that that is not the case. It's not their fault.

Ben: Totally. The Wall Street Journal has this great quote. "The scientific foundation for treating obesity as a disease rather than a lifestyle problem was solidified in the mid 1990s, when researchers discovered that fat tissues release proteins that act as hunger and fullness signals to the brain. This system is out of balance in people with obesity, making it more difficult for them to lose weight. For those who do lose weight, there are biological mechanisms making it hard to keep it off."

What is so interesting about Medicare is that we will all end up on it one day, when we retire and we get off of our private insurance. It does mean that the government is left holding the bag with our health for the long term. There are really two parties with aligned interests for us to stay healthy, ourselves and Uncle Sam. For us, it's actually quite hard to look out for long term interests, because the feedback loop is too long.

I go out and drink, even though I'm going to have a hangover the next morning, and that's only a 12-hour feedback loop. Lots of times, you make long term bad decisions. The question is, can Uncle Sam fix that problem in some way? It is far too early to say whether these recent GLP-1s are actually miracle drugs that massively reduce the complications later in life?

David, you mentioned there's research being done to figure out it might reduce heart attacks meaningfully, strokes, and liver and kidney disease. But if all of these things turn out to be the case, the American taxpayer has a huge benefit in investing early to keep all of our health care bills down later in life. I don't have a specific proposal. I'm not saying the government should pay for every single person in the country to be on Ozempic. We'll have to see where the studies net out on the benefits of these long term things.

Taking the moral thing aside of, does everyone deserve a miracle drug if it exists, even if there is no economics around it, it might just be ROI positive for Medicare to do this if everyone's going to need knee replacements, hip replacements, Diabetes treatment, amputations, and cardiovascular interventions.

David: Right. That is the crux of the broader societal debate and issue here. Obesity leads to such a huge amount of comorbidities, disease, health problems, and issues. That's even just talking about the medical system, let alone everything outside of the medical system that it leads to. Is it worth a certain amount of both risk in terms of the drugs, cost, and tax on society to save those expenses later? That's the question here.

Ben: Right. The last thing to say here, payers are Scared and rightly scared of how much it will cost them in the short term if they do start covering these drugs. Forty-percent, as we keep saying, of the population today is obese. The list price of these drugs is over $12,000 per person per year. Insurance companies, employers, Medicare, literally don't have the budget right now to fund all the demand for these drugs. Even if we had all the supply, there's a lot of intentional slow rolling and campaigning to try to get people to look at other interventions first before these drugs, given how colossally expensive it would be right away.

David: Yup, which might be a good time to talk about Eli Lilly and other companies out there that are also bringing GLP-1 drugs to market.

Ben: Yes. Please tell me about Tirzepatide.

David: Yes. Obviously, other Big Pharma companies have not just been completely ignoring this incredible development/cash gusher that has emerged in Novo Nordisk land. Eli Lilly now has a GLP-1 Diabetes approved treatment on the market under the Diabetes brand name, Mounjaro, that seems to be as if not more effective as Semaglutide in terms of weight loss when used for obesity.

Ben: Tirzepatide is basically the same. It's a GLP-1 receptor agonist, but it is also a GIP, which is basically bundling two hormones together that act in concert to be certainly a little bit more effective on weight loss from the early trial data, but also potentially more effective on helping your body produce Insulin as well.

David: That's showing great promise. It was approved in the U S for Diabetes treatment in May, 2022. Approval just came recently in November, 2023 for official FDA sanctioned weight loss use case under the marketing name Zepbound. Look for that in 2024.

What this really shows though between Eli Lilly, Novo, and other companies that are almost certainly going to get into the GLP-1 business, I think this is going to be like Insulin all over again, where there's just going to be a series of product improvements, and companies will drive innovation and increase supply.

The demand is so huge out there that Mounjaro can be a huge hit. Ozempic and Wegovy will continue to be huge hits. Other companies getting into the game will be huge hits. Novo has next generation GLP-1 drugs in the pipeline themselves. CagriSema is the big one that they're currently working on, that they think will be as good, if not better than what Eli Lilly has with Tirzepatide. I think we're basically just assuming that everything continues to be proven safe in the long run, we're kicking off a new super cycle here in pharma development around these compounds, just like played out with Insulin over the last century.

Ben: Yup. It really also just goes to show like it was time. Multiple researchers arrived at similar ideas concurrently, which we see over and over again in the world. Uber and Lyft is our modern canonical example. Cellular connectivity plus GPS, plus iPhone made it possible to do something for the first time. Multiple parties were arriving at the same time to do that.

I think science had just arrived at a place, where multiple parties could develop similar things side by side. Now, there's certainly a catch up race among other pharmaceutical companies who weren't doing this to now try to get into it and see if they can compete.

David: Totally.

Ben: Other things to know about these GLP-1 drugs today, for Diabetes, I try to basically figure out from asking around, what are people actually paying for this? What are most people actually paying? Because list prices of drugs, as we discussed earlier, is stupid.

David: At least in the US, yeah.

Ben: Yes. There are a lot of reports of people paying somewhere in the neighborhood of $300 a month after insurance as their actual cost. To corroborate that, a different way to arrive at that number, one person told me that it is common for most employers to put between a 20%-50% copay on these drugs. At $1000, that's $200-$500.

On the one hand, it's still very expensive. $3000-$4000 out of pocket per year. That's probably my entire out-of-pocket healthcare spend in an expensive year. That's a big price tag. But on the other hand, if that's the thing that changes your life, that could be seen as an easy choice.

It's easy for us sitting here to say something like that, because there's a lot of people that don't have that kind of cash to spend on something that could potentially change their life. There's definitely a meaningful access problem, not just the supply constraint on the manufacturing side, but even at a highly subsidized rate from insurance, a lot of people still can't actually afford the drugs.

The last thing I want to say on the current state of GLP-1s is that not adherence is a bigger issue with these drugs than many other drugs that have come before it. There's some research that points out that as many as 68% of people roll off it after a year. Part of this is related to price, changing insurance that doesn't cover it, that it's hard to find since they're still supply constrained, or maybe there are side effects that a doctor is not staying on top of with you, so you just get fed up and you're like, screw this, I'm off.

Aa lot of employers and insurance companies are waving their arms around and saying, why are we covering this expensive thing when people don't even stay on it, and all the benefit goes away when they get off of it, or at least 90% of the benefit goes away and your weight yo-yos back up. There are some very real things to figure out in making sure that you can prescribe these GLP-1s in a way that come with enough handholding to help you understand and manage the side effects and make all the behavioral lifestyle changes that you need to to make them be effective and sustainable.

David: Interesting. I hadn't found that about non adherence.

Ben: Yeah, it came up in a bunch of Tegus calls. There must have been some hedge fund investor trying to dig into building a model of non adherence into their DCF. Before we go into analysis, there is a little bit of catching up to do on the Insulin market. We left it as, hey, it's still 22% of revenue in Novo's business. The big three companies, Sanofi, Eli Lilly, and Novo really compete here, and they've iterated to become great products over time.

One thing that we didn't talk about is the complete destruction of how attractive it is to operate an Insulin business. This is super recent. If you would have asked any of these companies ten years ago, how durable is this revenue stream, and how durable are the profits from the revenue stream? They probably would have told you that it's pretty durable, because we have things like delivery pen mechanisms that we keep improving over time, that are proprietary, that give us some pricing power, that we keep revising the formulation so we keep getting the ability to patent new things.

It's difficult to manufacture, because it is developed from living cells. We're not just pouring chemicals into a vat, we do have to do some complex work to produce the Insulin. Somebody's not just going to waltz in here and figure it out. That was a pretty widely held view, one of the reasons why I think these companies thought they had so much pricing power, which they got in trouble for.

One thing that happened was a big controversy over pricing that we talked about. In 2021, US officials alleged that Novo Nordisk increased prices more than 600% between 2001 and 2019 in lockstep with competitors to the detriment of diabetics. Novo, of course, denied this. They pointed out that the net prices had actually decreased since 2017, so very convenient that they just talked about the last two years of that 18-year accusation.

My read into that is, yeah, prices were really rising and yeah, we all thought we had a lot of pricing power, and we don't want to dig too much into it Now if you look at the last five years and especially the last two, the opportunity to sell Insulin for a profit has basically completely fallen apart. You've got regulation that came in after the public outcry, so there are real price caps on what you can sell Insulin for now.

Biosimilars also came in. Biosimilars are effectively what people call generics, but for the category of drugs that involve live cells rather than mixing chemicals together. Traditional drugs have generics and biologics have biosimilars.

Biosimilar Insulin became a thing. A lot of the profits just got completely arbitraged away. GLP-1s are here, so those are reducing demand for Insulin, too. Those three things in the last five years or so created this complete perfect storm for Insulin to be a super unattractive business.

David: Interesting. Obviously, as we've shown throughout this story, it's not like Novo Nordisk planned it that way. However, this is really to their great benefit. Of all the Insulin manufacturers, I guess Eli Lilly was first to market with GLP-1s, but Novo really created the true GLP-1 and were the ones to really benefit from these early years while the competitors are catching up in many ways.

Ben: In many ones, they disrupted it just in time. In some ways, you could say, wow, it's so courageous of them to come in and disrupt themselves. But on the other hand...

David: It's like the headphone jack.

Ben: Right. Was it courageous? Or did they see the writing on the wall that eventually, we're not going to make any money from Insulin, so it's time to really start putting our foot on the gas on this thing where we could have bigger market, differentiated profitability? I think it was a happy accident that the timing worked out, but there are different ways to look at it.

David: Yeah. I certainly didn't find anything in my research that suggests it was anything but a coincidence.

Ben: Yeah. It's interesting to think about the fact that these companies thought that biosimilars weren't just going to waltz in, eat their lunch, and arbitrage all the profits away. Over time, the market for Insulin became sufficiently large that they just had a target on their back. The prize became worth it.

As we talked about in the NVIDIA episode, moats are only sufficient if the castle is sufficiently lame to invade. Otherwise, if the castle becomes better, you need a bigger moat. In 1999. I think it was, Eli Lilly sold $700 million of Insulin in America. By 2017, just two of their products sold $2.6 billion in America.

David: Yeah, two of their Insulin products.

Ben: Yeah, $700 million to $2.6 billion, it's just an illustration of how large and how interesting that revenue stream became for other people to go after.

David: Totally.

Ben: All right. Should we get into power? We're there anyway. We're in analysis land here.

David: Yeah. Let's talk power. For folks who are new to the show, this is borrowed from our great friend, Hamilton Helmer and his wonderful book, Seven Powers, where he talks about the means by which a company can achieve persistent differential positive returns versus their competitors in an industry.

Ben: Yeah. Or put another way, how to be more profitable than their closest competitor and do so sustainably? The seven powers are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. The first thing I want to say is, we are in the pharma industry, so the one that has a blinking red light around it is a cornered resource.

David: Yes, this is a patent driven industry.

Ben: Yes. Novo Nordisk has the patent on Semaglutide until 2032. This is an industry, where when you have the patent and you are able to make an N of one drug, we're not quite seeing an N of one drug here, but it's an N of two drug, you get the profits. Frankly, the crazy thing is when you look at some of the analysis, the profits evaporate within two years of your patent going away.

That was from the previous era before biologics. Now that things are harder to copy, because the molecules themselves are more complex, and they require growing living tissue...

David: More engineering.

Ben: Yeah, that would fall more under process power, and frankly scale economies because it requires more capital. But right now, historically, pharma is a patent driven cornered resource industry.

David: Yup. I think how this GLP-1 super cycle is going to play out if it continues, and what's interesting about the Insulin history and the analog to that, it's looking like it's going to be this ever stacking waves of patentable innovation and product innovation happening here. Yes, the Semaglutide patent will expire in 2032. But if CagriSema, their new next generation GLP-1 product shows the promise that they think it'll have, then that'll be a new patent cycle starting then, and then they'll develop the next generation, and it'll play out again just like Insulin. But yes, absolutely coordinated resource, for sure.

Ben: Yup. The patents aren't just on the molecules, they also patent delivery mechanisms, so they keep changing delivery mechanisms. You basically have this scenario where doctors don't really want to prescribe the old thing. When you introduce a new novel form of a pen, oftentimes doctors will say, well, that's the thing we need to be prescribing now. There's a brand that gets built around the most current thing that's patented, even if it's not that much better than the old thing.

There's a lot of people in pharma that are going to get mad at me for that characterization. But in addition to patenting molecules, delivery mechanisms also provide defensibility. One question I had was, there might be contractual things that entrench relationships too.

When you get really big, and this would be a scale economy, are there contractual relationships with formularies that entrench you and make it so that even if someone else comes out with something similar to treat any given condition, and your patent isn't defending you because it's a different molecule, well, sorry, you've locked up a distribution channel with the PBM and getting on the formulary in such a way that like, good luck to anyone else.

David: Yup. I think that falls into scale economies, which for sure also apply here. I think really on three sides on the R&D and research side, because that is incredibly capital intensive.

Ben: $2.3 billion dollars a drug.

David: Yup. The production side, as we've talked about for much of the episode and then also here on the go to market side, you can't just you know waltz into these markets

Ben: Right. The gigantic amount of R&D, it literally is $2.3 billion to bring a drug to market on average. You need to make a lot of profit dollars on any given drug to benefit. You don't necessarily need scale of patients, but you do need scale of dollars in order to outrun the fixed costs of R&D.

David: Yup. I think we can say, there's no network economies here pretty safely. I think we can probably also say there's no branding, although Ozempic has become such a buzzword.

Ben: I think there actually is. Normally, there isn't, but that's one of the breakout things about Ozempic. There actually is brand power. The first time I heard about Mounjaro was 18 months after I'd heard about Ozempic, and I was like, oh, it must be some kind of knockoff. It's my first time studying pharma. I was like, oh, it's probably something crappy that's trying to ride this same wave, but isn't actually the breakthrough molecule.

The studies show, Mounjaro helps you lose more weight and has a very similar mechanism, plus another mechanism that together worked, but most people don't know that. Most people know, I read on the cover of the New York Times that Ozempic is a breakthrough, and I heard about it at the Oscars because a joke was made on stage.

David: Jimmy Kimmel was talking about it. Yeah.

Ben: Yes. I think for the first time, and it's happened a little bit before, but for the biggest time in a while, Ozempic has actual brand power.

David: Yeah. There's Tylenol, et cetera, but yeah, it's entering that category. An admission on that front too, when we very first started talking about potentially doing this episode a number of months ago, I thought the same thing you did about Mounjaro about Wegovy. I was like, that must be a crappy knockoff. I did a cursory amount of research and I was like, holy crap, it's the same drug from the same company. Like, I'm an idiot.

Ben: It's literally the same thing.

David: It's literally the same thing.

Ben: Often in the same doses. It's technically a higher dosage, but you can get many different dosage levels of either drug.

David: Right. Not only that, it is the one that is supposed to be for weight loss. You're right, Ozempic has become this brand name.

Ben: Yup, Vitamin O or Oz.  I've been reading the Ozempic subreddit for a while to prep for this episode.

David: I bet you found some fun stuff in there.

Ben: Totally.

David: Switching costs are a thing.

Ben: Switching costs with any drug are a big thing, because once you find something that works for you, you never change. I've been on cetirizine hydrochloride for my allergies for 15 years. I think it's Zyrtec. No, I'm not trying anything else. It works. Why would I try something else?

David: Yup. Especially in this case, where in the vast majority of patients, it does seem that if you stop treatment, you will regain the weight.

Ben: Yeah, that's one of the worst things about it. I will also throw in network economies.

David: I had said I thought there was none, but I want to hear your case for it.

Ben: I think most of the time in pharma, there's none. But with Ozempic, I think there are two ways in which GLP-1s used for weight loss resemble consumer tech products. One is a tight feedback loop. When I start taking Lipitor, I don't physically notice anything about myself, despite the fact that something that is potentially very dangerous to me has become less dangerous with cholesterol.

When I lose weight, I immediately notice. If I lose what, six pounds in the first month, there is a super tight feedback loop there. In the same way that Zynga created these feedback loops for mobile gaming, and that psychology has been used in all tech consumer products now to create these gratification loops, that totally exists with Ozempic.

The second one is what I think is a network economy, you become a walking billboard. There's a little bit of taboo around saying, I'm taking Ozempic, but people know you lost weight. It has almost like a shareable Ozempic can go viral in a different way than most pharma describes going viral.

David: I totally agree with you. I would push back a little bit in the classification. I don't think this is actually a network economy. I think this is just incredible word of mouth marketing, because I don't think other people actually get a benefit from you taking Ozempic, but literally you become a walking billboard. It is an obvious word of mouth marketing.

Ben: I guess the only one would be like the taboo thing. If I'm taking Ozempic and I'm ashamed of it because I'm the first person, if a million more people start taking it, then it is actually better for me.

David: Right, if Elon Musk tweets that he's taking it.

Ben: Wegovy.

David: Again, it's the same thing.

Ben: Right. Not to mention, Rybelsus, that's the new oral one They have figured out how to make Semaglutide a once-a-day pill if you prefer taking that to a once-a-week injection It's a little bit weird, because you have to take it on an empty stomach and then not eat for 30 minutes afterwards if you don't like needles.

David: I believe it is also not quite as effective as the injectable version, but still, it is an amazing feat of engineering that they created an oral version of this.

Ben: This is the kind of stuff that Novo Nordisk is so good at. It's all these decades of researching. How do we make this stuff break down differently in the body? The issue with the GLPs is it can't get absorbed into your bloodstream by you putting it in your mouth, then it going into your stomach, and it's hitting the harsh environment of your stomach. Figuring out how to make something go from your stomach into your bloodstream for a sustained period of time.

David: Right, protect the molecule enough.

Ben: Right. That is the novo magic.

David: Wow, there's a lot of power here. I think the only one we haven't talked about yet is counter positioning, which is interesting. Maybe you could make an argument at the beginning there was, because this could disrupt the Insulin market, but I don't really think so.

Ben: Yeah, and counter positioning basically always exists in the takeoff phase and never exists later. I think that we keep finding that pattern over and over again. Incumbents don't really counter position, startups counter position.

David: Yup.

Ben: I think in the world of healthcare, there is a ton of power for basically any company that we would study, because the returns over and over and over again keep going to these incumbents that keep getting bigger. I know biotech investing and startups is a thing. There will be new disruptions on the horizon, CRISPR, gene and cell therapies, and things like that. But the last 30 years, at least of health care, has consisted of returns to scale, which would indicate lots of power.

David: Yup, and it'll be interesting to explore health care broadly and specifically biotech more on the show. My arm's length understanding of the industry is that where startups primarily are doing drug discovery, and then they get acquired by the big companies for go-to market.

Ben: Yup, that's right, or they do some kind of distribution deal. But a lot of the economics of that deal are eaten up by the Big Pharma company as the distributor, which really they're not the distributor. The PBM handles making sure that the reimbursements are there, so doctors will prescribe them. The wholesaler distributors handle physically moving the drugs, but when you do a "distribution deal" as a biotech company with a pharma, it's because the pharma has the relationship with those two other parties to ensure that you actually can be available at prod scale.

David: Really, this model all started going back to Genentech and Eli Lilly. Genentech ended up getting acquired by Roche. But it was that partnership of Eli Lilly being the go-to market for Genentech in Insulin that started this whole startup, Big Pharma partnership.

Ben: Yup. All right, playbook?

David: Playbook, let's do it.

Ben: The first one that we've hit a few times but is just worth putting a fine point on is concentration. The focus of this company is unbelievable. Eighty-five percent of their revenue is dedicated to metabolic disorders. They are the second largest market cap pharma, second only to Eli Lilly.  It's crazy. They're that focused, but they have an ability to be that large by market cap. It is worth knowing, they aren't in the top 10 pharma companies by revenue. In fact, they're 20th.

David: Wow, I didn't realize they were that low.

Ben: Yeah, no, it's a multiples thing. Part of the reason why they're Europe's biggest company is people are very optimistic about their future and about their ability to be profitable in the future, not just make a lot of revenue. But it continues to blow my mind that they have had the huge success that they have had with how focused they have stayed.

David: It's funny. I was thinking the same thing as my main playbook take away from this one. It reminds me of our Sequoia Capital episodes a few years ago, Sequoia's historical classic mantra, and the Don Valentine ethos of target big markets. Find a big market, target it, and then stay focused on it for decades and decades and decades. That's the story of a lot of companies we've covered here, but this is such a pure play example of that. Like one disease, one drug area for a hundred years, and now a second drug area that came out of that first drug area.

Ben: But for 60 years, it wasn't actually that interesting of a market. That's the crazy thing. In 1920 to 1980, it was Type 1 Diabetes, which again, absolutely incredible for the world that they took children who had a death sentence, then gave them life, and they got to live basically a full life. But was Type 1 Diabetes actually this colossal mega interesting market? No, not at all.

David: Yeah. Something changed. Yeah, absolutely. You're totally right.

Ben: What did Charlie Munger tell us? He said, there aren't many times in a lifetime where you know you're right and you know you really have an investment that's going to work. You may even find it five years after you bought it. Your own understanding gets better. I think that's basically what happened with the Novo Nordisk foundation. They realized oh, my God, this isn't just a service we're doing for the world. This is one of the most important markets in the world.

David: Totally right. It's so funny. Obviously we weren't in the room as these conversations were happening. But from reading the history, it feels like they understood it more than management at the time. Management was too close to it and thinking, industry wisdom, we need to merge, consolidation is happening. They were like, no, there's this incredible wave that we are riding here. Let's keep compounding.

Ben: You should share the stat on the size of the endowment.

David: Yes. I can't believe we haven't talked about this yet. Novo Holdings, which is the vehicle by which the foundation holds their stakes in Novo Nordisk and Novozymes, their assets under management, and thus the endowment of the foundation is worth $120 billion, which makes it the single largest charitable foundation in the world, over 2x larger than the Gates Foundation, which is number two.

Ben: Unbelievable.

David: Just unbelievable. Through Novo Holdings, it is actually now become one of the largest and most active life sciences and biotech investors in the world too. They hold venture stakes in 80-plus other companies that's on top of giving out lots and lots of grants to life sciences around the world and fulfilling the foundation's mission. It's just wild. We're burying this so deep in the episode, but this is the largest charitable foundation in the world. That's wild.

Ben: It's interesting that it qualifies as that because yes, that is totally true. On the other hand, $120 billion is pretty neatly just a little bit larger than a quarter of Novo Nordisk's market cap. The vast majority of that $120 billion is their ownership of Novo Nordisk.

It's not like, oh my god, they spat off $120 billion in cash that they're investing elsewhere. No. If Jeff Bezos decided to put his 9% percent of Amazon into a foundation and call it charitable suddenly, that would be the most charitable foundation, or up there.

David: Yes, correct.

Ben: But the point stands.

David: It's still pretty cool.

Ben: Yeah. While we're on the topic of the foundation before we keep going in playbook, it is worth pointing out that there are formally defined objectives of the foundation, and those objectives do not include growth. It's amazing that they have grown the way that they have. The dual mission now is stability and supporting scientific and humanitarian causes.

What does stability mean? I suppose it means ensure the longevity and duration of Novo Nordisk as a company. It's interesting when your stated mission is stability and this humanitarian cause that is a by product, you could end up being this incredible market leader, innovator, super high growth company too.

On the point of mission, Novo Nordisk has a stated mission that it's not just about supplying treatment, it's about eradicating Diabetes. There was a 2014 paper that came out that suggested a real cure for Diabetes using stem cells. I think it was out of Harvard. At the time, the Novo Nordisk chief medical officer replied, "We feel a responsibility for trying to prevent or eradicate Diabetes. If that means the dissolution of Novo Nordisk, that would be fine."

I'm having such a hard time wrapping my mind around like, is that actually true? Is all of the behavior of the executives actually in service of curing Diabetes, even if it means that their revenue would go to zero? Isn't that at odds with the idea of stability of Novo Nordisk?

David: That quote was from 2014, did you say?

Ben: Yeah, so previous administration, so to speak.

David: And pre GLP-1s becoming really huge. It's very easy for them to say that now, because they could eradicate Diabetes now and still be Europe's largest company just based on obesity alone. But from talking to folks from the outside. my sense is I think that is as true as it can be in a corporation.

Ben: Yup. I also found a stat that in the last six years, four and a half billion dollars of grants have been distributed. I was a little tongue in cheek about like, well, geez, most of that is the ownership of Novo Nordisk, but that is a lot of outflows to research. I think, importantly, that research often supports what Novo Nordisk, the corporation, wants to go do, so it's nice to have a close relationship with researchers.

David: Yes, there is a cycle here.

Ben: Yes, which rolls up to the mission of stability. Yeah, they deserve to be applauded for the reinvestment.

David: Certainly, it is a unique structure in the corporate world and one that has had a huge impact on the company's history.

Ben: Yup. While we are in corporate structure land, alignment of incentives is pretty interesting among management. I don't know if you looked into this at all, but their executives are not meaningfully incentivized by stock price performance.

David: Interesting. No, I didn't look at this at all.

Ben: Yeah. They are forced to think on a different time horizon than if your compensation came primarily in the form of stock options, and you wanted to make the stock go up in a three to five-year window.

Executives and board members are not given stock options as a part of their compensation. When you talk with folks in the industry, the employees reportedly have lower compensation than their counterparts at other companies. I couldn't figure out if that was a Danish versus American thing, or if they intentionally try to repel the idea of mercenary employees and attract missionaries.

It would seem that their excellence in pioneering Diabetes medicine is really mission driven. There's what they call their remuneration policy, which requires all board directors to hold stock. You're not getting it as your comp, but you're required to hold it, which I think is a similar idea to what Berkshire Hathaway has, of, hey, we should have sticks, not carrots.

In Berkshire's case, there's no D&O insurance for board members. You actually have to own the liability of the company's actions yourself to be on the board, so they take it seriously. But in Novo's case, it's, hey, you don't get the carrot of big piles of free equity in our company.

David: Yeah, you got to go buy the stock.

Ben: Yeah, you have to actually be aligned with the owners so you get the fruit of the appreciation or the punishment if it doesn't do well.

David: Yup. I suspect it's probably both. I do think Danish culture plays into this too. It is a much, much more socialist country than America. Actually, watching interviews with Lotte, she talks about this. Sometimes she's asked about it. Hey, didn't you get rich on basically inventing GLP-1s? She's like, no, I've never asked for a raise in my life. I'm a socialist, but look at what we've done for the world.

Ben: Yeah, it's pretty crazy. The question is, does that thinking lead to the GLP-1 breakthrough? Other pharma companies certainly didn't make these investments in these decisions on these time horizons. There's a reasonable narrative that it was actually Norvo Nordisk's focus and their time horizon that led to the decades long work to actually bear fruit. Semaglutide isn't out of nowhere.

It was built on all the work that went into liraglutide since the early 90s and incorporated all the clever ideas they had, previously developing longer acting Insulins and things like that. There is a reasonable narrative of it's their long time horizon and their focus, their ability to learn from doing the same thing well, and iterating them over a hundred years, that actually led them to find this breakthrough when others didn't.

David: Yup. The key point is long term focus. If you can do that, as we've shown time and time again on this show, you can create something great. If you do that, it's not like you will create something great. You still got to get lucky and also be doing the right things in the right areas. But if you're going to build something really, really big, you got to have that long term focused mindset.

Ben: Yup. There are a few unexplored areas that I think are interesting to know about healthcare as a whole and about Novo Nordisk that I want to talk about here in playbook. One of them is a shift that Novo has done here to broad populations with relatively inexpensive drugs versus other pharma companies. I know you're going to be allergic to the idea that I just told you, $1000 is an inexpensive drug. The crazy thing here isn't just that the revenue and the focus is so concentrated. It's concentrated in an area that other companies shied away from.

Pharma, over the last couple of decades, shifted away from these mass population drugs to specialty drugs. These are often to treat specific forms of cancer or rare childhood diseases with super narrow populations and huge price tags. To put numbers around that, we're talking total market size of a couple hundred thousand people or fewer, as few as 300 people in these super rare orphan diseases.

Occasionally, these diseases are so rare and the treatment is so life changing or life giving that the treatment, one dose of the pill, one infusion of the therapy, or whatever it is, can be measured literally in the millions of dollars. It gets far more extreme than a thousand dollars a month.

It's understandable why the other pharma companies went there for a few reasons. This is a little bit of a walkthrough history, but it's been a while since we saw a breakthrough in a mass market drug. Really, the last one that we can point to is statins, which was to treat cholesterol. Thirty years ago is really when that was the thing. HIV and Hep C are examples we can point to, but again, it's been a while.

David: Those are small markets compared to obesity.

Ben: Compared to obesity, but they still qualify as large population. When you're treating millions of people with something, (1) You can have a different pricing structure. You can have much cheaper drugs. (2) You can just affect a huge swath of the population. It's not like we're discovering an antibiotic or a cure for polio every other year these days In fact, the Alzheimer's researchers have really been trying, but the trials have just been disappointing.

We had this great heyday 30 years ago of small molecule drugs that you could manufacture relatively easily by mixing chemicals, but after those patents expired, and these could be manufactured by other companies as generics and sold to everyone for cheap, we really haven't discovered something like that since. That's why the shift has really gone. Of course we have new technology to do it too, but really shifted to biologics, the complex proteins that are harder to manufacture. I think a way to summarize that is a lot of the low hanging fruit has been picked. Compounding this problem just because this is health care, and you compound every problem.

David: Different type of compounding.

Ben: Yes. The way that FDA approval works is that you get a label for a drug if you can prove with the right degree of statistical significance that the benefits outweigh the risks and that you are better than current alternatives by some measurable amount. Conditions with existing alternatives are harder to get approval for.

David: Another factor pushing to rare diseases.

Ben: A hundred percent. Going back to the piece that Alex wrote, he references this idea of the better than the Beatles problem. What if it was a requirement to be releasing a new pop song in the market that it was better than Hey Jude or better than Here Comes the Sun? You'd have no innovation. Of course not.

David: Right.

Ben: The rule both makes sense, and you understand why once we hit some minimum level of treatability for something. You're like, geez, is the juice really worth the squeeze there anymore? No, you go work on something that you're actually likely to get approved for, make your billions of dollars of R&D worth it, your years and years of clinical trials, and recruiting all the people for the study.

By the way, these studies have just gotten so insanely expensive to run. It's not just the studies that cost money. But if you just look at the cost to bring a drug to market in 1953, it costs $40 million for an approval, and that's an inflation adjusted figure. Today, it averages $2.5 billion.

David: Wow.

Ben: It's easy to be disillusioned with why would I go after something large population if there's already something else that treats a large population good enough.

David: Right. Wow, that's interesting. Whereas you look at almost every other market out there, if it's a big market, there are insane capitalist incentives to go make a better mousetrap for it.

Ben: Right. That's super true. This leads into this another playbook theme. Pharma is the most classic example of the venture business. It's super high risk, it's super high return if it works, and the winners need to subsidize all the failures. In fact, it's even more severe than typical venture capital, because a lot of the research can take over a decade of investing before the winners bear any fruit at all. Everyone was like, oh, my God, Figma spent four years writing code before they shipped a product.

David: Four years, that's nothing. Yeah.

Ben: There's no MVP in Semaglutide. Let's put a couple billion to work, and then we'll check in a couple decades later and see if we've changed the world. Obviously, there are stage gates along the way, but it's adding a zero or two to the venture business, to be honest. I think that the most illustrative stats on this are that the top decile of pharmaceuticals are what matters for the profits. If you look at the pipeline of a hundred drugs that enter clinical development, ten actually make it to market, and one provides half the profits, one drug.

David: Oh, crap. Wow. The initial part of what you just said jives with our math earlier that 10% make it to market. That's a power law right there.

Ben: Right. Ten percent of the ones that make it to market provide 50% of the profits. Most drugs, this is also a crazy stat. Even after they are approved do not earn back their R&D costs.

David: This is another dynamic showing why the market forces led to consolidation in this industry. You just need to be so large and have the capital resources to pull all the risk of these drug pipelines.

Ben: That's exactly right. Yeah. You need to actually be able to pull risk or have some differentiated way, versus all your other competitors of being more likely to create a hit.

David: AKA, Novo Nordisk.

Ben: Yeah. You will not be a successful pharma company without blockbusters, and even then, blockbusters might not be enough.

David: Wow.

Ben: It's nuts. All right, now we're into healthcare as a whole land, so I have some commentary on this. I'm very excited about this. I think this is going to be a new chapter of Acquired, because there's a lot of stuff to dive into here. We'll still never understand it all, but it's fun learning.

I think everybody is aware, in some sense, that for every dollar that we're investing into the health care system, we're getting less and less incremental utility out. People complain all the time that as a percentage of GDP, which by the way is something like 17%-18%, which is nuts, our health care system costs us 17%-18% of GDP, that goes up every year, and the quality of care goes down, or life expectancy goes down. Everyone heard some variation of this problem before.

David: On the surface, things appear to be broken.

Ben: Yeah. The 17.3% of GDP that healthcare costs us, you should just know as a baseline that in 1960, that was 5% of GDP. This isn't gone up a little bit, this is one of the biggest line items for the entire country used to be fairly de minimis and is now enormous. You should expect a lot of your health care system given what it costs.

On the one hand, this is really bad. There's a zillion people to blame for it, so it's hard to blame one individual or one company. It's a little bit of a tragedy at commons where everyone throws their arms up and says, well, I'm going to go do the best I can and make sure I'm okay, because I I really don't know who to point to and be like, this system is effed up for this reason.

You could blame oligopoly, you can blame regulatory capture, you can blame too many middlemen, too high of hurdles to get new drugs in the market. But on the other hand, you would expect this. A lot of the low hanging fruit is picked, so it seems like it's going to require more money to go eek out more rewards.

People always make fun of pharma with this thing they call Eroom's Law, which is Moore's Law backwards. The idea is pharma for every next generation gets more expensive, but semiconductors also require huge amounts of R&D. Just because we're getting that speed up every 18 months, have you looked at EUV? It's an order of magnitude more expensive every generation to be able to make processors like that. I think that's a little bit of a false equivalence.

I totally understand why, especially in heavy industry, it should be more expensive to get marginal benefit out once you have already picked the lying fruit. I have a little bit of pushback on the healthcare is getting more expensive, and we're getting less out of it.

The thing that isn't good is that the average life expectancies have actually declined in America in the last few years, despite the fact that we're spending more money. It's not just that our marginal dollars are earning us less, it's that we're putting more money in and life expectancy is actually decreasing. Unfortunately, it's outside the health system's control. It's a lot of mental health related stuff, overdosing on drugs. A lot of things impacting the length of life are cutting 60 years off of people's lives when they're young, which obviously will massively.

One other thought on this, though, is from 1850 onward, we got these huge increases in life expectancy every decade. If you look at these charts, it's astonishing. You're like, wow, there's a miracle drug every year, there's a miracle process, there are people washing their hands, there are indoor bathrooms, or whatever it is. Life expectancies are getting way better.

We were curing infectious diseases that killed kids all the time. But once we got those mostly covered, at least for the big, large population ones, and we got antibiotics Insulin, and all this., if you spend money to help a 75-year-old live to 80, it has a much different effect on the data than helping a 10-year-old live to be 75. Once you compound that with the low hanging fruit, of course it's going to be really expensive to figure out how 75-year-old live to be 80, especially if there's a big fragmentation of disease.

David: Yeah, it's also exponentially harder to get that five extra years of life, because you're facing 20 different morbidities out there.

Ben: Right. We rarely are getting the silver bullets like we did with antibiotics. It's going to be $2.3 billion over here to cure this form of melanoma, and it's going to be $2.3 billion over there to cure this form of pancreatic cancer. It's just going to keep getting more expensive to cure the more fragmented small population things. I think there's a reasonable question of like, what do we do about that as a society?

That's on the benefit side. There might be some massive cost reduction side. You could imagine, some technology comes along that makes drug development way cheaper or makes us able to massively collapse the time and dollars spent in a clinical trial by using AI or something, or there might be ways to collapse costs 10x or 100x somewhere in the healthcare system. But the current state of affairs is not very free marketing, so it's harder to imagine that happening versus other ecosystems the way it happens in tech.

A couple other just fun things that I heard from people during research, which I think are just interesting problems to think about, the health system that was created over the last century was really designed to treat acute and infectious diseases. If you think about our health care system as it exists today, hospitals where you go in when you're sick, doctors that you see when you're sick, surgeries you have when you have an issue, pills that you take when you have an infectious disease, antibiotics that you take, you look at the chart of life expectancy, the people that designed that system and solved the acute infectious disease problems should just hang up a big mission accomplished banner. It worked. It was amazing.

David: Right. We made it to the moon.

Ben: Human quality of life is just unbelievably high, and there's very little in common today on the list of things that will kill you versus 1850. It's completely different set of things. The next frontier then is chronic illnesses. They catch up with us later in life, and they're basically undetectable for the first 50 years or the first 30 years. Obesity leading to Diabetes or cardiovascular, health leading to heart attacks and strokes. These are very different things to treat and require a very different way of thinking, of regulating, of paying for. You don't want to wait until people are sick to treat it because then it's too late.

In many ways, this entire old system that we created that consumes 18% of our GDP may actually not make sense in this new world of treating the things that are more likely to kill us now, which is chronic illnesses. I don't really know what to do with that. I think it's pretty interesting.

David: You did so much more of this side of the research than I did. Did you get a sense in talking to people that that transition is happening or no?

Ben: It's so hard in healthcare, because there are so many buzzwords. There's a thing called value based care, which in a sense, it makes sense. It's like, we shouldn't have to pay for every little intervention someone does. We should pay for them helping me cure the thing. You don't pay for the interventions, pay for the outcome.

That forces the right sort of thinking all the way up the value chain of how can we deliver a quality of service in the cheapest way possible to achieve the same outcome, which is how free markets work. But in healthcare, the way everything gets built is on a cost basis, which we've talked a lot about cost plus pricing and the dangers of that on the show. To the extent that the value based care stuff helps, no, I didn't hear any solutions.

I did hear one credible pushback against why is healthcare getting so expensive as a fraction of GDP. We use a lot more healthcare. People just have a lot more life bettering interventions, be it from doctors, from pills, from facilities, than we did in a long time ago. I had two surgeries a few years ago, one of which was an ACL surgery and whole bunch of PT.

In 1980, would I have had those? Maybe the PT, probably a worse surgery, because the procedures were worse back then. In 1950, would I've had an ACL surgery at all? No, I probably just limp around the rest of my life. There really is just actually a lot more care delivered now than there used to be.

David: This is so close to home for me, Jenny, and my family. I've talked about this on the show before, but Jenny and I both have genetic cancer predisposition mutations. The amount of screening that we get and then for family planning with having our daughter and other children in the future, the amount that we have used the medical system as very healthy 30 somethings throughout our life would not have been imaginable a few decades ago, so yes, I totally buy that.

Ben: All right. We're drifting into value creation, value capture here, because we're making societal judgments around, are the economics worth it? Do you want to formally enter that section of the show?

David: Let's do it. Maybe to start, on this segment of the show we talk about for a given company, how much value do they create in the world versus how much they capture? Let's start narrowly with Novo Nordisk itself.

What do we think? Value creation versus value capture. Undeniable that over the hundred plus year history of this company, the company, it has created incredible value for diabetics and now for a much broader population than just diabetics. The creation amount is large. It is also undeniable that it is a half trillion dollar market cap company on $30-$40 billion of highly, highly profitable revenue that they have also captured a lot of value.

Ben: A lot of people talk about, does the pharma sector over earn? This is the way people talk about this. On other episodes that we've done, there's far less of a value judgment. We're like, yeah, companies should go be as profitable as they can be. My God, Visa makes so much money. That's a little bit tongue in cheek.

In healthcare, it's different because there's an expectation. You start from a place of public good. When healthcare companies earn too much money, you look at it and you're like, ooh, I don't know if I like that, which is so interesting. It's a very different starting place than I think a lot of people tend to look at businesses.

One thing that is true is that these businesses require a tremendous amount of investment. Just merely looking at their margins is stupid. I alluded to that earlier, but of course they have high gross margins. For the things that they actually end up selling rather than killing, they should.

David: Right. That's not taking into account all of the research that they did over the past.

Ben: All the research, because those are below the line costs and all the failures, because they never sell those drugs. You basically have to say, all the margin dollars they earn from the winners, both have to cover all the fixed cost r& d of that drug, but they also have to cover all the failures of every other drug. When you actually look at their return on invested capital numbers, the ROIC, they are not through the roof. They're 13% industry wide. Hold for Novo for a second.

It's totally in line with other industries like trucking broadcasting electronics, when you look at the federal data on it. The fact that on the blockbuster drugs, the companies earn a ton of money, is not the whole picture. The picture really is like, as an industry, are they over earning? No, they used to until 2000. But nowadays, the ROIC numbers are just actually not that interesting.

In fact, some would argue as pharma gets less and less efficient, capitalists should just not allocate their dollars there, because there's literally not enough incentive in the profit dollars that you get to earn from your drug after it's patented for many years. Should you actually index the pharma sector? Probably not. It's a little better than other sectors, but not necessarily enough to take the sector risk of putting all your dollars there.

David: You're making me feel better about my career choices here to work in tech.

Ben: Novo Nordisk on the other hand massively outperforms their peers. It has been this really interesting trend, where ROIC for pharma as an industry over the last 50 years has declined, but the variance between companies has increased. Novo far outperforms the median pharma company in terms of return on invested capital, but there are companies that way underperform too. It's interesting that the good companies are getting better, and the bad companies are getting worse, while the whole industry declines in its ability to produce a return.

David: Yeah, so interesting. I'm tempted to say from this whole episode that the moral of the story here is focused on long term focus, but I feel like we need to uncover this industry more and hear from folks in it. If that were always true, why are there not more Novos out there?

Ben: Right. It may also be play compounding games in big markets. It's very clear, even if not intentionally, that a lot of Novo's historical work led to them understanding something important better than anybody else. I think they might have lucked into how important it became to play compounding games. It's pretty interesting. Pharma as a whole of the medical pie only occupies about 13% of revenue. I really would have thought, with all the hate toward Big Pharma, that it would be higher.

David: Thirteen percent of revenue in the healthcare industry?

Ben: Yeah.

David: That means 87% of health care revenue is not going to pharma.

Ben: Right. If you could trade never having drugs again or never having doctors again, which one would you pick?

David: Wow, that's a good question. I hadn't even thought about that.

Ben: It's, of course, farcical.

David: Right, it's totally farcical. I think about Jenny and my scenario like, it's both together, for sure.

Ben: Yeah, of course it is. But do you think drugs only provide 13% of the value to all of healthcare?

David: No, certainly not.

Ben: It's crazy.

David: Definitely more than that.

Ben: Especially incrementally. Of the investments we're making going forward in improving humans and their quality of life, some amount of it comes from amazing new surgeries, some amount of it comes from amazing new medical devices, but some amount of it does not come from new administrative billing practices.

David: The four middle men in the middle of the equation.

Ben: Right, the improved ability to move drug from place A to place B and come up with yet another clever way to build out the formulary, so it moves money from this pocket to that pocket. Hospitals, if you back out the drugs they prescribe, are 28% of the revenue in all of health care, which is large, but hospitals provide a crap ton of value.

Professional services like doctor's offices are 26%. They also provide a lot of value. Do both of them provide together four times as much value as the breakthrough drugs do? Freaking health insurance. The administrative costs of health insurance are 8%.

David: Of a very, very, very large number. Yeah.

Ben: Right.

David: That said, the administrative costs of health insurance are within spitting distance of pharma.

Ben: I will say, who is taking any risk in this whole ecosystem? It's only pharma. Who's taking risk to innovate and make anything better? Every other bet that a hospital makes or that an insurance company is just probably going to pay off.

This is actually pretty interesting. If you look at the net income of a pharma company, and let's just take the biggest one or a very large one, Pfizer, super spiky, even though they're diversified, up down, up down, up down. In some years they make very little profit, some years they make a lot of profit. That is what you should expect from someone who is taking risk, trying to innovate, sometimes they succeed, sometimes they don't.

By the way, let's define insurance company. Insurance company is someone that, in the good years, collects money, and then in the bad years, they have a big loss. Hopefully, they collected enough money such that they can still make some profit after covering the losses, like a hurricane hits. The insurance company has a bad year. Does that ever happen if you look at the net income of the big insurers? No.

David: Yeah. This is no surprise here, but health insurance in the US is not insurance. It's access.

Ben: It's a hundred percent right. We just had the single greatest healthcare crisis in the last several decades with Covid. What happened to the profits of the big health insurers? They stayed flat or grew. We aren't here on acquired to demonize people for making money or for being capitalists, but I do think we should call a spade a spade.

The health insurance companies are not actually insurance. They're not actually holding the bag as the funder of last resort when calamity hits. It's the government, so really it's the taxpayers. The big insurance companies and the PBMs make good profits in the good times, but the taxpayer funds the bad kinds.

I would be kinder here to the middlemen of the industry if I thought they were innovating and taking risk the way that the drug companies are. But the incredible consolidation that's happened among insurers, PBMs, frankly, even the hospitals and pharmacies too, there are either local monopolies in the hospital case or a three-race oligopoly in every other part of the value chain that really is just obfuscated and insulated profits.

David: What you're telling me is that pharma are the guys in the arena. They're out there trying things.

Ben: Exactly, no matter what value judgments you want to place on them or anyone else. There are years where pharma way out earns. Frankly, Novo Nordisk has way out earned many of their peers many years in a row. It's a very fine question to ask of like, does any healthcare company deserve to have such phenomenal returns on invested capital like Novo Nordisk does? But there are many players in the ecosystem for whom it is obvious to me that they should not be as large and not be as profitable as they are.

David: I got no arguments here. All right, team Novo.

Ben: Yes, and frankly, team Pharma, at least relative to its reputation. I think there are many players in the healthcare industry that have a fine reputation. They probably deserve a fine reputation, but it's weird to me what a terrible reputation Pharma has when they're the ones innovating and trying to massively affect the trajectory of humans.

David: Yup. I think that's why a lot of scientists, including Lotte and many, if not most folks at Novo Nordisk, work there.

Ben: Yup. All right, finally to wrap this section, listeners, this is all very, very complicated. Every time I was tempted to say, well, XYZ party or XYZ mechanism is stupid, which I probably did too much on this episode, I discovered a very rational argument for why that thing exists and why it isn't all that bad, which is a little bit maddening to research and also explains how the system in America ended up the way that it did today.

To close value creation, value capture, there's an interesting thing that everyone should just noodle on and try to square the circle. People feel like drugs cost too much, and they don't understand how much they're going to cost, and they're upset because they can't get drugs that they want. They think they're being extorted in some way. This is patients, generally.

Shareholders in pharma companies feel like they're actually not making that much money. If you look at the whole industry, their return on invested capital is maybe slightly better, but pretty much on par with other industries. Square that circle. It's pretty weird. All right, bear bull, David? We can be reasonably quick in this since I think we've hit a lot of these points along the way.

David: Yeah. For Novo Nordisk specifically, I think it's pretty simple. Are GLP-1s the next super cycle? If yes, that is the bull case.

Ben: Right, even if Lilly's Mounjaro and Zepbound are 30% percent cheaper, they might be better, but they can both make a ton of them, and all of them will get pulled off the shelves right away.

David: There is room for everybody here. The barriers to entry from everything we talked about to competing in this area are very, very high. There will be a number of competitors, including Eli Lilly, but there will be plenty of demand and profits for everyone. That's the bull case. The bear case is, for any variety of reasons, be it health risk, lack of efficacy, or whatever. Long term, this just doesn't play out, or it doesn't play out on the same multi decade long timeline that Insulin did.

Ben: Yup. I think that is exactly the right way to put it. For some numbers, which I think are interesting and just to illustrate, if Semaglutide becomes truly a mega blockbuster, an example of this is Humira by AbbVie, that generated $200 billion in lifetime sales since Humira was approved for 11 different indications across this whole spectrum of inflammatory and autoimmune disorders.

It turns out, you actually don't need a deep pipeline if you have a drug that you can be profitable on, where there's not a lot of competitors for it. Your patent actually gives you a good amount of room. You build a brand around it. You get approved for a ton of indications that all have large populations. There is such a blockbuster that for a decade, it doesn't matter how deep your pipeline is or how diverse it is, you just win. There's a chance that with Semaglutide and Tirzepatide, both Lilly and Novo Nordisk have that for the next decade.

David: Yup, and decade plus with further innovations and iterations that are going to come.

Ben: Yeah, Eli Lilly has this one in the pipeline called Retatrutide that is a triple agonist, that adds yet another hormone to the mix. I think, assuming that Novo stays neck and neck with Eli Lilly as they both keep coming out with better and better versions, this could be the next Humira or potentially much bigger than Humira. I think the defensibility is an open question for how many years, but at least the next decade.

One other downside that I think you didn't point to specifically, but you meant in saying there's some unknown downside to this, there are some early studies that are showing that you lose more lean muscle mass when you're on a GLP-1 than if you were just doing diet and exercise. When you're losing weight, normally you lose 25% lean muscle. These early studies are showing something like 40%.

That would be a bare case is that we learn a couple years from now like, oh, man, this is actually way worse for some set of people that could lose weight through diet and exercise. But if you're obese, it's still probably better to lose weight even if a disproportionate amount of it is lean muscle mass. But I think there's this open question of like, is there a boogeyman in the closet like that? Or is that a significant enough boogeyman to really change things?

David: Yup. It's probably also worth mentioning quickly here before we wrap, one potential boogeyman that is out there people have talked about is suicidal thoughts. As best as we can tell from the research, it seems like that's not a major risk with these drugs. Based on the broad population studies, certainly that's what Novo Nordisk says. Regulators have not indicated that that is an actual issue. But that narrative is out there and we don't want to go through the episode and not mention it. That could be one of these boogeymen for these drugs.

Ben: Yup. All right. As much as I don't like leaving it there, I think we have beat this horse and we should do something fun like carve outs.

David: Yes. Carve outs, let's do it. For new folks to Acquired and since it's the top of a new season here, we do this for fun at the end of every episode.

Ben: I have two.

David: Great, I do too.

Ben: One is something that my wife got me as a Christmas present, which is the Noxgear Tracer 2. This is, I think, a Columbus, Ohio company. It is a running vest and some lights that are rechargeable with USB-C and waterproof. It's super lightweight. It fits really well.

David: Perfect for Seattle.

Ben: I know. I wear it on all my winter runs when I'm out walking the baby now.

David: You sent me a photo and you were all lit up. I was like, wow, Ben has really invested in some gear.

Ben: It's pretty hard to hit you when you're this lit up. It also has an optional light you can buy that clicks into the front that's basically like a headlight, but you wear on your chest. You don't really feel it when you're running with it, but you do light up the whole road in front of you. When you live in a place like I do that is dark from 3:30 PM to 8:30 AM, it's a great way to get outside and be seen.

David: Nice. I bet we will have a lot of folks in Denmark that are interested in that.

Ben: Yes. To our Danish friends and our Swedish friends at Spotify, I highly recommend this product.

David: Yeah. Nice. All right, that's one.

Ben: All right. Two is a recommendation from friend of the show, Ian McCormick. He texted me and said, I listened to the holiday special, I have a show recommendation for you. Go watch Drops of God on Apple TV+. I'm three episodes into it, and it is awesome. It is thrilling.

It's a little bit unapproachable if you don't like subtitles, because it takes place in France and Japan, so parts of it are in French, parts of it are in Japanese, and parts of it are in English, so you have to read subtitles for the majority of it. But it is a beautiful story about wine, family, and love. It's got some very unexpected twists, turns, and drama to it. So I highly recommend it.

David: Fun. Sounds like Apple TV's got some good shows these days.

Ben: I've been liking it.

David: Nice. I have to give you a big thank you, because over the last couple of weeks since your recommendation, I have read the book Wool, which is the first in the series that is the Silo series on Apple TV+, because I'm more of a book guy than a TV guy. It is awesome. The book is so good, a new addition to my favorite sci-fi books and sci-fi series.

Ben: It's funny, I've been holding off on reading the book, because I don't want to spoil the show too much, but I hear it actually deviates pretty significantly from the show.

David: I wouldn't be surprised by that having now read the book. I'm excited to dive into the rest of the series. My carve outs, I've got two. The first one is a fun, timely in-person carve out. It's a guest carve out from my wife, Jenny. San Francisco Ballet, where she works, is premiering a new work at the beginning of the season this year. January 26th, here in San Francisco, is the premiere, a new ballet called Mere Mortals.

This is pretty cool. She was like, you got to talk about this on Acquired. It is about AI, and it is a Pandora's box analogy for AI. It's super cool. The music is composed by the British DJ, Floating Points. It's super modern ballet, choreography from a great up and coming choreographer. SFB is going to do after parties in the opera house afterwards. It should be a super cool event. Jenny and I will be there. I think we'll be there on opening night, January 26th. It runs through February 1st.

Ben: For listeners, David and Jenny lived in Seattle, and Jenny was involved in the ballet up here. I went to an event held where the ballet performs, and it's immensely cool to be in there with the performers and at the place where they perform and in a party setting. I highly recommend it for any of the before or after stuff, too.

David: Yeah. Ballet is such a cool art form, because of all the classical art forms, it's the most young and modern. These dancers are athletes. They're like NFL level athletes at what they do. They're young, so there is this new life in it relative to a lot of other classical art forms. Anyway, I love it. Obviously, it is Jenny's whole life and career. That's one.

Two on some holiday travel flights, I think recommended by an Acquired listener, actually, I watched the Blackberry movie. Have you seen this yet?

Ben: No, but I can't believe it's Dennis from Always Sunny.

David: I know. It's so good. It's really, really well done. I just watched it, because I was on the flight and it was on the entertainment system. I was like, yeah, sure, whatever. I'll give this a try. I don't know, RIM BlackBerry, but it's really, really well done. I really enjoyed it.

It's hilarious. It's also a good business story. It's a good example of we get asked all the time of like, oh, can you guys cover a failed company or a cautionary tale? It's hard to do on Acquired, because a lot of these companies are still going and RIM is still going. Blackberry is a good one, because it's super obvious that they failed. There's no argument about that one.

Ben: Did you just see the add-on keyboard you can get for your iPhone?

David: No.

Ben: Someone debuted a physical keyboard. For you diehards out there who were crackberry heads, you missed the clicks. I think it's actually called clicks, maybe.

David: Oh, nice.

Ben: With that, we have a bunch of people to thank who massively contributed to this episode. It's been fun doing more and more of this recently, so I think we'll keep doing it, too. A huge thank you to the PillPack founders, TJ Parker and Elliot Cohen, for being so generous with their time and having conversations.

David: PillPack, a super cool company. They've got acquired by Amazon a few years back for over a billion dollars.

Ben: Something like that. It became Amazon Pharmacy, which I actually know some people that use and rave about it. Also, thank you to the founder of CoverMyMeds and AndHealth, Matt Scantland, the founder of Blink Health, Geoff Chaiken, the CEO of JP Morgan's healthcare arm, Morgan Health, his name is Dan Mendelsohn. I had an awesome conversation with him and the other folks I mentioned to bounce some ideas around that we were thinking about what are the main points that we really need to hit in this episode.

Good friend of the show, Kate Karames, who spent her career at various pharma companies. Finally, thanks also to some of my favorite reading materials to prep for this, Out-Of-Pocket, the newsletter from Nikhil Krishnan, a very approachable fun way to read about the healthcare industry, A Shareholder Letter from Tom Williams, who's a friend of the show and a portfolio manager at Fidelity.

David: Yeah, Tom is great.

Ben: Some blog posts from the Drug Channels Institute that were publicly available, that I thought were great, some very helpful DMs with Ashwin Varma, who pointed me to a lot of the great information about the profitability, frankly lack thereof, or the returns on invested capital for pharma industry.

He's actually a med school student and former Lux Capital associate, so he's got a foot in both the capitalist and the medical camps. And a truly incredible long form read on Github by Alex Telford. I think that helped frame my understanding of how we got here in drug development better than really anything else I read, so thanks Alex for that too. Sign up for notifications of when new episodes drop, acquired.fm/email. You can also get our follow ups, the corrections, and teasers at what the next episode will be.

ACQ2, you should go check it out. It is where we do follow up interviews when we have topics we're more interested in. Perhaps we'll do that for healthcare or just CEOs or investors that we want to talk to. Look in any podcast player.

After you finish this episode, come discuss it with us at acquired.fm/slack. If you want any of that sweet Acquired merch, go to acquired.fm/store. In fact, I am wearing the t-shirt now, so check it out. With that, listeners, we'll see you next time.

David: We'll see you next time.