Novo Nordisk (Ozempic)

Ben Gilbert 0:00 All right, first episode back. Let's see if I can do this sleep-deprived. [laughing]

David Rosenthal 0:04 [laughing] Oh, you and me both, Ben. [laughing] Oh.

Speaker 0:08 Who got the truth? Is it you, is it you, is it you? Who got the truth now? Hmm. Is it you, is it you, is it you? Sit me down, say it straight, another story on the way. Who got the truth?

Ben Gilbert 0:25 Welcome to Season Fourteen, Episode One of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 0:33 I'm David Rosenthal.

Ben Gilbert 0:34 And we are your hosts. Today's episode is on the company behind the sensational diabetes and weight loss drugs, Ozempic and Wegovy. The company is Novo Nordisk. Now, when I first learned about Ozempic a few years ago, I thought, "Of course, this is gonna be amazing for a lot of people and could also completely destroy the market for insulin. Those insulin companies better watch out." But here is the fascinating thing, listeners: Novo Nordisk is the company behind insulin, or at least one of the few big ones. Now, you might say, "Well, that's okay, 'cause they're probably a big pharmaceutical company that's, you know, very diversified with lots of different drugs."

David Rosenthal 1:14 Nope.

Ben Gilbert 1:15 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 one hundred years, and 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 thirty-eight million Americans with diabetes. That's one in ten people. Globally, that number is over five hundred million with the disease. Diabetes costs the US alone more than three hundred and twenty-seven billion dollars a year, and on the other side of things, in the weight category, around a billion people suffer from obesity worldwide. A billion, including forty percent of the US population. If you expand that from obesity to overweight, seventy-five percent 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 Rosenthal 2:21 Yeah, it's wild. I mean, 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. Like, this is the Hermès of the pharma industry.

Ben Gilbert 2:39 Yeah. So why is today, in the early twenty twenties, 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, and it was built on research started in the early nineties. But here we are in 2023, almost three decades later, talking about it as a weight loss drug that sort of 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-nineties, in the first sort of scientific publication about it, but only in 2021 did we finish the clinical trials that truly show how effective it can be.

David Rosenthal 3:28 And as we'll see, that's just the tip of the iceberg. I mean, this company is a hundred years old. The history goes way back and is way more interesting than I think just about anybody knows.

Ben Gilbert 3:38 Yep. Pharmaceuticals is, without a doubt, the most complex industry that we have ever studied. So 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 and healthcare oligopolies, 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 wanna 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. And 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. Before we dive in, we wanna briefly share that our presenting sponsor this season, which we are so pumped about, is J.P. Morgan, specifically their incredible payments business.

David Rosenthal 4:39 Yeah. We'll be talking about them in depth later in the episode, but we've known J.P. Morgan for a long time. We both personally bank with them, as does Acquired, but we really uncovered the breadth of J.P. Morgan Payments as we went deep into our industry research for our Visa episode last year. Just like how we say here on Acquired that every company has a story, every company's story is powered by payments, and J.P. Morgan Payments turns out to be a part of so many of our Acquired companies' journeys. And it's not just the Fortune five hundred, they're also helping companies grow from seed to IPO and beyond.

Ben Gilbert 5:10 Yep. We're pumped to explore payments through all these different industries this season through both a technology innovation lens, but also a business model innovation lens. Much more ahead. So with that, this show is not investment advice. Dave 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 Rosenthal 5:29 Well, 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, and 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.... So 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. Now, 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 Gilbert 6:56 Yeah, and to set some context for the time period here, nineteen twenty-one, the public is not aware of what insulin is. The public is, however, aware of what type One diabetes is. This is the juvenile form of diabetes. Only five percent of diabetes sufferers have type One today, but back then, this was the dominant form of diabetes, and it was families whose kids had a death sentence, and there was basically nothing that could be done. And there were lots of rumors of people trying to figure out what substances, you know, you could inject or eat or anything to cure this sort of mysterious, horrible way to die. And people were so convinced in the late teens and early twenties that scientists were on the verge of a breakthrough, that the common wisdom was to go on a diet of, like, two to five hundred 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 couple of years long enough when the treatment did arrive to finally get it.

David Rosenthal 8:01 I mean, we, I can't overstate how important this was and how terrible, awful diabetes was. I mean, it was truly a death sentence. That treatment that you were referring to, that was the official American and globally accepted treatment for diabetes. It was literally called the starvation diet, and it was just attempt to prolong your life as long as possible, but, like, you are going to die unless a treatment is found. So, you know, when we say that this group won the Nobel Prize in nineteen twenty-three, this isn't just, like, a Nobel Prize. This is one of, if not the most important advance in, like, all of modern medicine that they're discovering here.

Ben Gilbert 8:41 I mean, we're just not that many decades after snake oil salesmen, 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. So this was the big breakthrough.

David Rosenthal 9:07 Yep. All right, so what did Banting and Best do? So scientists had known, even going back to the eighteen hundreds, that diabetes was caused by the misfunctioning 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 Gilbert 9:29 And 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 sort of 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 Rosenthal 9:45 So by experimenting with dogs and dog pancreases, they're able to extract something [chuckles] that comes to be known as insulin, and not only extract it, they then experiment with it and inject it into human diabetes patients who are at, like, severe end-of-life stages. And miracle, like, the human body is able to use this extract from dog pancreases, and these patients have, like, miraculous recoveries.

Ben Gilbert 10:16 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 you could target the pancreatic islets and isolate the extracts in a relatively pure form, and, you know, pure by their standards, 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, like, getting it to people because they're like: Well, okay, we did this thing that kind of worked once from, like, one dog into one person. So, um, where do we go from here?

David Rosenthal 10:53 And importantly, this new insulin substance, while it is a miracle, it's not a cure. [chuckles] Injecting patients with it doesn't magically, like, 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. So these diabetes patients, you know, they finally have a new lease on life, but it's kinda also just that, like a lease. In order for them to survive, they need to regularly inject an appropriate amount of insulin, you know, and by regular basis, especially in these early days, that's like every couple hours.

Ben Gilbert 11:33 And you can imagine the incredible high-wire act in the early days, where they've extracted from literally one dog. They've kind of 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. I mean, we discovered the process for refining insulin enough to put it into humans and then lost it and then found it again. This was the state of medical science, and so you have people ringing off the hook, newspapers reporting, "The breakthrough is here! The breakthrough is here!" And they've got, like, you know, single digits or dozens of vials of usable insulin, each of which need to be injected into a single patient every few hours in Toronto. So there's not enough to go around. The path forward is super unclear, and this is foreshadowing a little bit, but the era that we're in here in nineteen twenty-one, 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 sort of turning them into companies. And so 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've gotta 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 Rosenthal 12:55 Yeah, Banting and Best and Macleod aren't gonna go, you know-- today, they would go, like, start a company, [chuckles] you know, around this. Like, that's not gonna happen back then. But 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. So 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, and they give Eli Lilly a one-year exclusive development license to try and mass produce this substance. And again, like you said, this is, like, 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 Gilbert 13:44 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 Rosenthal 13:54 Yeah. Wasn't Elizabeth Hughes, one of these famous first patients, the daughter of the Secretary of State of the US, right?

Ben Gilbert 13:59 Charles Evans Hughes. Yeah.

David Rosenthal 14:01 Yeah. Wild. So it's obviously not practical or maybe not ethical, that's [chuckles] 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 sort of 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, you know, all the meat that we eat.

Ben Gilbert 14:32 Indiana's got a lot of cow farmers, and so the clever, really start-up Eli Lilly... I mean, the company had been around for a while, but this idea of taking on real R&D risk was sort of a new concept. So the sort of start-up 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 Rosenthal 15:00 We'll pay you for those. Yeah. [chuckles]

Ben Gilbert 15:01 And it's actually not an easy sell because those farmers are like, "It's gonna slow down my process if I have to figure out how to separate the pancreases, and this is already a real tight ship." So there's a real entrepreneurial tale of Eli Lilly sort of 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's two conditions, and the conditions are a trade. One, Eli Lilly has to report back any advances that they make to the University of Toronto. It's almost like a little Operation Warp Speed going on, kinda 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 wanna build a brand around insulin so that people know it's coming from us, that it's of a certain quality, and 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 Rosenthal 16:09 Yeah, we're gonna talk a bunch more about Eli Lilly here as we go, but this moment, this insulin moment, this is what really turbocharges them and makes them into one of, if not the first, kinda leading American and international pharmaceutical company, which it still is to this day. Still bigger than Novo Nordisk.

Ben Gilbert 16:27 Yep.

David Rosenthal 16:28 Although not by too much.

Ben Gilbert 16:29 Well, much more diverse, but not too much larger by market cap.

David Rosenthal 16:33 Okay, so back to this whole Nobel Prize thing, which, as we said, was awarded to Banting and Assistant Medical School Dean John Macleod. Now, how did Macleod end up being the guy who shares the award with Banting and not Best? And 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, the actual nomination for that prize was put forth by a previous Nobel Prize winner in physiology or medicine, the nineteen twenty Nobel Prize winner from Copenhagen, Denmark, a animal biologist named August Krogh.

Ben Gilbert 17:24 Oh!

David Rosenthal 17:25 Who also happens to be the founder of Novo Nordisk.

Ben Gilbert 17:28 Is that how Nobel Prizes work, a previous winner nominates the current nominees, or is that just like, uh... it certainly helps their case if a previous winner?

David Rosenthal 17:38 Yeah, I do not think it is a requirement, but, you know, certainly a, uh, previous winner and a recent previous winner in the same category, you would imagine carries a lot of weight.

Ben Gilbert 17:47 So 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 Rosenthal 17:55 Yeah. Now, 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 [chuckles] company. He's not a physician. He's not even a human biologist.

Ben Gilbert 18:12 Yeah, he was an animal biologist, right?

David Rosenthal 18:14 Yeah, he was an animal biologist. Uh, fun fact, though, this is maybe my favorite sidebar in the episode: he studied at the University of Copenhagen. His, like, advisor was a guy named Christian Bohr, B-O-H-R. That name might sound familiar to some people.

Ben Gilbert 18:29 Descendant of Niels Bohr?

David Rosenthal 18:31 Father-

Ben Gilbert 18:32 What!

David Rosenthal 18:33 ... of Niels Bohr.

Ben Gilbert 18:34 [chuckles]

David Rosenthal 18:34 That Niels Bohr, father of atomic physics, you know, also winner of the Nobel Prize, major contributor to the Manhattan Project. So yeah, like-... his, 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 Gilbert 18:51 Also, that tells you how long ago this was, that in my head, Niels Bohr is, like, someone from a long time ago, so it would be a descendant, but actually this is his [chuckles] father.

David Rosenthal 18:58 Yeah, right. Right, right. Okay, so back to August Krogh. How the hell does he end up going to Toronto, getting involved in all of this, starting, you know, Novo Nordisk? Well, in 1920, the same summer that he wins the Nobel Prize, his wife, Marie Krogh, is diagnosed with diabetes, and this starts weaving together this whole crazy chain of events that leads to, well, Nordisk. Novo comes a little later. Marie herself is actually a pretty incredible person. She is a physician, so she's the first woman in Denmark to earn a doctorate in medicine, and Denmark, I kinda suspect, has always been pretty progressive relative to the US, but even still, like, we're talking about, like, the 19-teens. A woman to earn a doctorate in medicine and then be a practicing physician was, um, obviously unique.

Ben Gilbert 19:51 Yes.

David Rosenthal 19:51 So when she's diagnosed in 1920, and, you know, she basically self-diagnoses, she knows what's going on, like, she and August, like, she knows exactly what this means, like, 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, which at this point in time in Denmark, is a young Copenhagen-based physician named Hans Christian Hagedorn, who is widely respected as sort of the best endocrinologist in town, even though he's very young, and he's up-to-date on all the latest, you know, workings of the starvation diet and 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, enough after a year or so. Now, back to August. Ordinarily, you know, after you win the Nobel Prize, you go on a major international lecture tour, and 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. So in 1922, August and Marie set sail for Boston.

Ben Gilbert 21:13 Which is, by the way, amazing that a Type 1 diabetic has made it sort of this far in life and is in the early 20s doing transatlantic travel.

David Rosenthal 21:23 Totally amazing. So August is gonna give a delayed series of lectures here at both Harvard and Yale. While there in Boston at Harvard, they meet with a guy named Elliott Joslin, who... He's actually the inventor of the starvation diet. He is, like, the world's foremost diabetes physician and researcher at this point in time, and Elliott 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 Gilbert 22:01 So it was, like, 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 Rosenthal 22:11 Yes. Well, and particularly, the competitive advantage, like, life advantage, like, they're just concerned about Marie's life [chuckles] at this point in time. So Elliott says, "You know, 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 and see the lab, see what's happening, and maybe get some of this insulin." So 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 kind of the leading diabetes physician in Denmark, maybe while they're in Toronto, they might be able to secure, like, some rights or ability to bring insulin back to Denmark. Macleod in Toronto, you know, he gets the letter, and 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, so 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." Now, funnily enough, at this particular point in time, it turns out you actually can't patent drugs in Denmark, so any blessing or patent licensing from the Insulin Committee to the Kroghs and Hagedorn for Denmark is sort of 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 Gilbert 24:18 And this is a pretty similar deal that they cut with Eli Lilly. That was for North America, and they basically gave him the same thing for Scandinavia.

David Rosenthal 24:26 Yes. So August and Marie set sail back for Europe. They arrive in Copenhagen. They go tell Hagedorn the news. Immediately, they all go get to work, and by get to work, they go buy cow pancreases at the local livestock market in Copenhagen. [laughs]

Ben Gilbert 24:41 This is something... So 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 Rosenthal 24:54 Ah, 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 both of them. They were just basically trying to get their hands on any animal pancreases that they could.

Ben Gilbert 25:06 Right. If it's got islets, we want it.

David Rosenthal 25:08 Yep. So using the Toronto method, they get a bunch of pancreases, they go to August Krogh's lab at the University of Copenhagen, run them through a meat grinder, pour hydrochloric acid over them, and they extract insulin, and then they test it on rabbits and mice, and 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.

Ben Gilbert 25:42 Hmm.

David Rosenthal 25:43 So this leaves just one obvious problem, just like insulin in Toronto: this is not gonna scale. You know, maybe you could do this to treat Marie, but they wanna treat the whole country, the whole region.

Ben Gilbert 25:56 Right, this is, like, a, a very real problem for insulin all the way up until, like, the 1980s, which is you are scale-constrained by the number of dead animal pancreases you can get your hands on. And I found this wild stat: it takes eight thousand pounds of pancreatic glands from twenty-three thousand five hundred animals to make a single pound of human insulin.

David Rosenthal 26:23 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 thirty thousand diabetes patients, [chuckles] and there are a lot more than thirty thousand diabetes patients in the world in 1980.

Ben Gilbert 26:41 And we'll talk about who the pioneers were and how we eventually got out of using animals to create insulin in the '80s, but that was also the moment in time where Type 2 diabetes really took off.

David Rosenthal 26:53 Yes. You're foreshadowing.

Ben Gilbert 26:54 It's been a forty-five-year massive issue, but, like, we basically could not have continued to use animal-based medicine to treat diabetes once it really exploded.

David Rosenthal 27:07 Ben, we're gonna get to this in, like, two hours.

Ben Gilbert 27:09 Sorry. [laughing] Foreshadowing.

David Rosenthal 27:10 All good. So back to the Kroghs and Hagedorn in 1922, '23 in Copenhagen. They need to scale production, so they go to the Lovens Kemiske Fabrik, and I need to, like, majorly apologize to all-

Ben Gilbert 27:28 Yeah, your Danish is amazing

David Rosenthal 27:29 ... Danish people out there. [chuckles] It is, uh... I talked to some Danish folks in research for this episode, and thank you very much, and, and I just, I realized in those conversations I need to give up on- [laughing]

Ben Gilbert 27:39 ... [chuckles]

David Rosenthal 27:39 -trying to pronounce things correctly. [chuckles]

Ben Gilbert 27:41 Stick to French.

David Rosenthal 27:42 Oh, we'll stick to French, yes. But that translates to English as the Lion Chemical Factory, and it is owned and run by another man named August, August Kongsted, with a K, K-O-N-G-S-T-E-D. And so they partner together, and 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. By that summer of 1923, the combo of the Kroghs and Hagedorn and the Lion Chemical Factory have produced enough insulin that they can complete trials with eight human patients with great success there in Copenhagen. And at this point, H.C. Hagedorn, who, remember, was originally Marie's physician to help treat her diabetes, he resigns his medical post and decides that he's gonna focus full-time on this project.

Ben Gilbert 28:40 So the founders are Hagedorn and August and Marie Krogh.

David Rosenthal 28:44 And Kongsted from the Lion Chemical Factory. These are the founders of the project, but there's no Novo Nordisk yet.

Ben Gilbert 28:51 And 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-

David Rosenthal 29:00 Oh, yeah

Ben Gilbert 29:00 ... like, hundreds of vials a week of usable insulin.

David Rosenthal 29:03 Absolutely. Eli Lilly had insulin on the American market available to patients at this point in time.

Ben Gilbert 29:09 Yep.

David Rosenthal 29:11 All right, so how does this actually turn into Nordisk? But before we do that, I wanna pick up the thread that we left earlier with our new friends at J.P. Morgan Payments.

Ben Gilbert 29:20 Yes, we are excited to partner with J.P. Morgan Payments this season and discuss all the ways they are helping businesses grow and innovate across a broad industry landscape. So whether it's a startup that needs merchant acquiring, which you now know what that is from our Visa episode, or a company building a new multi-sided marketplace, or even a business expanding across borders and having to manage the complications of cross-border treasury and FX, the more we dug into the industry and the more we got to know J.P. Morgan Payments, the more we realized how relevant it is for founders, CEOs, and operators to be thinking about how to leverage payments as a source of revenue.

David Rosenthal 29:55 Yep. If you think about it, there are whole companies and industries that couldn't exist a decade ago without today's modern payment infrastructure. It's become central to businesses with modern product experiences like ride-sharing, the creator economy, or B2B use cases like SaaS marketplaces or managing supplier relationships. For those types of companies, payments literally is their business, yet thankfully, they don't need to go it alone. J.P. Morgan Payments has been pioneering in this industry for decades. I mean, they're J.P. Morgan. They move ten trillion dollars a day. Yes, that is trillion with a T, and you can literally never outgrow their capabilities. Like we said, for us at Acquired, the peace of mind of having a single innovative banking and payments partner for the long term is pretty powerful.

Ben Gilbert 30:41 Yep. So let's look at the healthcare industry through the lens of payments. There are multiple ways of innovation on the horizon with telehealth, preventative treatment, and new clinical trial processes. Seamless and secure payments are critical to the improvement of patient experience in unlocking innovation for businesses and providers. When you zoom out, this complicated ecosystem of payments, healthcare providers, insurance networks, specialists, health monitoring services, and more-... It creates a complex and friction-filled payment experience. Who's paying who, when, under what terms? And then you layer data privacy requirements on top, you can understand why there are a lot of forces impeding change [chuckles] in this industry.

David Rosenthal 31:18 So if you're a company or a provider trying to innovate in this space, getting the payments piece right is paramount, which is why J.P. Morgan Payments' array of products, including their healthcare solutions and InstaMed offering, provides a patented cloud-based technology to securely transform healthcare payments by driving electronic transactions, processing payments, and moving healthcare data seamlessly. J.P. Morgan Payments believes that no matter where your business falls on the care continuum, better payments can help healthcare companies deliver better care.

Ben Gilbert 31:47 Yep. Some of our listeners may have attended J.P. Morgan's Healthcare Conference earlier this month in San Francisco. So if you did, let us know in the Acquired Slack. David and I are curious what your takeaways were from the state of the ecosystem. To learn more about J.P. Morgan's end-to-end payment solution and how they could be used in your business today, head on over to jpmorgan.com/acquired, which just feels good to say.

David Rosenthal 32:08 I know. [chuckles]

Ben Gilbert 32:09 [chuckles]

Ben Gilbert 32:10 Stay tuned to discover how they're accelerating innovation across all the industries we are covering this season. Okay, so David, the founding of Nordisk, how does it happen?

David Rosenthal 32:20 So the Lion Chemical Factory at this point has established a new production line for insulin, but it's unclear, do they own this production line?

Ben Gilbert 32:29 Mm.

David Rosenthal 32:30 Did the Crows, does Hagedorn, is the University of Toronto involved? Crow and Hagedorn are sort of consulting on it. When Hagedorn makes this decision to go full-time, what actually happens is he becomes an employee of Lion Chemical, which isn't really what he wants. August Crow steps back, and he returns to his other research at the University of Copenhagen. But once insulin starts rolling off the line later that summer, under the brand name Insulin Leo, like, you know, Lion Chemical Factory, they use the brand name.

Ben Gilbert 33:03 Ah.

David Rosenthal 33:03 And that would continue to be Nordisk's insulin brand name for the next sixty years, I think.

Ben Gilbert 33:09 Wow!

David Rosenthal 33:10 Pretty quickly, demand is just off the charts, and they are, like we talked about, essentially the first mover in continental Europe. So there's a pretty enormous opportunity here. So in 1924, Crow, Hagedorn, and Kongsted, who owns Lion Chemical, they all come to an agreement. They're gonna set up a new independent and self-owning institution to produce and distribute this insulin throughout Europe.

Ben Gilbert 33:40 Yeah, what does that mean?

David Rosenthal 33:42 Still not a company, because other than Kongsted from Lion Chemical, Crow and even Hagedorn at this point, they're not particularly commercially minded.

Ben Gilbert 33:51 No, it's a biologist and a physician.

David Rosenthal 33:54 Yes. So what they do is they set it up as an operating company because that's what they have to do to have employees and make sales and whatnot. But this operating company is one hundred percent owned and controlled by a foundation that they also set up, and the three of them are gonna be board members of this foundation, and Hagedorn is gonna run it day to day.

Ben Gilbert 34:19 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, and we're gonna 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 Rosenthal 34:47 And foreshadowing, there is a moment much later in history where, absent the control of this foundation, Novo Nordisk would have ceased to exist. [chuckles] It is only because of this structure that Novo Nordisk survived and that we have GLP-1s and everything we have today.

Ben Gilbert 35:06 It's fascinating. By the way, this is not that uncommon in Danish companies. Lego, same structure. Maersk, the shipping company, same structure.

David Rosenthal 35:15 Well, I dug into this a little bit. So yes, this is a very common structure in Denmark, mostly for tax reasons, because Denmark has very, very high taxes. So this is a common, like, generational transfer mechanism. And Novo, later, 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 like a foundation of convenience. It really is like a charitable foundation with a dual mission. So they give it two missions. The first mission is to produce insulin and sell it: A, at cost in Scandinavia, in the original kinda territory mandate, in order to maximize access and kinda humanitarian public health benefit. B, though, 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. So no profits allowed in Scandinavia. Profits are allowed from export activities-

Ben Gilbert 36:26 Huh!

David Rosenthal 36:26 ... And then all of those profits, literally by contract, get shipped one hundred percent to the foundation to then be used for, you know, grants and research about diabetes and supporting diabetes patients in Scandinavia.

Ben Gilbert 36:40 Fascinating. I did not know that.

David Rosenthal 36:42 Totally fascinating. And, you know, more or less, as you said, that is the same mission and structure that is still in place today. It's obviously changed a little bit.

Ben Gilbert 36:50 Yeah, there's some caveats that I'll get to when we get to today.

David Rosenthal 36:52 Yes, the operating company is now publicly traded, but still that foundation controls seventy-seven percent of the voting shares of Novo Nordisk and twenty-eight percent of the economic shares. [chuckles]

Ben Gilbert 37:04 Yeah, so no shareholder activism in this company, or at least no one's effective in doing so.

David Rosenthal 37:09 Yes. So-... 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 is the insulin manufacturer for the Nordics.

Ben Gilbert 37:26 Very creative.

David Rosenthal 37:27 Very creative. So, um, you know, you're listening here, you're probably like, "Okay, that's Nordisk. What's the Novo piece of this?" Well, 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, Harald and Thorvald Pedersen. And the Pedersens, you know, you've gotta remember the time we're in. They're sort of like prototypical 19-teens, 1920s kinda engineers and tinkerers. We're not that far removed from, like, the Wright brothers and Henry Ford, and that kind of stuff here. They're, like, kinda cast from that mold. So the older brother, Harald, he had been working in August Krogh's lab, doing all the mechanical engineering stuff to carry out the experiments. Like, you know, you need to build devices and contraptions and set up experiments, and so Harald was in charge of doing that. Once the insulin project gets going, Harald naturally sort of shifts over, and he's the one going out and building and buying and modifying, like, the meat grinders and figuring out how to pour hydrochloric acid over it in the right way, and all that sort of stuff. [chuckles] When Lion Chemical gets involved, and they're spinning up mass production, Harald goes to Hagedorn and 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." 'Cause 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, like, the perfectly qualified person to be, like, a, you know, early employee of this new operation. Except it turns out there's just one problem: Hagedorn thinks he's in charge, and Thorvald, who's just been hired, thinks, "Hey, I know what I'm doing here. I'm in charge. Like, Hagedorn, you're this pompous physician. Like, what do you know about running a factory?" [chuckles]

Ben Gilbert 39:29 So this schism happens, like, in the first year of Nordisk's existence?

David Rosenthal 39:34 Yes. In the first six months after Thorvald is hired, he and Hagedorn, they're constantly fighting. One day, they get into a huge, huge argument, and Hagedorn fires him, six months in.

Ben Gilbert 39:47 Guess we know who's in charge.

David Rosenthal 39:48 Yeah. When that happens, Harald, the older brother, resigns in solidarity, and they're super pissed. They go to see Krogh, and they're like: "Hey, you know, August, I've been working for you for a while. Like, clearly, we know what we're doing here. Why is this happening?" And Krogh sides with Hagedorn. He's like, "No, no, he's my guy. He's Marie's physician. He's gonna run this thing." So they say, "Well, all right, fine. You know, as you know, here in Denmark, you can't patent drugs."

Ben Gilbert 40:18 Oh, that's why this is important.

David Rosenthal 40:20 "We're just gonna go down the street and make insulin, too." [chuckles] And the legend has it that supposedly August looks at them and replies, "But you're not capable of that." [laughing]

Ben Gilbert 40:31 Oh!

David Rosenthal 40:31 To which Thorvald yells at him, "We will show you!" And they storm out of the building and go down the street, and they found a new insulin company, a Novo- [laughing]

Ben Gilbert 40:44 [laughing]

David Rosenthal 40:45 ... insulin company there in Copenhagen, Insulin Novo, and that is the beginning of Novo. And for the next 65 years, these two companies would compete in blood sport, head-to-head, hated each other, absolutely hated each other, until they finally merged in 1989.

Ben Gilbert 41:06 Crazy.

David Rosenthal 41:07 Yep. Now, this is such a key part of the Novo story, that certainly, you know, 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, like, bitter competitive motivation from down the street, I don't know that they would've moved as fast. And, you know, Novo ends up building its own scientific research capabilities, and, like, 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 Gilbert 41:46 It's amazing. I mean, it's the local and bitter competition. It's Ferrari and Lamborghini. It's Aldi and Trader Joe's. It's Adidas and Puma. You sort of create the seeds of competition early, and you can really infuse that into a company's DNA for decades.

David Rosenthal 42:03 So 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 a interesting market and large market potential. You know, one, even with just Type 1 at this point in time, it's still a very large and widespread disease in the world, so there's kind of a large patient and potential patient market size. But two, unlike many other diseases and drugs for those diseases, you know, it's chronic. You don't cure it. So what insulin is doing is it is enabling these diabetes patients, who often are diagnosed as children, to live essentially normal, long lives. So you're talking about decades, 40, 50, 60, 70, 80 years of patient lifespan here, where they are injecting insulin daily, if not, you know, in most cases, multiple times daily.

Ben Gilbert 43:02 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 Rosenthal 43:11 Yep, and there's also kind of another aspect that makes it particularly interesting commercially, which is-... 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. I mean, this early insulin, as we've alluded to a little bit, it was barbaric by modern standards. Like, 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's infections-

Ben Gilbert 43:52 There's allergic reactions to all the impurities.

David Rosenthal 43:55 Totally. It wasn't shelf-stable in liquid injectable form. This is wild.

Ben Gilbert 44:01 Hmm.

David Rosenthal 44:01 I don't know if you knew this, Ben.

Ben Gilbert 44:02 No.

David Rosenthal 44:02 So everything we're talking about in these days, and what Nordisk was originally producing, were insulin tablets, solid insulin tablets. Now, until recent times, you can't take insulin in tablet form. It doesn't get absorbed by the gut. You have to inject it. So 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 Gilbert 44:30 Like a glass syringe with a big needle. No pens, none of this fancy stuff we have today.

David Rosenthal 44:35 Yeah, big-ass needle. And, you know, so 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 Gilbert 44:47 Yep, and there's no measurement. I mean, there's no, like, one-touch pin prick, 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 Rosenthal 44:58 Totally, and actually, it's kind of a side note to the story, but it's Novo in the 1980s that invents the insulin pen.

Ben Gilbert 45:06 Oh, I didn't realize that wasn't Nordisk, but Novo.

David Rosenthal 45:08 Yeah, Novo invented the pen, and Nordisk focused on pumps, and they were, um, one of several companies, but one of the leading companies innovating in pumps.

Ben Gilbert 45:16 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 and actively suffer from the complications and actively benefit from all the advancements in it, and so 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 Rosenthal 45:36 I'm quite certain that almost everybody listening right now either is diabetic themselves or has a close family member who is.

Ben Gilbert 45:44 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, and [chuckles] it's basically like 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 and farmers and, you know, 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. So everyone's on the path, it just depends how long you live. [chuckles]

David Rosenthal 46:23 We also weren't really, uh, designed to, you know, live this long either, [chuckles] so.

Ben Gilbert 46:27 Well, careful with the word "designed," David.

David Rosenthal 46:29 Well. [laughing] So when Novo gets established, this starts the competitive race that really leads to 100 years of R&D pipeline that changes all this. So the Petersen brothers, they know right off the bat they can't really just go clone what Nordisk is doing. I mean, technically, legally, they can in Denmark, but what physician and what patients are gonna buy Novo insulin when right down the street you've got Nordisk, which has a Nobel Prize-winning scientist, the best diabetes endocrinologist, [chuckles] you know, in Denmark running it, and the explicit blessing of Toronto and the insulin committee? If Novo just sells the same thing, like, nobody's gonna buy that.

Ben Gilbert 47:13 Right.

David Rosenthal 47:13 But they do have a pretty significant advantage that Nordisk doesn't have, which is they've got their engineering and tinkering skills. So they go to work, and pretty quickly, actually, they come up with shelf-stable liquid insulin. So 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. So they go to market, Novo goes to market, with their Novoinsulin as insulin at half price-

Ben Gilbert 48:01 [laughing]

David Rosenthal 48:01 ... because it's so much more efficient. Now, this is so antithetical to, like, the ivory tower scientists over at Nordisk. You're marketing insulin at half price, and does this liquid stuff work, and is this safe, and all this stuff. The Petersen brothers are like, "Yeah, whatever, you know, we're gonna crush you." [chuckles]

Ben Gilbert 48:17 Hmm, all right, so Novo, scrappy upstart, counter-positioned, and competition drives innovation, so they create better product.

David Rosenthal 48:24 Yes. So 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 Gilbert 48:42 Really? Hagedorn is in the name?

David Rosenthal 48:43 Because H.C. Hagedorn, he himself led the research developing this-

Ben Gilbert 48:48 [chuckles]

David Rosenthal 48:48 ... and he puts his own name on it. Kinda 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. So 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, so like 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, [chuckles] and that is Novo.

Ben Gilbert 49:26 Amazing.

David Rosenthal 49:27 So Novo, undeterred, they go, and they work around Nordisk's patents on this. You know, and again, I'm not sure at this point if the laws have changed, and you can patent drugs in Denmark, but it kinda doesn't matter because it's clear, you know, 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. So 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 Gilbert 50:02 Which the pharma industry has a rich history of figuring out exactly how to do this. Because 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 sort of 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. So if you can accomplish a similar biological or chemical reaction in the body with a different molecule in basically any way, then unpatented, and so 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 Rosenthal 50:43 Yes. To your point, though, it is still quite scientifically difficult. It's not like software here, where like, yeah, yeah, yeah, I write some code, and it's like, "No, no, you still gotta find a molecule that does what you say it does."

Ben Gilbert 50:55 Yep.

David Rosenthal 50:56 So this leads to a whole bunch of lawsuits. It actually ends up going to the Danish Supreme Court, where Hagedorn represents Nordisk himself. You know, in the lower courts, they had lawyers, and I think they lost the case in the lower courts, and Hagedorn's like, "Screw this! I'm gonna be my own lawyer." [chuckles]

Ben Gilbert 51:16 At the Supreme Court case.

David Rosenthal 51:17 At the Supreme Court.

Ben Gilbert 51:18 Wow!

David Rosenthal 51:18 Yeah, amazing, and they win. Nordisk has won here. This is like a huge, huge blow for Novo, you would think. But then, literally, right at the same time, World War II starts, and Denmark is invaded by the Nazis shortly after they invade Poland, and in April 1940, the Nazis now occupy Denmark. So this sort of like infighting between these two Danish drug companies-

Ben Gilbert 51:47 Much less relevant.

David Rosenthal 51:48 Much, much less relevant. But what is still super relevant is, how is Europe gonna get insulin [chuckles] in the middle of World War II? And this is a major, major turning point, both for the two companies vis-à-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 Gilbert 52:18 Huh, 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 Rosenthal 52:28 Well, so what happens is Denmark is relatively unscathed during World War II. You know, it's a small country. The Danish army was quite small, and so when the invasion happens in April 1940, there's basically no fighting. Germany just takes over the country, um, and there's no destruction, which means that insulin production continues unabated in Denmark. Now, 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." And with World War II, you know, most of the dollars for their licensing revenue is coming from Allied countries. Well, Germany just took over Denmark, so all of that revenue, all of those profits go to zero overnight, and 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 Gilbert 53:36 They basically cannot address the market of any Allied countries anymore.

David Rosenthal 53:39 Yeah.

Ben Gilbert 53:40 Wow!

David Rosenthal 53:41 Novo is the complete opposite story. They had been scaling production all throughout Scandinavia, all throughout Europe, and when Germany takes over Denmark, Insulin Novo is now... You know, the ethics of this are really complicated.

Ben Gilbert 53:57 'Cause it's Danish-owned, which is Nazi-occupied at the time.

David Rosenthal 54:01 Yeah, they are now essentially the official Nazi-sanctioned insulin provider for all of Nazi-occupied Europe. So the German government basically directs Novo to massively expand production and supply insulin, you know, not only to Germany but to France, to Poland, to Austria, to all, everywhere in continental Europe, basically.

Ben Gilbert 54:25 So 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, and so they're relying on their own suppliers, like Eli Lilly.

David Rosenthal 54:42 Yes. Now, 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, 'cause obviously, [chuckles] you know, transfer payments-

Ben Gilbert 54:58 Right

David Rosenthal 54:58 ... from Allied countries are now blocked. [chuckles]

Ben Gilbert 54:59 Right. Fascinating.

David Rosenthal 55:02 Totally fascinating. So 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, and, like, if they hadn't done it, all the diabetics in Europe would've-... died.

Ben Gilbert 55:29 Oh, it's unquestionably a good thing. Again, I'm learning about this from the first time from you, but, like, 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 Rosenthal 55:42 Uh, right, right. I definitely agree. It is important to note, though, after the war, the Danish state did require both Novo and the Petersen brothers personally to repay most of the profits that they made during the war back to the Danish state.

Ben Gilbert 55:58 Fascinating!

David Rosenthal 56:00 Again, like, the ethics are complicated here.

Ben Gilbert 56:01 Very. Yeah. Wow!

David Rosenthal 56:03 So regardless, after the war, Novo emerges as now both a scaled pharmaceutical company generally, and the largest producer of insulin in Europe. And 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, L-E-N-T-E, which is slower-acting insulin, which means it's less longer lasting, and this can now be used for diabetics as a basal or background insulin. So 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 twenty-four/seven throughout the day. This now is a new background insulin that diabetics can take to help stabilize when you're sleeping or not eating. So this is a pretty big breakthrough.

Ben Gilbert 57:09 And 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 sort of finely tune how we want injections to react in your body over a long period of time in a, a very complex environment? You know, you've got the human immune system wanting to react to anything foreign you put into it. You've just got a lot of systems that you sort of have to make sure that you're interacting well with to achieve something simple, like we'll make it dissolve slower, and I know that's not technically right, but that is kind of the blunt way to think about it.

David Rosenthal 57:53 Yeah. Hopefully, it's obvious, but, like, this isn't quite like software. It's like, oh, just you add some new code, and you ship a new feature. It's like, no, no, this is very complicated stuff, and you gotta make sure that the side effects are not gonna kill people. So this is really the first major scientific advance that comes out of Novo, and Eli Lilly licenses this Lente insulin from Novo and kind of 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, and now, you know, it's kind of Novo that's taking up this mantle. You know, this will come back up later in the episode, but Eli Lilly, although insulin was and still is a huge part of the business, what they basically decided is to be a kind of 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 Gilbert 58:53 I'm really curious if the Eli Lilly folks would agree with that characterization. I know I- you read that great history of Novo Nordisk book, and I'm sure that's the way it paints it, but, uh, at some point, we should dig into Eli Lilly a little more and see if that's how they think about it, too.

David Rosenthal 59:05 Yeah. Well, that is gonna change in a big way in the 1980s, but during this post-war period, at least that's how, um, Kurt Jacobsen's book makes it sound, and we gotta give Kurt a big shout-out, and he wrote this great history of Novo Nordisk that just came out last year for the company's hundredth anniversary. Unfortunately, you can't buy it in America [chuckles] so I emailed him a couple months ago, and I said, "Kurt, is there any way we could buy a copy of your book?" And very, very graciously, he just sent it to us. So, uh, very, very kind. Thank you, Kurt.

Ben Gilbert 59:38 Yep.

David Rosenthal 59:39 So 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 hundred percent pure, zero antibody potential insulin. That also becomes the kind of new, widely accepted best product in the market internationally. So this is the general state of play after the war. Novo is now a scaled pharmaceutical company. Nordisk is mostly in rough shape, you know, if production capacity has gone down to basically zero, you know, 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. So, you know, they're not, like, insolvent or anything, but they're the much, much smaller company. Now, Novo, interestingly, they're now a large pharmaceutical company. They wanna add a second leg of the stool, a new business line. So they get into the enzymes business. This is like laundry detergent enzymes and other industrial uses. They add that on alongside the insulin and diabetes business, and, you know, that's all well and good to be a diversified, you know, industrial conglomerate, except the enzyme business is both capital-intensive and not that profitable. [chuckles]

Ben Gilbert 1:01:19 Those don't mix well.

David Rosenthal 1:01:20 Yeah, those don't tend to mix well. Now, 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 Gilbert 1:01:29 Oh, is this, uh, Novozymes?

David Rosenthal 1:01:31 This is Novozymes, yes.

Ben Gilbert 1:01:33 Ah.

David Rosenthal 1:01:33 It is still majority-controlled by Novo Holdings, which is the holding company of the Novo Nordisk Foundation.

Ben Gilbert 1:01:40 ... Interesting. So just like Novo Nordisk is majority controlled by the foundation's holding company, Novozymes still is also.

David Rosenthal 1:01:47 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. And so this enzyme business that they tried to add as, like, a diversification and hedge to the company and expansion, all of a sudden it's bleeding cash, and they don't have enough capital resources to do the CapEx upgrades that they need for the main business in insulin.

Ben Gilbert 1:02:24 Oh, interesting! If only they had a cash-rich partner without a lot of CapEx needs.

David Rosenthal 1:02:30 Goodness, if only there were such a natural partner- [laughing] ... right down the street that, you know, it might make sense maybe they could merge with. So here we are. In the early 1970s, Novo approaches the old bitter rival, Nordisk, and here's the situation, you know, this is a perfect marriage, let's get the band back together. You know, everybody's basically dead at this point from the original days. Let's let bygones be bygones. And Nordisk, they've just gone through a pretty rocky succession period after Hagedorn retired. They're now on their third CEO in seven years, and the new CEO, Henry Brennum, he isn't from the pharma industry at all. He's not a scientist. He was previously the head of a lumber company. So this merger makes perfect sense.

Ben Gilbert 1:03:24 Huh. But they don't merge for another decade and a half, so what went wrong?

David Rosenthal 1:03:29 It's not what happens. So instead, contrary to all sort of what you would think on paper, the new CEO, Brennum, actually turns out to be, like, an amazing leader and CEO-

Ben Gilbert 1:03:44 The lumber guy

David Rosenthal 1:03:44 ... for Nordisk. The lumber guy.

Ben Gilbert 1:03:46 Huh!

David Rosenthal 1:03:46 He is like the wartime CEO for Nordisk. He rejects Novo's overtures to merge, and 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 gonna be a complete reset of all the insulins on the market, whether they're fast-acting or long-lasting insulins, they're all gonna move over to this MC highly purified method and type of insulin.

Ben Gilbert 1:04:27 Hmm.

David Rosenthal 1:04:28 But Novo's in this spot where they're gonna be delayed for several years in making the transition in their actual factories 'cause they don't have the CapEx.

Ben Gilbert 1:04:38 So 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 Rosenthal 1:04:45 So Brennum convinces the board that rather than merging, they should use their capital reserves to rebuild up Nordisk's own production capacity-

Ben Gilbert 1:04:57 Hmm

David Rosenthal 1:04:57 ... go hire a global sales force. Brennum's, he's really ambitious. He says, "We're gonna go enter America directly as this, like, forgotten, you know, Nordisk company." So he goes and hires a global sales force because he knows Eli Lilly is gonna have the same dynamics as Novo. Like, everything's gonna have to shift over to MC, and Eli Lilly's this, you know, big, large, diversified giant. They're not gonna move as fast as he thinks Nordisk can. And even though it's unrealistic that Nordisk is gonna 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. [chuckles]

Ben Gilbert 1:05:48 Well, and you gotta remember, too, in the '70s, there was still kind of a functioning healthcare market. There wasn't massive consolidation yet, and so every level was super fragmented. Manufacturers were fragmented, insurance companies were smaller, little doctor's offices existed everywhere, neighborhood pharmacies were there. And so entering the American market, you didn't necessarily need huge scale to do it. And the other thing to note is it wasn't yet the heyday of drugs, like of pharma. There weren't that many drugs that people had high demand for. It wasn't like today, where, you know, 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 the... 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 kinda can without too many barriers.

David Rosenthal 1:06:51 Yeah, this is the right window. So I don't know how Brennum convinced both boards to do this, but he does, and, like, by God, he's right. It works! So for the entire decade of the 1970s, Nordisk's sales grow at thirty percent compounded annually, which is amazing.

Ben Gilbert 1:07:15 Wow!

David Rosenthal 1:07:16 Now, they're still small. So by 1980, Nordisk is still only about one-tenth the size of Novo overall, but they're a third the size of Novo's insulin business, and they've moved from being this licensing company to now an actual production company with capacity all around the world. So this is a huge win from, like, basically, they were gonna be taken over for cash by their old rivals, and now they're back in the game.... So 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. So by the time we get to 1980, and just to set some scale here, Novo's annual global insulin sales, this is Novo, they're still much larger. They're about a hundred million dollars annually, and Nordisk's are about thirty 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 a hundred and sixty million in sales.

Ben Gilbert 1:08:27 By the way, these numbers are staggeringly small. These are like Series C startup.

David Rosenthal 1:08:32 And this is exactly my point. So 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 [chuckles] here in 1980." And that's not exactly tiny, and like you were saying, you know, 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 fifteenth largest company in the world? Like, what gives? What happened?

Ben Gilbert 1:09:00 Yeah, just look at pictures of people in the '70s and look at pictures of people today.

David Rosenthal 1:09:04 Yes. The answer is, one, what you just said, we all got fat, and the diabetes market, and specifically Type 2 diabetes, exploded. But two, and this is gonna be such a fun story to tell here on Acquired 'cause it's a huge part of Silicon Valley history that we've never touched.

Ben Gilbert 1:09:23 Yes, Genentech.

David Rosenthal 1:09:25 Two, Genentech happened.

Ben Gilbert 1:09:27 Oh, yes.

David Rosenthal 1:09:28 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, and it changed everything.

Ben Gilbert 1:09:46 Former Kleiner Perkins employee.

David Rosenthal 1:09:49 Yeah, was a co-founder of the company. But before we talk about that...

Ben Gilbert 1:09:53 Yes, now is the perfect time to introduce one of our other new Acquired partners for season fourteen, an incredible company that we have gotten to know well over the last couple of years, ServiceNow. ServiceNow, as many of you know, is the cloud-based platform that automates and manages workflows across the whole enterprise, making everything about the way a company or organization works actually work better for eighty-five percent of the Fortune five hundred. It has also been one of the absolute best-performing technology companies over recent years.

David Rosenthal 1:10:24 Yeah, I mean, ServiceNow has outperformed almost every enterprise software company over the past five years, including Microsoft.

Ben Gilbert 1:10:31 Yep, but what you may not know is ServiceNow is also an incredible Silicon Valley startup story that ranks right up there with Google, Facebook, NVIDIA, Genentech, as one of the best venture investments of all time. Funnily enough, the ServiceNow campus is actually right next door to the NVIDIA campus in Santa Clara.

David Rosenthal 1:10:48 Yeah, we waved hi when we were there to hang out with Jensen. So ServiceNow was started in 2003 by Fred Luddy, and Fred, kinda like August Krogh starting Nordisk, was already the equivalent of a Nobel Prize-winning software developer and founder. He dropped out of college in 1970.

Ben Gilbert 1:11:06 Yeah, this is like, uh, Nolan Bushnell, Atari-era Silicon Valley.

David Rosenthal 1:11:10 Totally, and he started programming and ultimately built a four billion dollar company as CTO. He really was part of that original technical crew, like Woz and others, that formed the backbone of Silicon Valley. But all the way back when he first started in the industry at age seventeen, Fred wrote a simple little program for an order clerk named Phyllis. Now, this was when he was working at a company that fulfilled building materials orders, and Phyllis spent all day just typing up the orders on these forms. So one night, as a favor, Fred wrote a program that automated it. Eighty percent of each form got filled in automatically. Phyllis comes in the next morning, Fred shows it to her, and she breaks down crying. He took this incredibly soul-crushing, mind-numbing task that she hated and made it eighty percent easier, eighty percent faster, and a hundred percent less soul-crushing.

Ben Gilbert 1:12:04 So fast-forward to 2004. Software as a service is just becoming a thing, and Fred is like: "Whoa, we now have a delivery mechanism that can take what I did for Phyllis back in '72 and scale it infinitely." Now, how many Phyllises are there in the world? Well, it turns out it's hard to remember because ServiceNow changed this forever. Every single company back then was filled with people just like Phyllis, who spent hours every day on repetitive tasks that software could handle eighty percent of. So Fred started ServiceNow and took that same simple automation concept and brought it to IT, brought to customer service, HR, ops, risk. Kinda like AI is doing now, and ServiceNow is a part of that, they freed up knowledge workers to go create, you know, more knowledge across the whole enterprise, rather than more forms and more individual point solutions. And like Novo Nordisk, it turned out that singularly focusing on eliminating suffering from just one pervasive worldwide disease, in this case, not diabetes, but repetitive manual office work, that was a path to becoming a one hundred billion dollar-plus Fortune Five Hundred company.

David Rosenthal 1:13:11 It's an incredible story. So if you wanna learn more about ServiceNow and connect with the team, go on over to servicenow.com/acquired, and when you get in touch, just tell them that Ben and David sent you.

Ben Gilbert 1:13:23 Yep. Okay, so 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 Rosenthal 1:13:34 Yes, more metabolically unhealthy.

Ben Gilbert 1:13:36 Correct.

David Rosenthal 1:13:37 And just to put some numbers on that, the number of Type 2 diabetes patients quadruples from 1980 to 2016.

Ben Gilbert 1:13:46 ... Yeah, and population growth was a lot slower than that. So definitely the share of the population is massively expanding. And at this point in time, we are still using pigs and cows to harvest pancreases and their islets and their extracts in order to make insulin, even with this incredibly refined process, until Genentech.

David Rosenthal 1:14:08 Yes, and specifically what that meant, using animals to make insulin, was that Type 2 was not treated with insulin. And actually, until this-

Ben Gilbert 1:14:17 Really?

David Rosenthal 1:14:18 -point in time, Type 2 used to be called, quote, "non-insulin dependent diabetes", because you didn't treat it with insulin, 'cause there wasn't enough insulin. There weren't enough animal pancreases in the world to do it.

Ben Gilbert 1:14:30 Oh, I had no idea.

David Rosenthal 1:14:32 And it wasn't necessarily that insulin didn't help Type 2. I mean, lots and lots of Type 2 diabetics these days use insulin. It was that there just wasn't enough of it.

Ben Gilbert 1:14:43 Wow!

David Rosenthal 1:14:44 And then in 1980, Genentech and Eli Lilly, as their partner, changed everything with recombinant DNA and genetic engineering of drugs. And I suspect many people don't know this. I, I sort of vaguely knew this before researching the episode, but the first drug that they genetically engineered and that started this whole revolution was insulin. [chuckles]

Ben Gilbert 1:15:13 Absolutely. It was the founding first application of the idea that Genentech had of commercializing recombinant DNA. The first implementation was insulin, and 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, you know, from a pig or cow.

David Rosenthal 1:15:45 Yes, because you couldn't really extract human insulin from, you know, 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 Gilbert 1:16:04 Yeah, it's interesting that this ended up being more of a manufacturing and scale advantage than an efficacy advantage.

David Rosenthal 1:16:10 Yes, but at the time, nobody really knew that. So in 1980, which is when Genentech and Eli Lilly announced their partnership together, that Eli Lilly is gonna be the go-to-market partner for Genentech's new recombinant DNA bioengineering revolution, and they're gonna make human insulin, they announced that in 1980. People go nuts, and it triggers this race for human insulin, and Novo gets swept up in it. They're like, "Oh, no! Eli Lilly, they're gonna come back into the research game. They're gonna innovate in product. Ah, we had the chance to work with Genentech." Genentech had actually approached them about being-

Ben Gilbert 1:16:55 Mm

David Rosenthal 1:16:55 ... a partner in Europe. Novo had turned them down 'cause they didn't think the science was ready yet, and they were wrong. So they're like, "Shoot, we gotta scramble!" They find a team of Japanese researchers [chuckles] who have shown that you can actually chemically modify pig insulin to make it chemically identical to human insulin.

Ben Gilbert 1:17:15 What? Really?

David Rosenthal 1:17:16 Yeah. [chuckles] You can't make this stuff up. So Novo is like, "Great, we're gonna race to market. We're gonna beat Eli Lilly with human insulin. It's not gonna be genetically engineered. [chuckles] We're just gonna take our pig insulin and modify it."

Ben Gilbert 1:17:29 Ugh.

David Rosenthal 1:17:29 [chuckles] It turns out to be a huge boondoggle. You know, it works, but it's not any better than pig insulin, so it's a big flop for Novo.

Ben Gilbert 1:17:39 Which the timing lines up to really be a nail in the coffin for them. I mean, if this is right after everything you just described with Nordisk scaling up production and compounding at 30% per year and massively growing share, like, this is not a good use of Novo's precious dollars right now.

David Rosenthal 1:17:55 [chuckles] Well, it's funny you say that. So when the Genentech and Eli Lilly announcement happened in 1980, I mean, truly, this was a bombshell. It's hard to remember now, I mean, 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. So Genentech goes public in the fall of 1980. This is well before Humulin, you know, 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's eclipsed two months later when Apple goes public. [laughing]

Ben Gilbert 1:18:52 [laughing]

David Rosenthal 1:18:53 But investors are just mad for biotech companies. So when Novo announces that they're gonna be first to market with human insulin, and like, yeah, yeah, 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 raise $100 million. [chuckles]

Ben Gilbert 1:19:17 When your currency is expensive, sell it.

David Rosenthal 1:19:19 Right? There are a number of analogies that we could make from the past few years that I'll, uh, refrain from here. [chuckles] So, as you say, is this a nail in the coffin for Novo? You know, I mean, 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, "You know, I don't know that human insulin, in and of itself, is all that much more effective. We're gonna take a wait and see approach. We are going to invest in building up our-"... recombinant DNA and genetic engineering capabilities because it's clear the whole industry is moving this way for production reasons, if nothing else. [chuckles] And Novo is doing this too in the background. But Nordisk's like: "We're not gonna get caught up in the specifically human insulin hype." And this really works out for them. So in 1984, Nordisk passes the German company, Hoechst, to become the number three global player in insulin. Hoechst, I think that's how you say it, today is part of Sanofi, the large international pharma conglomerate, and they're the only other player left besides Novo and Eli Lilly.

Ben Gilbert 1:20:30 Yeah, Sanofi today, yeah, the three of those companies are essentially the entire insulin market.

David Rosenthal 1:20:35 Yep. So 1984, Nordisk passes them. On the back of that, they do their own share listing on the Copenhagen Stock Exchange. So they change 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. And by the end of the 1980s, Nordisk is now up to 20% global market share in insulin, and that's really all come at the expense of Novo, which is down to 30% global market share.

Ben Gilbert 1:21:12 Whoa! So they're close to matching them.

David Rosenthal 1:21:14 Yeah, they're pretty close. And 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-

Ben Gilbert 1:21:28 Hmm

David Rosenthal 1:21:28 ... than the last time.

Ben Gilbert 1:21:29 Interesting.

David Rosenthal 1:21:30 And 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 Gilbert 1:21:55 And 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 healthcare, starting around this time, the late '80s, early '90s, and obviously went nuts till today.

David Rosenthal 1:22:15 And a big part of it is the production and, you know, infrastructure side of things, but the other part is the go-to-market. Pharma kinda almost becomes like the enterprise software industry. Like, 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. And like, yes, you can build a big company on top of or underneath Microsoft or Oracle or Amazon or Salesforce or Google, but they're the ones with the infrastructure, they're the ones with the channels. [chuckles]

Ben Gilbert 1:22:47 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. And 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, like: "Why is this so complicated?" But yes, this is how the US market functions. So I wrote a sentence, David, that I thought would be a fun way to break it down, and that simple sentence is, "A patient buys a drug."

David Rosenthal 1:23:29 [chuckles]

Ben Gilbert 1:23:30 But really, actually, that's not how it works. [chuckles]

David Rosenthal 1:23:31 That's like a butterfly flaps its wings.

Ben Gilbert 1:23:33 [chuckles] A person doesn't merely buy a drug. So 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, 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. Well, the insurance company doesn't wanna pay whatever price the pharma manufacturer picked for their drug, and 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. And as you can imagine, when there are this many middlemen in a transaction-

David Rosenthal 1:25:02 Yeah, so that's what, four middlemen, sir?

Ben Gilbert 1:25:05 Uh, the PBM, the insurance company, the distributor, and for some reason, employers are involved.

David Rosenthal 1:25:11 So we're talking about a six-sided market.

Ben Gilbert 1:25:14 Well, I don't think it's a sided market. There's two good diagrams that I'd found in the research that we'll put on the Acquired Twitter account and the, uh, Threads account to kinda get access to these visuals that I think are pretty good illustrations of the way the dollars flow and the way the product flows. But 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 like a statistic in a large aggregated basket, we've sort of lost the plot in being able to actually have a functioning free market. But anyways, I wanna 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. So 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, and 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, and so it's, you know, thinking of CVS as just CVS is not really right anymore. It's CVS Caremark, so they're sort of with a PBM. There's the Walgreens Boots Alliance, which is, uh, the way they named it is sort of all you need to know. So the way to think about pharmacies is that there are a few big ones, and that is kinda what matters, even though there are many people interested in keeping a thriving, independent set of pharmacies out there. Then there's the PBM. So why does the PBM exist, the pharmacy benefits manager?

David Rosenthal 1:27:07 That's a good question. [chuckles]

Ben Gilbert 1:27:08 [chuckles] Yeah. Well, in the old days, there were lots of drug companies and lots of insurance carriers, and so 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, a big list of drugs and the prices, and obviously today, that is less necessary 'cause there's less fragmentation, given all the mergers that have happened. But the PBMs still establish themselves as a key, sort of immovable piece of this puzzle.

David Rosenthal 1:27:47 So are they sort of like agents? Is that the right way to think about them?

Ben Gilbert 1:27:52 Agent implies that the principal can sort of make a decision to go elsewhere. You're not going elsewhere.

David Rosenthal 1:28:00 Ah, the PBMs are the ones actually setting the prices.

Ben Gilbert 1:28:03 Well, that's the key question. So maybe a little more context on PBMs, and then let's try to answer your question, David. So one, they're huge. PBMs manage pharmacy benefits for two hundred and sixty-six million Americans, and that number is old. That's as of twenty sixteen. So 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 thirty, and there's essentially three that cover about eighty percent of the market, and those are Express Scripts, CVS Caremark, and Optum Rx, which is actually owned by UnitedHealth Group. So interesting to know that Caremark, that PBM, is corporately bundled with CVS, a pharmacy, but Optum Rx, corporately bundled with an insurance provider.

David Rosenthal 1:28:46 So there's vertical integration happening here, too. [chuckles]

Ben Gilbert 1:28:48 Yes. So if you wanna be a little bit cynical about it, you could say they've really become kind of the gatekeeper for consumers getting access to drugs, since a doctor's not gonna prescribe a drug if only two of the three big PBMs have it on a negotiated agreement there. So each PBM individually has control or, uh, almost like a veto. If a PBM says, "We're not gonna 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. So as a pharma company, you kinda need all three big PBMs to come to some terms with you to be on their formulary and handle the reimbursement for your drug. So one other way you can kinda think about it is a PBM is sort of 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.

David Rosenthal 1:29:39 Hmm.

Ben Gilbert 1:29:40 So 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. So 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. So there's a sticker price, but then there's a rebate that, you know, once the PBM pays the sticker price, actually, the drug manufacturer-

David Rosenthal 1:30:10 How does any of this get past the DOJ? [chuckles]

Ben Gilbert 1:30:13 Great question. So 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 what are the exceptions. So rebates are extremely high. Eli Lilly has publicly claimed that the cost of these discounts and rebates accounted for seventy-five percent of the sticker price of insulin. If you're getting a rebate on seventy-five percent of the total price, the sticker price is not the price.

David Rosenthal 1:30:47 Wow! Wait, so who gets the rebates? Is it the PBMs themselves or the consumers?

Ben Gilbert 1:30:53 Well, PBMs say that they tend to pass most of the rebate along to the healthcare plan.

David Rosenthal 1:30:59 Ah. Yeah, consumers are far away from any of this. [chuckles]

Ben Gilbert 1:31:03 And the healthcare plan says they share it in some fashion with the employer, in some part of their agreement to be the healthcare provider, the insurance provider for the employer. But this is a quagmire [chuckles] of a debate that is out of scope for this episode, and my favorite quote from one source that we talked to described rebates as a, uh, game of hide the sausage.

David Rosenthal 1:31:25 [laughing] Oh, gosh. Wow.

Ben Gilbert 1:31:27 But 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 sort of 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 Rosenthal 1:31:45 Wow.

Ben Gilbert 1:31:47 So that is the current state of what happens when many people or most people go and fill a prescription.

David Rosenthal 1:31:57 So 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, like, scale now really matters. And both companies are now on much more of an even footing. So in January 1989, the Novo Nordisk merger is finally announced, and it's a dual merger of both the operating companies and their respective foundations. So the two foundations merged into one, and the two operating companies merged into one as well. And I had to dig a bit to figure out the exact economic splits. I believe that the final ratio was sixty-two percent Novo and thirty-eight percent Nordisk. So Novo was still the kinda larger majority institution here, but this is a far cry from when discussions first started ten years ago, and Nordisk was this little, you know, "Hey, we're buying you for cash," essentially. No, now it's like, this is really a sixty/forty merger.

Ben Gilbert 1:33:12 It's crazy. The two guys that split off and 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 Rosenthal 1:33:21 Yeah, wild. And they drove each other to create all of this innovation over the years. So the new combined company has roughly a billion dollars in insulin revenue and fifty percent, five zero percent, global market share, with Eli Lilly just behind at forty-five percent and Hoechst at five percent. That kinda tells you right there how much the market has grown just during the decade of the 1980s. You know, that puts the total market size at roughly around two billion for insulin. Ten years ago, the total market size was five hundred million.

Ben Gilbert 1:33:56 Wow!

David Rosenthal 1:33:57 Yeah. Wow. The enzyme and other businesses within Novo, they 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 Brennum from the Nordisk side, they remain as co-CEOs for the next couple years. And Brennum notes that they are still a dwarf compared to the increasingly consolidated pharma market out there, "But we are, quote, a specialized dwarf that will probably create a certain furor on the global stage." And what they're referencing here is, as we were talking about, this is the era when just huge pharma mergers start happening. So Glaxo and Wellcome merge around this time, Astra and Zeneca merge around this time, Sanofi buys Hoechst. You know, these are all multi, multi-billion dollar, tens of billions of dollar transactions that makes Novo and Nordisk look kinda like small potatoes at the time. And actually, Wall Street and the investment community believes that this is really just the first step, that this is Novo and Nordisk and, you know, the leading insulin business in the world, sort of preparing itself for a further merger or sale into one of these new diversified global pharma conglomerates. And actually, this is crazy to think about in retrospect, but Novo Nordisk management agrees with that. That's actually their plan. Like, there's no rush here, but they think that they do need to merge into a larger organization.

Ben Gilbert 1:35:46 So they think the writing is on the wall, where we need scale in order to function in this changing marketplace, and so we're gonna merge in, and 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 Rosenthal 1:36:04 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, and kinda luckily, none of them come to fruition. And 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 and insulin treatment of Type 2 diabetics and all the supply that's unleashed by genetic engineering. So revenue and profit compound again at, like, twenty percent, sometimes twenty percent plus annually for, like, fifteen years there. [chuckles] They're firing on all cylinders. In the year 2000, they sign 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. And so by the end of 2003, annual revenue for the company is now over four billion dollars, and that's pretty much just on insulin alone. Remember, they've spun out Novo Zymes. All the subscale pharma businesses that Novo had are all gone. And that's when management finally decides to sell the company. [laughing]

Ben Gilbert 1:37:26 Ba na na.

David Rosenthal 1:37:27 Ba na na! So 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 Gilbert 1:37:43 Which is the only shareholder that matters.

David Rosenthal 1:37:46 But there's never been a conflict between the foundation board and the management board. Like, everybody's always been aligned here. [chuckles]

Ben Gilbert 1:37:53 But 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 Rosenthal 1:38:05 Yes, and there's a clause in the foundation's agreement with the company-... that there must be a, quote, "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." Now, in management's eyes, like we've just been talking about, there's so much consolidation happening in the industry. Like, of course, it is a necessary precondition, given everything going on, that we need to get to a larger scale, and so that's why we have, after ten plus years, finally found the right deal. So they go to the foundation board expecting that everybody's gonna see the light and just agree here, and the foundation board is like: Yeah, I mean, I hear what you're saying, but have you looked at our revenue and profit- [chuckles] ... growth over the last fifteen 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? And 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? And the foundation board is like: Uh, how about you come in and present to us with your financial advisors? [chuckles]

Ben Gilbert 1:39:30 My rubber stamp's feeling like it is not working right now. I'm not sure. [chuckles]

David Rosenthal 1:39:36 Yeah. Yeah. [laughing] Oh, my daughter loves to say when, uh, something doesn't go her way these days, she says, "Not working!" [laughing]

Ben Gilbert 1:39:41 [laughing]

David Rosenthal 1:39:41 Foundation board is like, "Not working." [laughing] So what ensues, 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, uh, the opposite of what happened at OpenAI, where, like, the foundation here is saying, like: "No, you must continue as an independent commercial entity." [chuckles]

Ben Gilbert 1:40:12 It's a fascinating analog, and 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 Rosenthal 1:40:24 Absolutely. One hundred percent chance, if this ownership structure were not in place, we would not be doing this episode today.

Ben Gilbert 1:40:31 And I don't exactly know what the deal terms were, but basically, in public company land, if anybody comes to you and offers you twenty-five to thirty percent higher than your shares are currently trading, congratulations, they get to own your company, and that didn't happen.

David Rosenthal 1:40:45 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 Gilbert 1:41:21 That is a mouthful, David.

David Rosenthal 1:41:22 That it is, but I'm pretty sure many of you know what that term means, or 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. [chuckles]

Ben Gilbert 1:41:39 Or Rybelsus, which just got FDA approval pretty recently.

David Rosenthal 1:41:42 Yes, indeed.

Ben Gilbert 1:41:44 So before we tell the story of how GLP-1s started being researched and the very unlikely place that they came from, we wanna thank our longtime friend of the show, Vanta, the world's leading security, compliance, and trust management platform. Vanta automates your security reviews and compliance efforts, so frameworks like SOC 2, GDPR, FedRAMP for payments, and critically for healthcare, HIPAA compliance and monitoring. Vanta takes these otherwise incredibly time and resource-draining efforts for your organization and makes them fast and simple.

David Rosenthal 1:42:18 Yep, it's the perfect example of a quote we talk about all the time on Acquired, Jeff Bezos's maxim to focus only on what makes your beer actually taste better. In other words, spend your time and resources only on what's actually gonna move the needle for your product and your customers, and outsource everything else that doesn't. Vanta and security, compliance, and trust management is this to a T. Every company needs it, especially every company operating in healthcare, and it plays a major role in enabling revenue because customers and partners demand it, but yet it adds zero flavor to your actual product.

Ben Gilbert 1:42:53 So enter Vanta. Vanta takes all the spreadsheets, fragmented tools, and manual reviews that go into managing modern security and compliance requirements and turns them into a single software pane of glass that connects all of your services via APIs and eliminates ninety percent of the work for your organization.

David Rosenthal 1:43:09 And it makes these otherwise static, point-in-time security reviews dynamic, so you can monitor your security posture in real time and share it with your customers and partners.

Ben Gilbert 1:43:19 Yep, and it scales all the way up from seed-stage startups to large enterprises like Autodesk, Gusto, ZoomInfo, many large AI companies, and more. They have over six thousand customers now and are quite a large enterprise themselves. So if your company is ready to automate compliance and go back to making your beer taste better, head on over to vanta.com/acquired and tell them Ben and David sent you. And thanks to our friend Christina, Vanta's CEO, all Acquired listeners get one thousand dollars of free credit. Our thanks to Vanta.

Ben Gilbert 1:43:49 So David, glucagon-like peptide-1 receptor agonist, what is it, and where did it come from?

David Rosenthal 1:43:58 Well, 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, uh, last night, I think, about this.

Ben Gilbert 1:44:17 Yeah, remarkably, there is this paper, I guess it's a paper, called Inventing liraglutide: a glucagon-like peptide-1 analog for the treatment of diabetes and obesity, that was published in 2019. But it is a first-person account by Lotte of the entire journey and her career, and how all the research went down and where it came from, that is published in ACS Pharmacology & Translational Science, publicly available to everyone. Like, she has just told the story, and it's very academic, scientifically written, but it's super cool that she's the hero of this story and sort of got to write how it all went down.

David Rosenthal 1:44:53 Yeah, super cool. We'll link to it in the sources.

Ben Gilbert 1:44:56 Yep.

David Rosenthal 1:44:57 So eventually, after a couple years, she switches from the enzyme division to the diabetes business. And 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. So 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 kind of like the first line of defense for type 2 diabetes before you progress to insulin treatments. And Novo doesn't have a drug in this category, despite being, like, the insulin leader. Novo and Novo Nordisk never had a viable oral anti-diabetic. So Lotte's part of this group that's looking for new candidates. So in the early to mid-'90s, Lotte starts digging into the academic research, and 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. And 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 Gilbert 1:46:41 Seems pretty straightforward. In fact, why don't you just go eat some GLP-1? Just get it into your body however you want, and I'm sure it'll work out.

David Rosenthal 1:46:48 Right. No big deal, except 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. So 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 gonna go away immediately. So a whole lot of people across the industry kind of bang their heads against the wall. Nobody can figure out how to make this work, and 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." So 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?" And then finally, a few years later, in the mid-'90s, management actually gives her an ultimatum, and they're like, "You either need to crack this and get an actual drug candidate in the pipeline within a year, or we're gonna shut down this whole program." And remember, this is even, like, Novo Nordisk, the world-class, most focused on pure-play diabetes research company in the world, and even they are like, "Yeah, we're almost ready to abandon this whole thing."

Ben Gilbert 1:48:19 Crazy. What year is this?

David Rosenthal 1:48:21 Uh, this is, like, '95, '96.

Ben Gilbert 1:48:24 All right. And she's been doing research on this since, like, '91, I think is when her and the team started cranking away on GLP-1 research inside Novo.

David Rosenthal 1:48:34 Around that, so a few years with nothing to show for it.

Ben Gilbert 1:48:37 Yep.

David Rosenthal 1:48:38 So [exhaling] she keeps tweaking the GLP-1 molecule, and again, you can do this with recombinant DNA, you can tweak any molecule. So eventually, she develops a GLP-1 analog, analog being, you know, similar type molecule, called liraglutide that includes a fatty acid grafted onto the molecule that helps prevent the body from breaking it down, and this is the big breakthrough. Liraglutide ends up having a half-life in the human body of thirteen hours, compared to, you know, like, a half-life of two and a half minutes for straight-up GLP-1.

Ben Gilbert 1:49:15 That'll help.

David Rosenthal 1:49:16 Yeah. That satisfies management's ultimatum.

Ben Gilbert 1:49:19 The mechanism by which it does this is totally fascinating. So you mentioned that the fatty acid gets attached to the GLP-1 to create this GLP-1 analog. 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 sort of 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. And so it protects the GLP-1 molecule from the degradation by enzymes, and it protects it from being sort of quickly cleared in the kidney because that sort of bound molecule is now too complex, too large to be filtered. So it kind of makes it like a big truck bouncing down a small highway in that the molecule is protected.

David Rosenthal 1:50:13 ... Yeah, and I think that's how she phrases it, too, when she describes it as protecting the molecule.

Ben Gilbert 1:50:18 Yep, the fatty acid sort of, uh, well, it makes it big and stick to stuff.

David Rosenthal 1:50:23 Sometimes it's good to have a layer of fat around you. [laughing]

Ben Gilbert 1:50:27 [laughing] Okay, so, a thirteen-hour half-life, you know, this liraglutide can become basically a once-a-day drug instead of an every five minutes drug?

David Rosenthal 1:50:37 Yeah. Well, I mean, eventually. But now here's the thing with this stuff: to get a whole new class of drugs to market takes a really long time. So this is a big breakthrough, kinda ninety-seven-ish timeframe, but, you know, Novo's like, "Great, we're gonna invest in this. This is promising. We'll see in a decade if we can get this to market." So they start the clinical trial path, first with animal trials for several years, then many phases of human trials, et cetera. And that brings us to two thousand and five, when the world's first GLP-1 analog drug finally comes to market for the treatment of type two diabetes. Of course, I'm talking about the world-famous, well-known Byetta from Eli Lilly. [laughing]

Ben Gilbert 1:51:26 Ba-na-na. Not a Novo drug, not from Lotte's work, and developed in a completely parallel way.

David Rosenthal 1:51:35 Not Ozempic, not Victoza, not Wegovy, something completely different. This might be the most random occurrence that we've ever had on Acquired.

Ben Gilbert 1:51:46 David, if I called you and said, "Ship me a lizard, this is important," would you do it? [laughing]

David Rosenthal 1:51:51 [laughing] Uh, knowing this context, I would actually say yes. An actual lizard.

Ben Gilbert 1:51:56 Is that where you're going?

David Rosenthal 1:51:57 Yes.

Ben Gilbert 1:51:58 Yes! Okay, great.

David Rosenthal 1:52:00 So during this time, in parallel to Lotte's work at Novo, two American researchers in the VA hospital system, the Veterans Affairs hospital system-

Ben Gilbert 1:52:11 Government employees.

David Rosenthal 1:52:12 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 Gilbert 1:52:39 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 just-- I have no idea how this got proposed and why people thought this was a good idea, but, like, incredible that it worked.

David Rosenthal 1:52:54 Incredible.

Ben Gilbert 1:52:55 So in nineteen ninety-five, 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 Rosenthal 1:53:10 Ooh. Well, I know one of the scientists at the VA was a guy named John Ang, and I believe he was at the VA hospital in the Bronx.

Ben Gilbert 1:53:19 I'll give you a hint: Daniel Drucker was not a researcher at the VA. He was at a university.

David Rosenthal 1:53:25 Ooh.

Ben Gilbert 1:53:26 Daniel Drucker, and I believe still to this day, was a researcher at the University of Toronto.

David Rosenthal 1:53:33 Oh! Amazing. [chuckles]

Ben Gilbert 1:53:35 Yep.

David Rosenthal 1:53:36 It comes full circle.

Ben Gilbert 1:53:38 And he owns the domain glucagon.com to establish some extra credibility.

David Rosenthal 1:53:43 I love it.

Ben Gilbert 1:53:44 Yeah, so it seems, best I can tell, that there were sort of parallel research efforts being done on the early GLP-1 and sort of place to find GLP-1 in the world to eventually turn it into a product.

David Rosenthal 1:53:56 [chuckles] The, uh, naturally occurring GLP-1 analog-

Ben Gilbert 1:54:01 Yes

David Rosenthal 1:54:01 ... 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 two thousand and five. It's FDA approved, and it works. It's not poisonous. It doesn't kill people. [chuckles] And it is the world's first GLP-1 analog to come to market. But, like, it is effective, but it's not, like, overwhelmingly more effective than traditional anti-diabetic orals like metformin and the like. And more importantly, the half-life is not as good as liraglutide, so Byetta requires two injections per day.

Ben Gilbert 1:54:46 Mm.

David Rosenthal 1:54:46 Which, you know, if you're a type two diabetic and you're not yet at insulin treatments, you're like, "Well, I could stick with oral anti-diabetics like metformin. I could go try this new thing, but that's gonna be two injections per day. Do I really wanna do that versus stick with orals and then transition to insulin injections when I need it?"

Ben Gilbert 1:55:07 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 Rosenthal 1:55:14 Big, big behavior change, totally.

Ben Gilbert 1:55:16 And 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 sort of making you behave more like a person without diabetes than you otherwise would.

David Rosenthal 1:55:34 Yes, correct.

Ben Gilbert 1:55:35 But many people still would need insulin on top, depending how far along the spectrum you are.

David Rosenthal 1:55:40 Yes. So that's two thousand and five. So then, in two thousand and seven, Lotte and Novo Nordisk's liraglutide GLP-1 agonist enters phase three human clinical trials.

Ben Gilbert 1:55:53 Yep, and 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. And I'm gonna quote Alex Telford, who wrote this really amazing long blog post sort of explaining how the clinical trial process works and why drug development has gotten so expensive and all that. We'll link to 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." And it is worth pointing out when I say the expensive one, twenty-nine percent-... of all R&D for a drug is spent right here. So Phase One is nine percent, Phase Two is twelve percent, Phase Three is twenty-nine percent, with the rest of it sort of coming from that early basic research, drug discovery, preclinical studies, and the, you know, a little bit later with the regulatory review. But, like, 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 Rosenthal 1:57:02 And my understanding is that most drugs never make it to Phase Three, and if you make it to Phase Three, that's, like, very promising. It's not automatic that you're gonna get approved and it's gonna work, but it's promising.

Ben Gilbert 1:57:14 It's a great question. Thanks to Alex, we have the data right in front of us. So here's the probability that a preclinical study even makes it to the phases. That's sixty-nine percent, so 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 fifty-two percent make it through Phase One, thirty-six percent through Phase Two, and only sixty-two percent through Phase Three. And once you get into regulatory review, then there's a ninety percent chance that you get approved, but each one of these gates filters out about half of the drugs that enter.

David Rosenthal 1:57:47 But I guess if you look at the, like, kind of lifetime risk of approval for a drug, by the time you make it to Phase Three, you're pretty far.

Ben Gilbert 1:57:53 So of the sixty-nine percent that even make it into clinical development, you've got thirty-six percent left at graduating Phase One, then thirteen percent left graduating Phase Two, then all the way at the end, eight percent graduating out of Phase Three. So 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 thirteen percent that have made it this far.

David Rosenthal 1:58:20 Yep. Cool. Okay. So as they're in trials, and Novo knew this, but it's starting to get confirmed, that, one, liraglutide is gonna be more effective than Byetta. Two, more importantly, it's only gonna need to be injected once per day 'cause the half-life is longer. And three, it's also now starting to be observed and confirmed in these human trials, something that Lada 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, and it seemed to have an effect on appetite. And if these rats had very large amounts of it, they would literally starve themselves to death and refuse to eat. And this effect is persisting in humans here in the Phase Three trials.

Ben Gilbert 1:59:14 Which wasn't a guarantee, 'cause there's lots of rat behaviors that then don't replicate in human trials. And so 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. Like, with the dosage of liraglutide that they were planning to sort of 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 Rosenthal 1:59:48 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 Gilbert 1:59:59 Right, which of course, compounds the problem.

David Rosenthal 2:00:01 Right. So Lada and her R&D team, they 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 Gilbert 2:00:24 Which in FDA speak is an indication. You're trying to get it approved for a second indication.

David Rosenthal 2:00:29 Yeah. Now, this was truly an out-there idea. There is a huge, huge stigma-

Ben Gilbert 2:00:37 Yes

David Rosenthal 2:00:37 ... around weight loss drugs. Enormous.

Ben Gilbert 2:00:40 Yes, the stigma is real, but there's also an interesting product efficacy thing here. So 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, and 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. And, like, 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's 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 Rosenthal 2:01:36 Yeah. You're talking about fen-phen?

Ben Gilbert 2:01:38 Yes. I mean, it dates way back, even before fen-phen, to the amphetamines in the '70s. People are taking speed because that's, like, the accepted weight loss drug.

David Rosenthal 2:01:47 Yeah, fen-phen was a combination of a drug with speed. One of the phens is speed, I believe.

Ben Gilbert 2:01:53 And so in the '90s, was it heart attacks?

David Rosenthal 2:01:56 Yeah, it was major heart damage.

Ben Gilbert 2:01:58 Yeah, so that scared the crap out of the FDA, out of companies that are pursuing weight loss drugs.

David Rosenthal 2:02:04 Yeah, this was a disaster. It kind of was like a grassroots thing that built up, and the two phens were independently approved for separate use cases. [chuckles] And a physician got the idea to combine them, and since both drugs were approved, Big Pharma was like, "Oh, wow! Weight loss drug, miracle drug. Let's commercialize this." And so they pushed the FDA to rush the process, which they did, thinking again, both of these drugs are approved, and it turned out that when used in concert, it caused major heart damage. So I think something like six million Americans took this thing, and, like, a large portion of them ended up with major cardiovascular issues.

Ben Gilbert 2:02:46 ... It's awful. I mean, that was the worst one, but there was, like, seven or eight over four decades of these either dangerous or just completely ineffective weight loss drugs. So most pharma companies completely steered clear of the black hole budget item that was weight loss research and development.

David Rosenthal 2:03:01 It's kind of going back to, uh, the beginning of the episode and Rockefeller's dad and the snake oil salesman. Like, this is the stigma around this stuff.

Ben Gilbert 2:03:09 Totally. And to illustrate this numerically, the annual obesity drug sales were only seven hundred and forty-four million dollars. Up until twenty twenty, the market for-

David Rosenthal 2:03:20 Wow!

Ben Gilbert 2:03:20 -weight loss drugs, you know, was just tiny 'cause basically nothing worked and everyone was scared of it. That seven hundred and forty-four million included the commercial sale of liraglutide for weight loss, which had, you know, already been on sale for six years. So why is everyone freaking out about Ozempic now? Like, does it feel like basically nothing worked before? It was true! Nothing worked before in a safe way. So there is sort of this, like, magic number around if you can actually safely enable someone to lose ten percent of their body weight or more, then there's a market, but otherwise, it basically rounds to zero 'cause people just don't think it's worth the trouble, and neither do the companies.

David Rosenthal 2:03:58 Yeah. It's like you need the appropriate amount of activation energy for the, uh, reaction to catalyze here.

Ben Gilbert 2:04:03 Exactly.

David Rosenthal 2:04:04 And just to, you know, put a really close-to-home, even finer point on the stigma, as recently as two thousand and five, two thousand and five, like, same year Byetta came out, Novo Nordisk's own official position on the obesity category, as articulated by the then CEO, Lars Sorensen, was, quote, "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 Gilbert 2:04:37 Now, imagine Lira and her team trying [chuckles] to get the company to release liraglutide for weight loss when that is the company's official position.

David Rosenthal 2:04:45 Right.

Ben Gilbert 2:04:45 You're like, "Look, I'm looking at these humans who are eating less."

David Rosenthal 2:04:49 Right. So, you know, what's going on here, and why is Lotte pushing for this? You know, she's a great scientist, well respected, you know, 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 Gilbert 2:05:11 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 Rosenthal 2:05:19 Yes, and Lotte knows this, too, obviously, because liraglutide, like the drug, the same drug, the same thing, has now been through twelve-plus years of super rigorous trials, starting with animals, now with humans, international approval processes. You know, there were issues along the way, like there are with any drug.

Ben Gilbert 2:05:40 Dude, the twenty ten trial was nine thousand patients across thirty-two countries. This is a big, expensive, almost two-year trial.

David Rosenthal 2:05:49 Yeah. She's like, "Yeah, I mean, we're pretty sure here this is about as safe as any drug possibly could be, and at least in the medium to short term, like, 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. So she eventually convinces the company to push forward with this, and in two thousand and seven, so only two years after the CEO made that statement, Novo enters a slightly higher dose version of liraglutide into human trials for weight loss. And why do minds change quickly on this? Like, 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. Like, if you could really crack this market... So at this time, back here in the mid two thousands, already about a third of the US population is medically obese, you know, defined as a body mass index over thirty. Two-thirds are medically overweight. The World Health Organization estimates that five hundred million people worldwide are obese. You know, so that's a total addressable market here of, like, a hundred 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.

Ben Gilbert 2:07:24 Yep.

David Rosenthal 2:07:25 And just like diabetes, it turns out that in most cases, obesity also is a chronic disease. So yes, you have this huge TAM of people, but it's also people that are then gonna be taking the drug probably for the rest of their lives.

Ben Gilbert 2:07:40 Which is just like a statin or, you know, there's 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, like, totally different than making a vaccine or making a, you know, hepatitis C cure or something like that. It really is a, for better or for worse, a durable, ongoing, recurring revenue stream.

David Rosenthal 2:08:02 This is annual recurring revenue here. Yeah. So in early twenty ten, Novo gets final approval for Victoza, which is the marketing name for the diabetes version of liraglutide. So five years after Byetta, Victoza is finally officially hitting the market in the US. And remember, this is just FDA approved for diabetes. But of course, everybody knows about these trials going on for weight loss and the ability to lose weight. It hits the market, and it is a enormous hit. It doesn't just overtake Byetta as the leading GLP-1 drug on the market for diabetes, it massively expands the market. So year one, in the first year that it's on the market, Victoza does roughly three hundred million dollars in sales.... The next year, the first full year it's on the market in twenty eleven, it does over a billion dollars in sales just in that year. So there's this concept in the pharma industry of a, quote-unquote, "blockbuster drug," and these are drugs that achieve a billion dollars in annual revenue.

Ben Gilbert 2:09:06 Sort of like, uh, the tech industry calling it a unicorn, when you have a billion-dollar valuation?

David Rosenthal 2:09:10 Yeah, exactly. [laughing]

Ben Gilbert 2:09:12 [laughing]

David Rosenthal 2:09:12 It's the pharma version of a unicorn.

Ben Gilbert 2:09:14 And these are like Lipitor, Humira, Advair. There's a bunch of examples, but that really are a huge breakthrough, address a large enough population. There's a bunch of ways to sort of slice it, but usually, they're drugs you've heard of.

David Rosenthal 2:09:27 Yeah, and Victoza hits it in, you know, its first full standalone year on the market, which is super fast. So what's going on here, obviously, is that people are not using Victoza just for diabetes. I mean, people are using it for diabetes, but people are also using this for weight loss.

Ben Gilbert 2:09:47 And you might be asking yourself: how does that work? If the FDA has only approved it for diabetes, what's going on there? Well, it is actually at the doctor's discretion if they want to prescribe an off-label use. So if a doctor does enough independent research or reads a study or... Technically, I don't think the drug companies can provide any marketing materials or sway the doctors in any way, so 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 Rosenthal 2:10:22 The FDA-sanctioned indication.

Ben Gilbert 2:10:23 Yes, the doctor can prescribe it for an off-label use.

David Rosenthal 2:10:26 Right, and that's not illegal. And let's be honest here, like, 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 can help me lose weight. What do I gotta do to make you prescribe it for me?"

Ben Gilbert 2:10:40 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.

David Rosenthal 2:10:46 Yeah. [laughing]

Ben Gilbert 2:10:49 We should say everything in healthcare has a modifier of sometimes, and 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 Rosenthal 2:11:04 Yeah.

Ben Gilbert 2:11:05 But David, it's not that effective. You can lose weight taking Victoza, but it's not necessarily a life-changing thing.

David Rosenthal 2:11:14 Right. So at the end of twenty thirteen, Novo submits Saxenda, the official weight loss version of liraglutide, to the FDA and EU for approval, and it's a slightly higher dose version, and expectations are at a all-time high for this. Novo's market cap has already been running. It now passes a hundred billion dollars on the anticipation of Saxenda's performance, and it's not that big a hit. It's a hit. It has good sales, and to be fair, I think a large amount of the early adopter GLP-1 weight loss market was already just using Victoza, so 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 eight percent BMI reduction, you know, which is meaningful, but it's not that meaningful.

Ben Gilbert 2:12:18 In research, it is crazy. I heard over and over again, physicians and other people in the industry echo this kind of magical ten percent weight loss reduction number, where there was always this belief in the industry that if something could reliably help you lose ten percent or more, then it sort of tips, and Saxenda just didn't get there.

David Rosenthal 2:12:36 Yep. So regardless, the next year, twenty fifteen, is a record year. Total company revenues for Novo Nordisk hit sixteen billion dollars, which is incredible for a pure play [chuckles] diabetes and now diabetes and, relatedly, obesity pharma company, but the stock flatlines.

Ben Gilbert 2:12:56 Yeah, and 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, and 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. And so this sort of Saxenda not being the blockbuster drug that, you know, expectations had trumpeted it up to be, plus this increasing pressure around insulin and I think a CEO change.

David Rosenthal 2:13:28 Yeah, well, the CEO change, I think, was a result of this. So what you're leading up to is, in twenty sixteen, the stock takes a forty percent hit, which is wild. You know, today, at the beginning of twenty twenty-four, this is a half a trillion-dollar [chuckles] company, and a few years ago, it was a well less than hundred billion dollar market cap company.

Ben Gilbert 2:13:47 Yep, but there was that really dangerous narrative that these GLP-1s aren't gonna be as crazy as everyone, at least everyone in the know, thinks, and also, their only franchise of insulin is suddenly under fire.

David Rosenthal 2:14:00 Yeah. So in September twenty sixteen, the then CEO, Lars Sorensen, resigns. Current CEO, Lars Jorgensen, takes over.

Ben Gilbert 2:14:09 Amazing. So wonderfully Danish.

David Rosenthal 2:14:11 Sidebar, this is wild. So right now, today, as we record this, Novo Nordisk is the fifteenth largest company in the world by market cap, and when I was doing research for this episode, I, of course, Googled Lars Jorgensen. When I did, the results that Google gave me, results one through six were for the University of Kentucky swimming coach- [laughing]

Ben Gilbert 2:14:33 [laughing]

David Rosenthal 2:14:33 -who is also named Lars Jorgensen.

Ben Gilbert 2:14:35 Talk about below the radar.

David Rosenthal 2:14:37 Who I'm sure is a great and storied, you know, NCAA swimming coach. [laughing]

Ben Gilbert 2:14:42 [laughing]

David Rosenthal 2:14:42 But it wasn't until number seven when I actually got the CEO of Novo Nordisk. That is how, like, underappreciated this company is.

Ben Gilbert 2:14:50 It's crazy.

David Rosenthal 2:14:51 ... Anyway, right around this same time, Novo begins phase three trials with their new next generation improved GLP-1 analog, semaglutide, which I think is pronounced semaglutide. [laughing]

Ben Gilbert 2:15:06 [laughing]

David Rosenthal 2:15:07 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 Gilbert 2:15:15 The most reputable source we could find seemed to say semaglutide.

David Rosenthal 2:15:19 Yes.

Ben Gilbert 2:15:20 Which makes sense, you know, coming out of liraglutide, and I believe there's a dulaglutide, so we're rolling with semaglutide.

David Rosenthal 2:15:26 Acquiredfm@gmail.com if- [chuckles]

Ben Gilbert 2:15:28 [chuckles]

David Rosenthal 2:15:28 ... you disagree. [chuckles] And semaglutide has several benefits over liraglutide. One, 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. Two, and much more important for the near term, it is twice as effective as liraglutide for weight loss. So we're talking fifteen percent plus long-term BMI reduction, which is well beyond, Ben, as you were saying, the ten percent magical threshold. [chuckles]

Ben Gilbert 2:16:14 Yep. It moves from the domain of irrelevancy to the domain of, "Is this a miracle drug?" in the press.

David Rosenthal 2:16:21 And there's some more, um, benefits, potential benefits that we'll talk about in a little bit here. But 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 Gilbert 2:16:45 Yep. So 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, and 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. And 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 sort of what people feel. It can also slow digestion, so 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. And David, you mentioned that fifteen percent weight loss, they're still studying exactly why it works, but it's believed to be that it's sort of these two mechanisms working in action together. And as you can imagine, food taking longer to move through your system kind of can make you feel gross, like the side effects naturally include things like nausea, vomiting, constipation, things like that. But these reports of side effects are pretty widespread. I listened to a bunch of things, one of which was a Tegas 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. So it's sort of this, we don't exactly know why it works. We have studied it a bunch, so we know that it works, but you can sort of imagine why the side effects might be linked to the idea that if you're eating, you know, really calorie-dense food, really fatty food, hard-to-digest food-

David Rosenthal 2:18:14 And it's moving slower.

Ben Gilbert 2:18:15 Right. I wouldn't want food either.

David Rosenthal 2:18:17 Yeah.

Ben Gilbert 2:18:18 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. But 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, and it sort of 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. You know, it sort of solves the debate that had been going on for decades of, is it a behavioral problem or is it a medical problem? Well, 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 Rosenthal 2:19:12 Right. So twenty eighteen, Ozempic finally hits the market for diabetes, and then in twenty twenty-one, Wegovy gets approved for weight loss. Ozempic does over a billion dollars in revenue in twenty nineteen, its first year on the market. It's clear it's gonna be a huge hit, and it's, like, even more than that. This is, like, even more than Victoza back in the day. It does a billion dollars in revenue, but, like, it's massively supply constrained. [chuckles] Like, it coulda done a lot more. These drugs still, Ozempic and Wegovy, could do a lot more revenue than they are doing right now.

Ben Gilbert 2:19:47 Which, by the way, on earnings calls, the company says: Yeah, that's gonna be true for a long time. The demand [chuckles] for this drug will continue to massively outpace our supply, and 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 Rosenthal 2:20:03 Yes. So at this point, you know, 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 Gilbert 2:20:13 Thirty-two years after Lada and her team started this research.

David Rosenthal 2:20:17 Right. If anything, we think of this company as like, "Oh, it's the GLP-1 company. It's the weight loss drug company." And like, no, [chuckles] 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, and that grew naturally out of the diabetes and the insulin research and Lada's work, and sort of 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. So when Wegovy finally launches in the US in twenty twenty-one 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. [chuckles] People were already, quote, unquote, "misusing Ozempic for weight loss" before this. So, like, Ozempic supply was fully exhausted, and then now Wegovy supply, fully exhausted.

Ben Gilbert 2:21:33 Well, in February of twenty twenty-one, after the clinical trial finishes on semaglutide for weight loss, so 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. So like, with the biggest megaphone you could possibly point at people, they're being told, "This thing freaking works, and it's a miracle drug."

David Rosenthal 2:22:00 Yeah. And we'll talk a lot more about pros and cons and 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. [chuckles] In twenty twenty, right before all this hit and as Ozempic was coming online, the market cap had climbed back up above a hundred billion. Summer twenty twenty-one, it hits two hundred and fifty billion. By the end of twenty twenty-two, it hits three hundred 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. Like, Novo Nordisk is up during this period. And then this past summer, in twenty twenty-three, it passes four hundred billion market cap, and it is currently flirting with the half a trillion dollar mark. Revenue goes from twenty billion in twenty nineteen to twenty-five in twenty twenty-one, thirty billion in twenty twenty-two, and in twenty twenty-three, so far, in the first three quarters that they've reported, it is up another thirty percent year on year. Of course, with Ben, as you said, years' worth of supply constraint, [chuckles] demand pipeline.

Ben Gilbert 2:23:11 Yep. That is pretty crazy. David, you mentioned it is the GLP-1 company already, and that sort of transition has already occurred. You're totally right. Looking at the numbers, fifty-one percent of their revenue comes from diabetes-focused GLP-1 drugs and an additional eighteen percent from obesity-related GLP-1. So sixty-nine percent of their revenue comes from semaglutide or liraglutide. I mean, it's crazy. That happened in a decade.

David Rosenthal 2:23:38 Yeah, totally wild.

Ben Gilbert 2:23:41 Insulin has become, to your point, it's still a part of the business, a smaller share of the business. Again, this is of revenue, not of profits, but twenty-two percent of their revenue today comes from insulin. That leaves about nine percent from the other efforts that they're putting energy into, rare diseases, so things like hemophilia. They continue to be a ridiculously concentrated company. They make about ten billion dollars a year in net income, so they're also a very, very profitable company, among the most profitable in all of pharma. The fifty-five thousand employees, so it's a huge international company at this point. And I wanna 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 'cause we talk about them on every other episode. Gross margins [chuckles] are better than software. They run about eighty-four percent. Lilly is also a very high-margin company, running about eighty percent. For context, Microsoft has a gross margin of seventy percent, and Google is fifty-six percent.

David Rosenthal 2:24:42 How is Google's gross margin fifty-six percent? They must be stuffing a lot of other revenue besides Search into the top line.

Ben Gilbert 2:24:49 I assume all the billions they pay Apple comes out of cost of goods sold, all the traffic acquisition costs.

David Rosenthal 2:24:55 Probably also for their infrastructure and for Google Cloud.

Ben Gilbert 2:24:58 Yep. So at eighty-four percent gross margins, you should know they're ten percentage 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. So they've sort of threaded a needle that if you were pitched a blank canvas, you would say, like, "Well, it's impossible. You need to make a trade-off somewhere." If you're gonna 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. And turns out, the thing that they picked, they can be both.

David Rosenthal 2:25:36 Yes, and also, it gets better. So because semaglutide has such a long half-life relative even to liraglutide, I mean, it's a once-weekly injection, so like, you know, 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, like, five minutes. So having GLP-1s active in your body for so long, it's reaching other tissues in your body that normally GLP-1s wouldn't. And indications are showing that that is beneficial [chuckles] for those organs. So 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, many others. Again, this is all for like a molecule that, through FDA processes and EU processes, has been deemed safe enough to be on the market for the accepted use cases. 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 Gilbert 2:26:55 Could be. Everything is really early, but it really might earn the title of miracle drug.

David Rosenthal 2:27:00 It really might. Now-... Not a scientist at all. This is just my thought looking at this. But yes, could be a miracle drug for humanity and certainly already is a miracle drug for Novo Nordisk in terms of financial performance. [laughs]

Ben Gilbert 2:27:16 [laughs]

David Rosenthal 2:27:16 Like, no doubt about that one.

Ben Gilbert 2:27:18 No doubt about that. Well, this is a very good place. I've got a couple of broad topic areas that I wanna hit here. Let's start with the general state of affairs of GLP-1s today. So the first thing to know is sticker price. The price of Ozempic to treat diabetes is north of one thousand dollars, and Wegovy for weight loss is north of thirteen hundred dollars per month before insurance, and this is in the US. So expensive, right? That's a lot of money. In Canada, [chuckles] of course, Ozempic is a hundred and forty-seven dollars a month. In the UK, it's ninety-three dollars a month. So everything that I'm about to talk about is a uniquely American problem, much like most problems in our healthcare system. So how do these drugs get paid for in the US? Well, 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. Well, first let's talk about private insurers. You might have coverage by your company's insurance, and this is a good place to talk about the two most pernicious issues in the entire US healthcare system that are deeply intertwined: one, incentive alignment, and two is time horizon. So the average American in the private sector holds a job for three point seven years.

David Rosenthal 2:28:39 Mm-hmm.

Ben Gilbert 2:28:39 That means that on average-

David Rosenthal 2:28:40 I see where you're going with this.

Ben Gilbert 2:28:41 [chuckles] Insurance companies are going to churn you every three point seven years or sooner if your company changes the insurance plan. So their incentive is to cover you only in two categories of things: one, things that pay themselves back in less than three point seven years, or two, things that have such an overwhelming demand from employees that their employers think that they absolutely have to cover them to stay competitive. Now, 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? I mean, 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-

David Rosenthal 2:29:33 Yeah

Ben Gilbert 2:29:34 ... or your current employer.

David Rosenthal 2:29:35 Oh, man. So if I'm an insurer, I'm like: Great, I'm gonna offload all that onto Medicare. [chuckles]

Ben Gilbert 2:29:40 Exactly. The insurers are not really holding the bag for this class, you know, these chronic conditions. This is the crux of the incentive problem in our healthcare 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 Rosenthal 2:29:58 They're invested in your health for your plan life with them. [chuckles]

Ben Gilbert 2:30:03 Exactly. So what is the exception? The exception is if your carrier is the US government. So let's talk about Medicare, and 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. So Medicare is through the US federal government. It is a health insurance for people who are over sixty-five, basically. The US federal government funds that plan with taxpayer dollars, and so a while back, which is actually not that long ago, just like twenty years ago, Medicare did not cover prescription drugs at all. Medicare Part D was passed into law in two thousand and three and took effect in two thousand and six. It allowed Medicare to cover drugs, not just hospital and doctor visits, which was Part A and Part B. So today, Part D, interestingly enough, is legally prohibited from paying for 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 twenty thirteen that basically has never been passed to try to get through.

David Rosenthal 2:31:07 Interesting. Do you know if this was a result of the Fen-Phen debacle?

Ben Gilbert 2:31:10 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 Rosenthal 2:31:19 Yeah, I could see the argument of, like, why is the whole taxpayer base covering, you know, people who should just be exercising more?

Ben Gilbert 2:31:26 Yeah.

David Rosenthal 2:31:26 Even though, like, it's definitely been proven that that is not the case, [chuckles] it's not their fault.

Ben Gilbert 2:31:31 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. And for those who do lose weight, there are biological mechanisms making it hard to keep it off." So what is so interesting about [chuckles] Medicare is that we will all end up on it one day when we retire and we get off of our private insurance. So it does mean the government is left holding the bag with our health for the long term. So there are really two parties with aligned interests for us to stay healthy: ourselves and Uncle Sam. And for us, it's actually quite hard to look out for long-term interests 'cause the feedback loop is too long. So, like, I go out and drink, even though I'm gonna have a hangover the next morning, and that's only a twelve-hour feedback loop. Like, lots of times you make long-term bad decisions. So the question is: Can Uncle Sam fix that problem in some way? Well, it is far too early to say whether these recent GLP-1s are actually miracle drugs that massively reduce the complications later in life. And David, you mentioned there's research being done to figure out it might reduce heart attacks meaningfully, and 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 healthcare bills down later in life.

David Rosenthal 2:32:57 Yep.

Ben Gilbert 2:32:58 So 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 kinda net out on the benefits of these long-term things.... and taking the sort of moral thing aside of like, 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 gonna need knee replacements, and hip replacements, and diabetes treatment, and amputations, and cardiovascular interventions.

David Rosenthal 2:33:32 Right. That is kind of the crux of the, uh, broader societal debate and issue here is obesity leads to such a huge amount of comorbidities and disease and health problems and issues, and, you know, that's even just talking about the medical system, let alone everything outside of the medical system that it leads to. And is it worth a certain amount of both risk in terms of the drugs and cost and tax on society to save those expenses later? That's the question here. [chuckles]

Ben Gilbert 2:34:05 Right. So 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, and the list price of these drugs is over twelve thousand dollars per person per year. So insurance companies, employers, Medicare, they literally don't have the budget right now to fund all the demand for these drugs. So even if we had all the supply... So there's a lot of, uh, 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 Rosenthal 2:34:44 Yep. 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 Gilbert 2:34:52 Yes, please tell me about tirzepatide.

David Rosenthal 2:34:55 [laughing] Yeah. So 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 Gilbert 2:35:26 And tirzepatide is basically the same. It's a GLP-1 receptor agonist, but it is also a GIP, which they're 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 Rosenthal 2:35:45 So that's showing great promise. It was approved in the US for diabetes treatment in May 2022, and approval just came recently in November 2023 for official FDA-sanctioned weight loss use case under the marketing name Zepbound, so look for that in 2024. What this really shows, though, between Eli Lilly and Novo and other companies that are almost certainly gonna get into the GLP-1 business, I think this is gonna be like insulin all over again, where there's just gonna be a series of product improvements, and companies will drive innovation and increase supply. I mean, 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. So 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 Gilbert 2:37:03 Yep, and 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 sort of our modern canonical example. Cellular connectivity, plus GPS, plus iPhone sort of made it possible to do something for the first time. Multiple parties were arriving at the same time to do that, and I think science had sort of just arrived at a place where multiple parties could develop similar things side by side. And so 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 Rosenthal 2:37:39 Totally.

Ben Gilbert 2:37:40 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? Like, what are most people actually paying? 'Cause list prices of drugs, as we discussed earlier, is stupid.

David Rosenthal 2:37:56 [laughing] At least in the US, yeah.

Ben Gilbert 2:37:58 Yes. So there are a lot of reports of people paying somewhere in the neighborhood of three hundred dollars a month after insurance as their actual cost, and 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 twenty to fifty percent copay on these drugs. So at a thousand dollars, you know, that's two to five hundred dollars. So on the one hand, it's still very expensive, three to four thousand dollars out of pocket per year. That's probably, like, my entire out-of-pocket healthcare spend in an expensive year. You know, 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. Now, it's easy for us sitting here to say something like that, 'cause there's a lot of people that don't have that kind of cash to spend on something that could potentially change their life. So 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 wanna say on the current state of GLP-1s is that non-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 sixty-eight percent of people roll off it after a year, and part of this is related to price or changing insurance that doesn't cover it, or that it's hard to find since they're still supply constrained, or maybe there are side effects that a doctor is not sort of like staying on top of with you, so you just get fed up, and you're like, "Screw this, I'm off." But a lot of employers and insurance companies are sort of 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, you know, ninety percent of the benefit goes away, and your weight yo-yos back up. So there's some very real things to figure out in making sure that you can prescribe these GLP-1s in a way that come with enough hand-holding to help you understand and manage the side effects and make all the behavioral lifestyle changes that you sort of need to, to make them be effective and sustainable.

David Rosenthal 2:40:01 Interesting. I hadn't found that about non-adherence.

Ben Gilbert 2:40:04 Yeah, it came up in a bunch of Tegas calls. There must have been some hedge fund investor trying to dig into building a model of non-adherence into their DCF. Well, before we go into analysis, there is a little bit of catching up to do on the insulin market, because we kinda left it as, hey, it's still twenty-two percent of, uh, revenue in Novo's business, and, you know, big three companies, uh, Sanofi and Eli Lilly and Novo really compete here, and they've iterated to become great products over time. Well, one thing that we didn't talk about is the complete destruction of how attractive it is to operate an insulin business, and this is super recent. So 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, uh, delivery pen mechanisms that we keep improving over time, that are proprietary, that give us some pricing power, that we keep revising the formulations, so we keep getting the ability to patent new things. It's kinda difficult to manufacture because it is developed from living cells, so we're not just pouring chemicals into a vat. We do have to do some complex work to produce the insulin, so somebody's not just gonna waltz in here and figure it out. And that was a pretty widely held view and one of the reasons why I think these companies thought they had so much pricing power, which they got in trouble for. So one thing that happened was a big controversy over pricing that we talked about. In twenty twenty-one, US officials alleged that Novo Nordisk increased prices more than six hundred percent between two thousand and one and twenty nineteen in lockstep with competitors to the detriment of diabetics. Now, Novo, of course, denied this, and they pointed out that the net prices had actually decreased since twenty seventeen. So very convenient that they just talked about the last two years of that eighteen-year accusation. So 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 wanna 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. So you've got regulation that came in after the public outcry, so there's 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. So traditional drugs have generics and biologics have biosimilars. Biosimilar insulin became a thing, and so a lot of the profits just got completely arbitraged away, and GLP-1s are here, so those are reducing demand for insulin, too. Those three things, in the last like five years or so, created this complete perfect storm for insulin to be a super unattractive business.

David Rosenthal 2:42:55 Interesting. Obviously, as we've shown throughout this story, it's not like Novo Nordisk planned it that way. However, this has really to their great benefit, right? Because of all the insulin manufacturers, I mean, I guess Eli Lilly was first to market with GLP-1s, but Novo really created the true GLP-1 market and were the ones to really benefit from these early years, while the competitors are catching up.

Ben Gilbert 2:43:20 In many ways, 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 Rosenthal 2:43:29 It's like the headphone jack. [chuckles]

Ben Gilbert 2:43:31 Right.

David Rosenthal 2:43:31 [laughing]

Ben Gilbert 2:43:32 Was it courageous, or did they see the writing on the wall that eventually we're not gonna make any money from insulin, and 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 kinda think it was a happy accident that the timing worked out, but there are different ways to look at it.

David Rosenthal 2:43:49 Yeah. I certainly didn't find anything in my research that suggests it was anything but a coincidence. [chuckles]

Ben Gilbert 2:43:55 Yeah. It's interesting to think about the fact that these companies thought that biosimilars weren't just gonna waltz in and, you know, 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.

David Rosenthal 2:44:20 [laughing]

Ben Gilbert 2:44:20 Otherwise, the castle becomes better. You need a bigger moat. In nineteen ninety-nine, I think it was, Eli Lilly sold seven hundred million dollars of insulin in America. Nineteen ninety-nine. By twenty seventeen, just two of their products sold two point six billion dollars in America.

David Rosenthal 2:44:38 Yeah, two of their insulin products.

Ben Gilbert 2:44:40 Yeah, seven hundred million to two point six billion. It's just an illustration of how large and how interesting that revenue stream became for other people to go after.

David Rosenthal 2:44:50 Totally.

Ben Gilbert 2:44:51 All right, should we get into power? We're kinda there anyway. We're kind of in analysis land here.

David Rosenthal 2:44:55 Yeah, let's talk power. And, uh, 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 Gilbert 2:45:13 ... Yeah, or put another way, how to be more profitable than their closest competitor and do so sustainably. So the seven powers are counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resource. So the first thing I wanna say is, we are in the pharma industry, and so the one that has a blinking red light around it is cornered resource.

David Rosenthal 2:45:42 Yes, this is a patent-driven industry. [chuckles]

Ben Gilbert 2:45:45 Yes. Novo Nordisk has the patent on semaglutide until twenty thirty-two, and this is an industry where when you have the patent and you are able to make an N of one drug, and, you know, we're not quite seeing an N of one drug here, but it's an N of two drug, you get the profits. And frankly, the crazy thing is when you look at some of the analysis, the profits evaporate within two years of your patent going away. Now, that was from the previous era before biologics, so now that things are harder to copy because the molecules themselves are more complex, and they require growing living tissue-

David Rosenthal 2:46:24 More engineering.

Ben Gilbert 2:46:25 Yeah, that would fall more under process power and frankly, scale economies, because it requires more capital. But right now, like historically, pharma is a patent-driven, cornered resource industry.

David Rosenthal 2:46:38 Yep. I think how this GLP-1 kind of super cycle is gonna 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 like this ever-stacking waves of patentable innovation and product innovation happening here. So like, yes, the semaglutide patent will expire in twenty thirty-two, but if CagriSema, their new kind of 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, cornered resource, for sure.

Ben Gilbert 2:47:23 Yep. The patents aren't just on the molecules. They also patent delivery mechanisms, and so they keep changing delivery mechanisms. You basically have the scenario where doctors don't really wanna prescribe the old thing, and so 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." And so there's like 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. And, you know, there's a lot of people in pharma that are gonna get mad at me for that characterization, but in addition to patenting molecules, delivery mechanisms also provide defensibility.

David Rosenthal 2:48:01 Yep. Yep, yep.

Ben Gilbert 2:48:02 One question I had was, there might be, like, contractual things that entrench relationships, too. Like, when you get really big, and this would be a scale economy, are there contractual relationships with formularies that sort of 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 Rosenthal 2:48:37 Yep. I think that falls into scale economies-

Ben Gilbert 2:48:39 Yeah.

David Rosenthal 2:48:39 -which for sure also apply here. [chuckles]

Ben Gilbert 2:48:42 Yep.

David Rosenthal 2:48:42 I think really on three sides: on the R&D and research side, 'cause that is incredibly capital intensive.

Ben Gilbert 2:48:48 Two point three billion dollars a drug.

David Rosenthal 2:48:50 Yep. 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 Gilbert 2:49:00 Right. And the gigantic amount of R&D, it literally is two point three billion dollars 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 Rosenthal 2:49:18 Yep. I think we can say there's no network economies here [chuckles] pretty safely, and I think we can probably also say there's no branding, although Ozempic has become such a buzzword.

Ben Gilbert 2:49:30 Oh, I think there actually is. Normally, there isn't, but that's one of the breakout things about Ozempic, is there actually is brand power. The first time I heard about Mounjaro was eighteen months after I'd heard about Ozempic, and I was like: Oh, it must be some kind of knockoff. You know, 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. And, like, the studies show Mounjaro helps you lose more weight and has a very similar mechanism, plus another mechanism that together work... But, like, 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 Rosenthal 2:50:11 Jimmy Kimmel was talking about it, yeah.

Ben Gilbert 2:50:13 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 Rosenthal 2:50:21 Yeah. I mean, there's like Tylenol, et cetera, but like, 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-

Ben Gilbert 2:50:39 Oh, that's so funny!

David Rosenthal 2:50:40 ... "Oh, that must be a crappy knockoff," and did a cursory amount of research, and I was like, "Holy crap, it's the same drug from the same [chuckles] company. Like, I'm an idiot."

Ben Gilbert 2:50:46 It's, like, literally the same thing.

David Rosenthal 2:50:48 It's literally the same thing.

Ben Gilbert 2:50:49 Often in the same doses. It's technically a higher dosage, but you can get many different dosage levels of either drug.

David Rosenthal 2:50:56 Right. And not only that, it is the one that is supposed to be for weight loss. [chuckles] But you're right, Ozempic has become this brand name.

Ben Gilbert 2:51:03 Yep, Vitamin O or Oz or, yeah, there's all sorts of... I've been reading the Ozempic subreddit for a while to prep for this episode. [laughing]

David Rosenthal 2:51:11 Oh, boy. [laughing] I bet you found some fun stuff in there.

Ben Gilbert 2:51:13 Totally.

David Rosenthal 2:51:14 Switching costs are a thing.

Ben Gilbert 2:51:17 ... switching costs with any drug are a big thing, because once you find something that works for you, you never change. Like, I've been on citrisine hydrochloride for my allergies for fifteen years. I think it's Zyrtec. And like, no, I'm not trying anything else. It works. Why would I try something else?

David Rosenthal 2:51:31 Yep, and 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 Gilbert 2:51:40 Yeah, that's one of the worst things about it. I will also throw in network economies.

David Rosenthal 2:51:46 Oh, I had said I thought there was none, but, uh, I wanna hear your case for it.

Ben Gilbert 2:51:50 Well, so I think most of the time in pharma there's none. But with Ozempic-- So I think there's two ways in which GLP-1s used for weight loss resemble consumer tech products.

David Rosenthal 2:52:04 Oh.

Ben Gilbert 2:52:05 One is a tight feedback loop. When I start taking Lipitor, I don't, like, 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, like, if I lose, what, six pounds in the first month, there is a super tight feedback loop there. And so in the same way that Zynga created these feedback loops for mobile gaming, and that sort of 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 kind of become a walking billboard.

David Rosenthal 2:52:43 Hmm. Yeah.

Ben Gilbert 2:52:44 There's a little bit of a taboo around sort of 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. [chuckles]

David Rosenthal 2:53:01 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.

Ben Gilbert 2:53:15 Yeah.

David Rosenthal 2:53:15 But, I mean, literally, you become a walking billboard. [chuckles] Like, it is a obvious word-of-mouth marketing.

Ben Gilbert 2:53:21 I guess the only one would be, like, uh, the taboo thing. If I'm taking Ozempic and I'm ashamed of it 'cause I'm the first person, if a million more people start taking it, then it is actually better for me.

David Rosenthal 2:53:30 Right. If Elon Musk tweets that he's taking it-

Ben Gilbert 2:53:32 Wegovy.

David Rosenthal 2:53:33 Yeah. [laughing] But again, it's the same thing.

Ben Gilbert 2:53:37 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 'cause you have to take it on an empty stomach, and then not eat for thirty minutes afterwards, but if you don't like needles-

David Rosenthal 2:53:52 I believe it is also not quite as effective as the injectable version.

Ben Gilbert 2:53:56 Huh.

David Rosenthal 2:53:56 But still, it is an amazing feat of engineering that they created an oral version of this.

Ben Gilbert 2:54:01 And 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? Because it-- the issue with the GLPs is it can't get absorbed into your bloodstream by you putting it in your mouth, and then it going into your stomach and, you know, it's hitting at the harsh environment of your stomach. So, like, figuring out how to make something go from your stomach into your bloodstream for a sustained period of time.

David Rosenthal 2:54:26 Right. Protect the molecule enough.

Ben Gilbert 2:54:28 Right. That is sort of the Novo magic.

David Rosenthal 2:54:31 Yep. Wow, there's a lot of power here. I think the only one we haven't talked about yet is counterpositioning, which is interesting. You know, maybe you can make an argument, at the beginning, there was, 'cause this could disrupt the insulin market, but I don't really think so.

Ben Gilbert 2:54:47 Yeah, and counterpositioning basically always exists in the takeoff phase and never exists later. I think that we keep kind of finding that pattern over and over again, is incumbents don't really counterposition, startups counterposition.

David Rosenthal 2:54:58 Yep.

Ben Gilbert 2:54:59 Yeah, 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. And I know biotech investing in startups is a thing, and there'll be new disruptions on the horizon, CRISPR and gene and cell therapies and things like that, but the last thirty years, at least, of healthcare, has consisted of returns to scale, which would indicate lots of power.

David Rosenthal 2:55:32 Yep. And it'll be interesting to explore healthcare broadly and specifically biotech more on the show. My sorta 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 Gilbert 2:55:51 Yep, that's right. Or they do a deal, 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, and the wholesaler distributors handle physically moving the drugs. But when you do a, quote, unquote, "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 broad scale.

David Rosenthal 2:56:21 And really, this model all started going back to Genentech and Eli Lilly, and Genentech ended up getting acquired by Roche. But it was that partnership of Eli Lilly being the go-to-market for Genentech and insulin that started this whole, you know, startup, big pharma partnership.

Ben Gilbert 2:56:38 Yep. All right, playbook?

David Rosenthal 2:56:40 Playbook. Let's do it.

Ben Gilbert 2:56:43 So 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 ten pharma companies by revenue. In fact, they're twentieth.

David Rosenthal 2:57:11 [chuckles] Wow, I didn't realize they were that low.

Ben Gilbert 2:57:13 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 Rosenthal 2:57:31 You know, it's funny, I was thinking the same thing as my main playbook takeaway from this one. It reminds me of our Sequoia Capital episodes a few years ago, and Sequoia's kind of historical classic mantra, the Don Valentine ethos of,