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Ozempic and the Substitution Trade

The diabetes drug Ozempic has made headlines recently as the secret behind several slimmed-down stars of the Bravo network’s “Real Housewives” franchise. Tabloid fodder doesn’t usually matter to investors, but the story of Ozempic is one worth reading.

The twist is that Ozempic, a trade name for semaglutide, is a diabetes drug, not an obesity drug. Semaglutide is however effective in inducing weight loss; its creator Novo Nordisk markets a separate version called Wegovy specifically for obesity. Wegovy became so popular there were shortages of it, so doctors began prescribing Ozempic “off label” for a condition other than its intended use. That popularity fueled Novo Nordisk shares and this month it pushed past LVMH as Europe’s most valuable company.

Ozempic being used as a substitute for a different medical treatment goes beyond Novo Nordisk selling the same drug under different names. Ozempic could also serve as a replacement for people contemplating bariatric surgery, since it stands to reason that anybody considering surgery would likely be willing to try a less-invasive treatment. Recently, Intuitive Surgical noted a slowdown in the growth of bariatric surgical procedures because of the increasing use of drugs such as Ozempic. “Some customers have indicated that they are seeing increased patient interest in weight-loss drugs,” Intuitive chief financial officer Jamie Samath said in July.

Given that obesity is the most important reversible factor contributing to sleep apnea, there’s a chance Ozempic and similar drugs could become a treatment for that, too. Eli Lilly, for instance, is running a study of its type 2 diabetes medication Mounjaro, which is in the same drug class as Ozempic/Wegovy, as a possible treatment for sleep apnea. Results are due in March 2024.

That could be a problem for a company like ResMed, which makes sleep-apnea treatments with its CPAP (continuous positive airway pressure) therapy. These are machines that force air through the patient’s nasal passages, enabling better sleep. For patients, the issue may go beyond just which treatment is more effective.

Cost will be a big factor. Medicare and private insurers cover Ozempic for its commercially approved use, diabetes, but not for weight loss or other off-label uses. That could be important because the cost of Ozempic can be considerable (without insurance, it can cost about $1,000 a month). For sleep apnea patients, ResMed products may end up delivering the same or better results at a much lower price.

ResMed CEO Michael Ferrell in fact seems to welcome the new attention, since sleep apnea tends to be an underdiagnosed condition. Ozempic and similar drugs could bring potential patients “into the funnel,” he said on a conference call, while issues like cost and side effects will limit any hit to sales caused by the drugs. “That’s good for us, too,” he said.

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Meta Accelerates Its AI Game

Meta has been quieter about its artificial-intelligence-focused endeavors this year than some of its big-tech peers like Microsoft and NVIDIA, but it expects just as massive a transformation of its business from the much-hyped technology.

In its second-quarter earnings conference call, Meta founder and CEO Mark Zuckerberg detailed how AI permeates the company. For example, nearly all of Meta’s advertisers now use at least one AI-based product, allowing them, for instance, to personalize and customize ads. He also touted an increase of 7% in time spent on Facebook after launching AI-recommended content from accounts that users don’t follow.

Now the company plans an aggressive push of its own version of generative AI, the kinds of large language models that have gotten so much attention lately. In July, the company released an open-source—i.e., free for even commercial use—generative AI platform called Llama 2, which Meta hopes will emerge as a competitor to OpenAI’s GPT-4. Meta is betting its platform will unleash users’ creative potential and result in a flood of content. If that occurs, Meta’s powerful algorithms for matching content with users—4 billion of them across all of its platforms—will become indispensable as a content-discovery tool with a rich set of monetization options from advertising to ecommerce to subscriptions.

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Small Caps: Adventures in Fundamental Research

How do you begin to research a company when so little information is readily available beyond a name and a set of regulatory filings? This is the challenge that defines small-cap investing, an asset class that invariably entails an adventure in fundamental research.

The superheroes of the stock market—mainly US corporations valued at or close to a trillion dollars—tend to dominate investment news and research. And yet little-known small companies—often based outside the US—that never generate a headline remain some of the most vibrant sources of innovation. If the biggest large caps sell the finished products that investors and consumers know well, small caps often occupy a small niche along the global supply chain, providing a critical piece of technology known only to its intended audience.

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Big Health vs. Big Tech: A Fight over the Future of US Health Care

The $4 trillion US health care system represents both the best and worst of health care globally, responsible for the vast majority of leading-edge treatments and providers as well as high rates of uninsured, a staggering $11,000 in annual expenditures per person, and among the worst levels of infant mortality and life expectancy in the developed world. The system’s structure—a hodgepodge of private employer-subsidized, public, and quasi-public insurers, for-profit and not-for-profit networks and unaffiliated providers—famously incentivizes some providers to ring up higher volumes of procedures while inflating fees to cover the huge overhead required to administer the complexity.