Weekly Reads - October 16, 2023
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The buzz around weight-loss drugs from Eli Lilly and Novo Nordisk have reached a fever pitch with the market penciling in mass adoption and raising questions about the long-term future of food consumption and healthcare stocks.
Mr. Market has made it clear that weight-loss drug adoption is a certainty with the two market leaders Novo Nordisk and Eli Lilly seeing their shares climb 90% and 82% respectively over the last 52 weeks versus 20% for the S&P 500. Goldman Sachs has projected the market for weight loss products to reach $100 billion by 2030 with Eli Lilly and Novo Nordisk capturing 80% market share. The sell-side is bullish that these drugs will not only help customers reduce their weight but also reduce the risk of heart attacks and strokes with recent studies supporting this thesis. Goldman believes that by 2030 15 million out of the 105 million obese or overweight adults will be using these drugs up from a few million today. The success of these drugs is expected to impact consumer packaged goods and healthcare companies which are expected to lessen business as users consume fewer calories and need less medical care. However, there are questions on the actual long-term impact of these drugs on these industries with consumer goods companies seeing no impact on their business so far and an industry push toward healthier products. Additionally, the cost of these weight loss drugs is astronomical with sources citing $1,000 a month for access to these drugs with private insurance companies not offering coverage. A 2018 study by the National Library of Medicine found evidence that lower income and obesity are correlated with obese Americans typically having a lower income than the average American. With a large portion of obese patients having lower income, the addressable market for these drugs may be smaller than the market realizes due to their unaffordability. On the competitive side, it’s unlikely Novo Nordisk or Eli Lilly will see no competition over the next decade with competitors looking to put more resources in this segment. In our opinion, the market is far too overzealous in forecasting the success of these drugs and the downfall of consumer packaged goods which have shown their resilience over various economic cycles and have delivered decades of consistent free cash flow.
Goldman’s retreat from consumer banking is getting serious with the bank looking to offload its high-profile partnership with Apple and GM credit card just a few years after establishing these products.
Goldman has publicly made it known that they are looking to exit consumer banking after losses piled up in the division during the pandemic. Internally the company’s consumer banking moves have been widely criticized by insiders who have blasted the company’s high-profile partnership with Apple which includes the Apple Credit Card, Apple Savings Account, and a buy-now-pay-later service. Insiders believe the partnership was a mistake since the beginning, yet management decided to extend the partnership with Apple till 2029. Prior to the company’s latest pivot out of consumer banking Goldman publicly praised the partnership citing the Apple Savings Account reaching $10 billion in deposits. CEO Solomon now is looking to improve the operations of these products after facing mounting losses in their consumer banking segment during the pandemic. Last quarter, Goldman reported its worst earnings in years increasing the pressure on management to exit these partnerships returning the business back to its core competency. It was reported in July that Goldman explored offloading the Apple partnership to American Express, but nothing official has been reported. It will be in the bank’s best interest to quickly exit these lines of business before shareholders push for changes at the top.
After a hot IPO music catalogue acquirer Hipgnosis is in tough straits struggling with a high debt load, unhappy shareholders, and an uncertain future after burning through most of its funds.
Hipgonsis was one of last year’s flashiest companies investing in the trendy music catalogue business acquiring the music catalogue of top stars such as The Red-Hot Chili Peppers, Justin Timberlake, Journey, and Neil Young. Today, the company is struggling to manage its debt load and is looking to sell 29 music catalogues which include songs by pop star Shakira, rapper Nelly, and a collection of non-core songs to a partnership between the company’s investment adviser and funds advised by Blackstone. The sale would help reduce the company’s debt load and fund a share buyback aimed at bolstering its share price which has fallen 20% YTD and more than 50% since hitting all-time highs. This deal is not without its critics with one of the company’s largest shareholders, Asset Value Investors (AVI), voting against the proposed deal and urging other shareholders to reject the deal. AVI has cited the “uncompetitive nature” of the process and lack of up-to-date valuation that makes it unlikely that Hipgonsis is getting the best value for its asset. For Hipgonsis, a quick deal is likely in their best interests with the company running out of funds and struggling to raise more cash to fund further catalogue purchases while keeping their dividend in place. The troubles at Hipgonsis may provide the opportunity for music giants Universal Music and Warner Music to snatch up music catalogues at more reasonable prices as many of these levered music catalogue funds like Hipgonsis struggle to raise cash in an uncertain economic environment.