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A miracle drug to end obesity?
PLUS: Silicon Valley Bank goes down.
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Today, we’ll be looking at two topics on top of my current reading list:
A miracle drug that could end obesity
Silicon Valley Bank collapses (the 16th largest bank in the US)
…and, of course, them memes (including an iPhone feature we need)
Can this weight-loss drug end obesity?
In the early 1990s, Pfizer was developing a drug called sildenafil to treat angina. It’s a condition in which patients experience chest pains due to a lack of oxygen-rich blood. The drug was supposed to dilate coronary blood vessels but failed. Pfizer was about to shelve the drug but found a side effect: male patients got long-lasting erections.
The blood vessel dilation was working, just in a different part of the body. You probably know which drug I’m referring to: it’s Viagra. From 1998 until 2020 — when Pfizer’s patent expired — Viagra made $1.8B a year.
Why am I bringing this up? (No pun intended)
Because a new drug developed for one purpose has been found to be very effective for another purpose and it’s hitting the mainstream big time.
The class of drug is known as GLP-1 agonists and the active ingredient is semaglutide. It was developed to treat diabetes but is remarkably effective for treating obesity (side note: other notable accidental medical discoveries include penicillin, pacemaker, valium). And the market for these drugs could hit $150B+ by 2031, on par with the present market for cancer treatment.
Many in the health community say that GLP-1’s are “too good to be true” but the treatments — primarily sold by Danish pharmaceutical giant Novo Nordisk first as a diabetes treatment under the name Ozempic and now as a weight-loss drug called Wegovy — have shown incredible results.
Some interesting nuggets from The Economist’s cover story:
Obesity is an expensive problem: By 2035, it’s projected that 4 billion people will be obese or overweight. The societal cost — from sickness, lost productivity and early deaths — could reach $4 trillion per year, or 2.9% of global GDP (that’s a comparable impact to the COVID-19 pandemic).
Obesity isn’t just about willpower: Society perceives obesity as personal failing or lack of discipline. The risk of obesity is 45-65% determined by genetics. And while exercise and healthy eating are certainly preferable to the opposite, the reality is that 10-20% of the population simply doesn’t respond to such a regimen (example: contestants on The Biggest Losers lost as much as >100lbs on the show but frequently re-gained weight even while staying fairly healthy).
GLP-1 effect: One of the most effective forms of weight loss is bariatric surgery, which reduces the size of a person’s stomach by using a staple or band (aka stomach stapling). The average weight lost from the procedure is >30%. But it’s a significant surgery. The anti-obesity drugs have seen an average weight loss of 10-15% with a weekly injection (Pfizer is working on a pill version).
How do GLP-1’s work? The drug regulates glucose levels, affects the region of the brain that controls hunger (the hypothalamus), and slows down gastric emptying (meaning food stays in the body longer so you feel more satiated).
The secondary-use of GLP-1s for weight loss has gone mainstream among celebrities and influencers, to the point that there is a shortage of the drug to treat diabetes. Another sign of “mainstream-ness”: Weight Watchers just acquired telehealth firm Sequence to help its 3m+ subscribers more easily access the weight-loss drug.
Of course there are drawbacks:
First-time users may experience nausea or aggressive bowel movements.
While there has been decades of research on the drug class for diabetes, its long-term effects for weight loss are to be determined.
People taking the drug — and the junk processed-food industrial complex — may use the existence of the treatment as a rationale to keep unhealthy lifestyles afloat.
The treatment looks to be continuous as people who pause the drug see weight come back (it could be a “forever drug” comparable to insulin or cholesterol treatment).
And at ~$1000 a month, it is expensive and potentially out of reach for lower-income populations, which are already more obese on average (the government will have to work with insurers — which currently only cover for actual obesity — to spread the benefits, a likely net positive economic decision).
Do you want to fill up more on this topic? (pun intended)
Check this technical article from Eric Topol and a deep dive on the off-label boom from Olivia Reingold at The Free Press. And here are two very interesting interview podcasts with industry professionals via Derek Thompson’s Plain English and The Ezra Klein Show.
Silicon Valley Bank collapses. Why? It took on too much interest rate risk and its tech-heavy depositor base was too concentrated.
On Friday, Silicon Valley Bank (SVB) shut down after a bank run — which saw $42B pulled the prior day (~1/4th of deposit base) — crushed the stock price and hampered its ability to operate. SVB was the 16th largest bank in America with $209B of assets, which makes this the largest bank failure since Washington Mutuals’ collapse in 2008 (>$300B assets).
SVB’s assets were seized by the Federal Deposit Insurance Corporation (FDIC). And even though the FDIC insures deposits up to $250k, less than 10% of SBV’s $175B of deposits is insured. Holders of the uninsured portion received “a receivership certificate”, basically an IOU for any funds recovered.
How did the 16th biggest bank in America collapse within 48 hours?
During the pandemic, SVB received a huge influx of deposits as its startup-and-tech-heavy client base raised boatloads of money or cashed out in IPOs and acquisitions (I received 0.00000000% of this windfall). From end-2019 to end-2021, SVB deposits swelled from $62B to $189B.
To get extra yield on that massive cash pile, SVB invested $80B+ into long-duration mortgage-backed securities (MBS) without hedging the position. This decision created a potential time bomb. Why? Because SVB was all-in on a low-interest rate environment:
Client base: Tech is sensitive to higher interest rates because the expected cash flows for the business are further out into the future relative to the rest of the economy. Rising interest rates hurt growth industries more than boring industries.
MBS: Higher interest rates reduce the value of a fixed long-duration bond portfolio. This would be fine if the assets were held to maturity but becomes an issue if the bonds are unloaded in a fire sale.
With the Fed raising rates aggressively over the past year, SVB’s business was hit from all angles as explained in a great thread by Jon Wu:
What was done with those deposits is the source of SVB's troubles. In an effort to chase yield and provide a decent return on equity, SVB bought billions of dollars of long-dated mortgage-backed securities paying ~1.6%.
Now, a couple very bad things are happening all at once, all because of the end of the Fed's 15-year long streak of 0% rate policies:
startups are burning cash faster
deposit growth is slowing
[startups] can't raise
So SVB has a bunch of long-dated illiquid assets and a bunch of short-term liabilities. Because remember: to banks, deposits are liabilities.
SVB tried over the last few days to raise debt and equity in order to shore up its balance sheet [including a fire sale of $21B bond portfolio that led to a $2.3B loss]. As a result, depositors got even more freaked out: "If they had sufficient liquidity, why would they have to raise?"
VCs were caught in an impossible decision:
tell portfolio companies to keep deposits in SVB and shore up a key capital provider in the VC ecosystem
tell them to withdraw, ensuring that same bank failure
The concentration of SVB’s depositor base in tech, VC and startups proved to be a significant risk. All the main players know each other and FUD (feat, uncertainty, doubt) spreads quickly on Twitter. Silvergate — a Crypto Bank — also went under this week, which put everyone on high alert and primed SBV for a bank run.
Prior to this week, the SVB was platinum in tech and the startup community. How much of the brand and network can be salvaged?
I’m writing on the afternoon of Friday, March 10th. By the time you read this email, the Federal Reserve, FDIC and major financial institutions (JPM, BAML, GS, Wells Fargo, Berkshire) will be hammering out a rescue plan. SVB’s final market cap was ~$6B (down 70-80% from recent highs). Who will buy?
Bloomberg’s Matt Levine — the absolute go-to for anything finance — believes that depositors will be made whole in a potential SVB acquisition:
“If it turns out to be true that they lose their deposits, there could be more bank runs: Lots of businesses keep uninsured deposits at lots of banks, and if the moral of SVB is ‘your uninsured transaction-banking deposits can vanish overnight’ then those businesses will do a lot more credit analysis, move their money out of weaker banks, and put it at, like, JPMorgan. This could be self-fulfillingly bad for a lot of weaker banks. My assumption is that the FDIC, the Federal Reserve, and the banks who are looking at buying SVB all really don’t want that.
If you are a bank looking at buying SVB, and you do a detailed analysis of its assets and conclude that they are worth $180 billion, and you come to the FDIC and say “I will take over this bank and pay the uninsured depositors 95 cents on the dollar,” the FDIC is going to look at you and say “don’t you mean 100 cents on the dollar,” and you are going to say “oh right yes of course, silly me, 100 cents on the dollar.”
A key distinction here is to make depositors whole (not investors, who took equity risk when buying SVB stock). A number of regional banks have similar bond portfolios to SVB and there is a real threat of contagion effect. This isn’t to say that there should always be bailouts for poor banking decisions (of course there shouldn’t because moral hazard). SVB has an asset-liability mismatch that regulators can solve instead of having bank customers lose faith in “uninsured deposits”.
There will be many updates between now and Monday, so definitely Google“Silicon Valley Bank” to keep up with the story. Here are other links for more context:
SVB also had bad communications. Specifically, SBV erred in (1) WHAT they said, (2) WHO the audience was, (3) WHEN they did it, and (4) HOW they framed it. (Lulu Cheng Meservey)
Did SVB management know things were bad? SVB didn’t have a Chief Risk Officer for most of 2022. But still held 18 Risk Committee meetings (vs. 5-7 in a typical year). And the previous CRO sold $4m of shares before leaving in December 2021, a likely signal that balance sheet was a “time bomb”. Also, the CEO sold millions of shares in recent days. (Non-GAAP)
Interest rate risk explainer: Marc Rubinstein breaks down how SVB got started and the accounting rules/bond classifications that contributed to SBV’s downfall. (Net Interest)
Salary issues: With payroll coming up next week, many companies are anxiously waiting to see if funds will be available. Because of the legal issues around missing payroll, there could be a wave of layoffs if sufficient deposits aren’t accessible. One VC firm — Chris Sacca’s Lowercarbon — has publicly said it will cover payroll for any of its portfolio companies that need help and is asking other VCs to step up. And the FDIC is in talk to issue "advance dividends" that could be enough to cover obligations. (CNBC)
Venture debt: SVB lends money to many startups that may not otherwise be able to secure loans. Traditional banks have less experience underwriting certain tech, biotech etc. But SVB’s loans often come with strict terms, like the borrower has to keep X% of funds deposited at the bank or — in periods of stress — have to pay off the loan principal before accessing banking services. These terms are major obstacle during a bank run. (Emergency podcast from The Outsiders crew)
Will Jamie Dimon bite? JPMorgan is considered by many to be the frontrunner to buy SVB’s assets and brand. During the financial crisis, the Fed got JPMorgan to buy both Washington Mutual and Bear Sterns. Because of lawsuits emanating from the toxic assets these banks’ sold, JPMorgan paid billions in fines for Bear and WaMu mistakes. SVB isn’t Bear but here is what Dimon said in a 2015 shareholder meeting, “In case you were wondering: No, we would not do something like Bear Stearns again. In fact, I don’t think our board would let me take the call.” (Financial Times)
Never forget that Giannis Antetokounmpo used to keep the FDIC-insured limit of $250k at 50 different bank accounts in the US. He lived in Greece when the country’s GDP shrank by 25% during financial crisis and never forgot its banking collapse. Former Milwaukee Bucks owner Marc Lasry eventually set Antetokounmpo up with a wealth manager and told him that it is safer to put that much money in other stuff like treasuries. (NYPost)
A lot of people will be impacted by SVB’s blow-up…so this very good tweet is the only light-hearted piece of SVB-content I’ll post.
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Links and Memes
Here some other baller links:
Spotify’s new app design is a copy of TikTok’s feed…which is kind of depressing (Garbage Day)
An awesome mash-up: Chance the Rapper goes on Jimmy Fallon and does an insane rendition of Nelly’s “Hot in Here” as a country song (Reddit)
This hotel room is on my bucket list: “The Hokkaido Nippon-Ham Fighters of the Japanese baseball league are opening a new stadium this month. It includes a 12-room hotel in the outfield that is open year-round, and rooms cost $1,000 per night. But most importantly, the view is INCREDIBLE.” (@JoePompliano)
Columbia University is dropping the SAT. It’s the first Ivy League school to do so and cuts off one major avenue for lower-income students to get into the school. Meanwhile, Columbia is keeping legacy admissions, which tells you all you need to know about its priorities. (Rob Henderson)
Who creates SEO content? There are 16 companies — including Conde Nast, Vox Media, Bustle, Red Ventures, Hearst etc. — that own 500 media brands that collectively dominate Google Search Results, sending >3B site visits a month (Detailed)
…and here some wild tweets:
Finally, this tweet basically explains my entire life: