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Market Pulse
Friday, April 5, 2024

A $2bn pivot, behavioural insights and the price of slimming down in the US

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

Our stories this week are:

  1. The power of the pivot: A $2bn move
  2. On the shoulders of giants
  3. Weight loss at a premium in America

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) The power of the pivot: A $2bn move

Pivoting, for startups, signifies a significant shift in strategic focus. This transformation may involve discarding core products or even venturing into entirely new markets. Cognition Labs recently executed such a pivot and created a lot of value as a result.

Originally a cryptocurrency venture, Cognition Labs identified an opportunity with the rise of artificial intelligence. Seizing this moment, they pivoted towards AI, giving birth to Devin - an innovative tool capable of autonomously tackling complex coding tasks. 

Cognition Labs calls Devin “the world's first AI software engineer” and its core capabilities include long-term reasoning and planning. This means Devin can plan and execute complex tasks requiring thousands of decisions. Devin can remember all its decisions and the reasons for making them which means it can learn and improve over time. Devin is so capable it can even set up and fine tune other AI models. That’s right, one AI building and improving other AI[1].

We’re clearly not the only investors who think Devin is impressive. Cognition Labs was valued at $350mn in a deal led by Founders Fund earlier this year and is currently in talks with investors to raise additional funding at a valuation of up to $2bn. If the raise is successful, Cognition Labs would have increased its valuation 6x in a matter of weeks. Not a bad return on investment for the Founders Fund who led the recent Series A raise with a $21mn investment[2]

Cognition Labs is a great example of the value that can be unlocked by being flexible as a startup and always being on the lookout for new market opportunities.

2) On the shoulders of giants

Investment is difficult but there are, in my opinion, things one can do to improve the chances of long-term success. One of those things is to gain a deep understanding of human cognitive biases and how those biases predictably influence our day to day decision-making. Understanding these biases doesn’t necessarily mean we can avoid them, but it means we can build systems that help us prevent, or at least mitigate, their impact on investment results. 

Few helped us understand human decision-making more than Daniel Kahneman, an American psychologist who passed away last week. Before Kahneman, economists assumed people were rational, that we are self-interested and that we use all available information to make the best unbiased decisions we can. Kahneman's work showed that this is not how humans behave in the real world at all. 

When asked if people would be willing to take a risk with an 80% chance of winning, most would say yes, but when asked the same question in a slightly different way, if they would take the same risk with 20% chance of losing, most would say no. Using experiments like these, Kahneman showed that the pain of loss is twice as powerful a motivator as joy from a similar sized gain. He also showed why human investors tend to buy high and sell low, the very opposite of what they should be doing to maximise long-term gains[3].

Kahneman was a giant in the field of behavioural economics and I believe his insights not only changed the way we invest but also how we see ourselves as humans. I’ll leave you with my favourite Daniel Kahneman quote:

“The illusion that we understand the past fosters overconfidence in our ability to predict the future.”

3) Weight loss at a premium in America

We’ve previously written about the weight loss drugs from companies like Novo Nordisk and Eli Lilly that are taking the developed world by storm. This time we’re looking at a recent study that revealed how cheap the drugs are to make. The study has ruffled some feathers, especially in the US, where prices for weight loss drugs from Novo Nordisk are more than 10x what some European countries pay. 

As a result of the study, investor focus is increasingly shifting from supply bottlenecks to pricing, especially in the US. The US is quite a unique pharmaceutical market and a different set of regulations means drug prices are generally not negotiated. This means drug prices tend to be far higher than in many other countries. 

The study showed Ozempic, the Novo Nordisk drug, can be profitably produced for less than $5 a month. Of course this doesn’t capture the cost the company incurred in developing and testing the drug but consumers and politicians are laser focused on the stark difference in prices between countries. 

In Germany the drug sells for $59 for a month's supply and this seems like a very healthy gross profit for Novo Nordisk. In Canada, things look even better for Novo profits, as they sell the drug for $155 a month. In the US, Americans are expected to pay nearly $1,000 a month for exactly the same thing. This big price difference is ruffling feathers among US politicians. [4]

We believe GLP-1 drugs, like Ozempic, have the potential to make a real difference in the diabetes and obesity epidemics in the US and elsewhere. But, as US politician Bernie Sanders pointed out, health shouldn't just be available to those who can afford to pay $1,000 a month. The pressure is building and there is already precedent for very large drug price cuts in the US. Novo Nordisk recently reduced the price of Insulin in the US by 75%. Even if they cut the price of Ozempic by 75%, it will still be 4x more expensive than in Germany. 

Sudden regulatory changes are what we consider black swan events. They are impossible to predict with any accuracy and when they happen they can have a significant impact on companies and even entire industries. We’re keeping a close eye on developments here. 

Note: We own Novo Nordisk in our Flagship Strategy.


[1] https://www.cognition-labs.com/introducing-devin 

[2] https://www.wsj.com/tech/ai/a-peter-thiel-backed-ai-startup-cognition-labs-seeks-2-billion-valuation-998fa39d?mod=tech_feat1_ai_pos5

[3] https://www.wsj.com/finance/investing/daniel-kahneman-behavioral-economics-270c9797?mod=finance_feat3_investing_pos3 

[4] https://blinks.bloomberg.com/news/stories/SB0RHRT0G1KW


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