Gnostic Portfolio Return for the 3rd Quarter Ended 30/09/24.

Major market indexes continued to post a consistent equity advance for the third quarter of 2024.

The DJIA advanced by 8.3%. The S&P 500 increased by 4.9% and the NASDAQ Composite index grew by 2.6%.

As for the Gnostic Global Portfolio, the account was priced at $1,004.40 at the end of Q2 2024 and increased to $1,102.78 at the end of Q3, a gain of 9.8%.

For the first 9 months of 2024, the DJIA, S&P 500 and the NASDAQ Composite Index advanced by 12.3%, 20.3% and 21.2% respectively. In comparison, the Gnostic Global Portfolio has increased by 30.4% for the first nine months of 2024. Outside of dividend reinvestment, zero trades occurred in the quarter.

Outsized gainers for the quarter (>10%) included Adyen (+25.9%), Ebay Inc. (+21.2%), Grupo Aeroportuario del Pacifico (+11.7%), Mastercard Inc. (+11.9%), Palantir Technologies Inc (+46.8%). Solvay (+13.7%), UnitedHealth Group (+14.8%).

Losers for the quarter included BJ’s Wholesale (-6.1%), Eli Lilly (-2.1%), Fomento Economico Mexicano (-8.3%), Grupo Aeroportuario Del Sureste (-5.6%), Microsoft Corp. (-3.7%) and Novo Nordisk (-16.6%).

All other equities within the portfolio were positive in Q3.

The relative outperformance by the DJIA in Q3 vs the S&P 500 and the NASDAQ, the first time in ever so long, likely represents a strategic capital shift by institutions.

A single quarter does not a year make, but long suffering index holders of the DJIA need something, anything, to maintain their resolve.

Novo Nordisk fell in Q3 due to a variety of developments.

Eli Lilly slashed list prices for Zepbound for those lacking insurance, to $399 (2.5 mg one month supply) and $549 for a 5 mg one month supply via direct purchase with LillyDirect. This places significant pressure on Novo Nordisk to further cut prices for the PBM companies that provide insured access through their formularies.

While the media talks up the low cost of production in relation to the list selling prices, when a company is forced, for competitive reasons, to potentially lower their drug prices by 40%, there needs to be a greater than 40% increase in prescription uptick, + reduction in the cost of production, merely to maintain the present level of profitability.

Novo investors also reacted negatively to disappointing news of psychiatric side-effects for monlunabant. Differing from the GLP-1 class, this drug in testing is part of a cannabinoid class that targets dopamine neurotransmitters. Novo purchased a Canadian biopharma firm, Inversago, to obtain this formulation and may have been sold a handful of magic beans, rather than a breakthrough product.

While all this represents a near term headwind and is known, the greatest headwind of all for Novo looms on the horizon, from China, and is not, as yet, widely modeled.

In April 2021, Novo Nordisk was cleared to sell Ozempic in China. The patent providing protection against Chinese biosimilars expires in 2026, with no fewer than 11 generic versions of Ozempic in late stage Chinese testing. For a modest sales revenue from China, Novo Nordisk executives handed over the intellectual property covering the entirety of the Ozempic formula to the Chinese government. It should be presumed that upon the earliest possible date of the patent expiry in China, a flood of biosimilars will be released, should work their way out of China into other Asian countries, and, I assume, via shadowy intermediaries, will then be sold throughout most of the non-western markets.

Just as Russian oil embargos failed to stem the tide of exports due to shipment redirects, expect a lot of generic packages of Ozempic heading around the world, even while western patents remain in place, early in 2026.

The Victoza patents also come off in 2025 for the very first drug of the GLP-1 class, Liraglutide. Overshadowed by semaglutide, formulation knowledge of the predecessor provides biosimilar competitors with a major leg up in their quest to produce effective weight management drugs, all for a fraction of the price now being charged by Novo Nordisk.

https://patentlawyermagazine.com/ozempics-impending-patent-expiry-spurs-development-of-biosimilars-in-mainland-china/#:~:text=According%20to%20Clarivate%20estimates,%20GLP-1%20receptor%20agonists%20have%20experienced

The business thesis supporting further price appreciation, in the face of pricing pressures and a probable flood of Chinese knockoffs in less than 18 months, now rests primarily upon a yet to be proven delivery system, a GLP 1+ pill from Novo.

Testing indicates promise and a pill would represent a major advance over injectables. The issue on the forefront remains a historic, repetitive, inability of Novo Nordisk to capitalize, with production, of any groundbreaking product. In order to make a pill, one must possess a pill making factory, one approved by the FDA. Personally, I doubt very much that the executives at Novo have bothered to ask the production team if they even have a pill press somewhere in their network.

Novo has recently announced a $1 billion share buy-back, which does not move the needle one bit. A far more productive use of that $1 billion would be to build a pill factory. It would mitigate a critical future production issue and would further send a message to the street that oral medications are a legitimate growth vehicle for Novo.

In contrast, Eli Lilly has multiple FDA approved pill making facilities throughout the world. There is no specific urgency for Lilly to beat Novo to an oral formulation approval; Lilly more or less clones any Novo product with a higher strength version of whatever Novo puts out, and adds just enough of a difference to the formula to make it appear novel to the FDA. Being a dear friend of the FDA board certainly doesn’t hurt either. So, Eli Lilly will wait a bit further, see how far Novo advances and then announce their own version of a pill, with a blazingly fast ramp up at the presses.