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Paul and Brett's Alpha

September 2023

An elegiac lamentation

Your managers are getting on a bit. We are not so young as to brim with that eternal optimistic hope which defines youthfulness (naivety?), but not so old as to despair of a world that we no longer understand, although recent weeks are testing our metal in this regard.  

However, we are old enough though to have seen a few crazy things in financial markets. The ‘dot-com’ bubble around the millennium and the financial crisis of 2007/2008 spring to mind. These two events are interesting because the implosion which followed the excesses that defined them seem obvious in hindsight. In the moment though, the coming crises were much less apparent.  

Why were so few people talking about banks being 35x levered or 100% self-certified, seven-figure mortgages as a financial risk? There were plenty of people who were sceptical, and vocally so, but they were dismissed. Some of the ‘naysayers’ were very early and a lot of money was made in the period from the early 2000s when the orthodoxy of cheap borrowing and high leverage first began to be questioned. In the long run though, they were correct, but the negative scenario took some time to play out. 

Turning to the dot-com bubble, it might seem obvious now to ask how ticket bidding site could have been worth $10bn at its IPO in March 1999, it lost ~$30 per transaction at that time. What is now known as Booking Holdings finally recovered to a level equalling its IPO price in March 2011, almost 12 years to the day from its IPO. It was a bumpy ride though; in late 2000 it had lost 98% of its value.  

Several decades and dozens of acquisitions later, the ongoing listed entity is the world’s largest travel agent, worth $109 billion dollars. It makes $7bn of free cashflow every year on 500m+ monthly visits to its website. If you were late to the (much changed) party, then you could have made a very handsome return indeed.  

If one could retrieve some of that IPO research from the fag end of the 90s, it would probably focus on a blue-sky scenario where one day (presumably very soon) the internet displaces the traditional travel agent and becomes the go-to conduit for booking everything from flights to cars to hotels.  

As noted above, this statement turns out to have been true: and Booking’s other sites are poster children for successful disruptive disintermediation. Who goes to a high street travel agent these days? Of course, the next step of the journey is for Booking to use AI to curate your ideal trip for you and then book it all and excitement about this prospect added around $20bn to the market value of the summer. 

Echoing some parallels with the financial crisis example: where the research went wrong was in forecasting the evolution of the market opportunity over time and the money to be made along the way. It was ever thus.  

We are minded to think that the unfolding excitement over obesity drugs represents something very similar. The ultimate outcome, at some point in the future, may well be a very large market in terms of value and patients. It may over time impact the funnel of patients into areas commonly associated with the secondary complications of obesity. However, all of this will unfold over a long period of time, creating the two probable scenarios described above.  

Those who ignore the risks face the prospect of potentially significant losses on the GLP-1 carry trade and those who ignore the opportunities in the meantime through being too bearish on the adjacent areas of healthcare expenditure could miss out on a lot of value creation in the meantime. 

“The weight loss industry, yo-yos and neolithic people” 

If ethical considerations are not front and centre of your mind and you want to make lots of money as a business, find something that impacts a lot of people at a psychological level and doesn’t really work very well, or has the propensity to be habit forming and then you have a repeat customer. If you can throw some pseudo-science into that, then all the better.  

We will keep this general, but readers will be aware of countless companies that offer calorie counting nutrition plans or food alternatives (“meal replacements”) and support to help people try to lose weight. These may work for some people for some time. However, the clinical evidence that they work long term for the majority is very limited, otherwise they would bang on about it endlessly. To our minds, the only winners seem to be the companies receiving the monthly subscriptions from the clients trying to lose the weight.  

We have no interest in owning such companies because we believe that the approach is fundamentally flawed. As soon as you stop restricting calories, you will (re)gain weight. This is great for these businesses, because you will come back – “yo-yo dieting” or “weight cycling” as it is known and it will happen rapidly in an environment of abundant calories.  

This cruel and unfortunate cycle is a scientific reality born of our evolution and exacerbated by modern lifestyles. We will try and explain why in the following paragraphs.  

Adipose tissue (fat cells) is a complex organ system in its own right, responding to and producing hormones and cytokines (‘adipokines’ such as leptin, adiponectin, and adipsin) that have a broader impact on the basal metabolic rate and appetite. 

These cells have evolved to be storage vessels and can thus expand to absorb significant amounts of fat in the form of triglycerides (a process known as adipocyte hypertrophy; the cells can swell to up to 10x their normal size). Equally, when these reserves are drawn down (i.e. when you are burning fat calories), the cells shrink away until the storage vesicles are empty.  

The production of the adipokine leptin from individual adipocytes is proportional to the amount of fat mass stored within them. Leptin supresses appetite. Thus, as you try to shrink your fat mass through calorie restriction, the blighters undermine you by literally making you feel more hungry. The body will adjust to this signal over time, but it will hinder you in the early ‘dieting’ phase.  

Unlike muscle cells, what these cells tend not to do (within the bounds of normal metabolism) is to die away when no longer needed. They tend to lay dormant until the next influx of triglycerides comes along and they duly absorb it.  

The lack of programmed cell death (apoptosis, or ‘lipolysis’ in the case of fat cells) is probably because these are not hugely metabolically active and thus the “burden” of them staying there is limited. There is adipose tissue turnover of course, but complex signalling pathways suggest that dying cells are replaced, it is almost as if the adult human body works to sustain the level of fat cells once formed. 

Worse for modern hominins in an age of food plenty, the consumption of certain foods actually stimulates the creation of new fat cells (‘adipogenesis’ or ‘adipocyte hyperplasia’) from precursor cells via multiple signalling pathways. This unfortunate metabolic ratchet means that we all gain fat cell mass as we age, and thus our propensity to become overweight will similarly increase.  

Generally speaking, hypertrophy is more significant than hyperplasia in severe obesity. There is a complex feedback loop that kicks in where very large adipose cells promote inflammatory cytokine release and infiltration of the fat tissue by white blood cells. This can finally trigger apoptosis, which may seem like a good thing.  

However, it is not in this case. This process leads to a cascade of other cellular signals and an increase in blood triglycerides etc., which causes all manner of secondary consequences that accelerate the progression of Type 2 diabetes and ischaemic cardiovascular disease. In general then, one is better off having a fat mass distribution that consists of more adipocytes that are less hypertrophic than to have less adipocytes that are full of triglyceride.  

How hypertrophic those cells are will depend on your calorie balance (activity versus intake), your diet and the interplay of this complex system of hormones and neurones connected to the brain’s reward centers. What does this mean? Simply put, we are programmed to seek out calorie dense foods. We get a literal kick from eating fats and sugar. This is why almost all of us love desserts and sweet treats and over-indulge from time to time.  

Unfortunately, evolution did not envisage the human ability to process sugar and cream etc. from natural sources. The consumption of these products literally overwhelms these pathways, sending reward centres and fat deposition into overdrive. The reward centre stimulation may lead to addiction-like habituation, where people actively seek out ‘bad’ calories. Some of the modern additives in ultra-processed foods may exacerbate these qualities, although research in these areas is at an early stage.  

On this topic, we do not subscribe to the view that food companies have actively sought to make their products addictive. It is the desire for mass production (arguably beginning with the Chorleywood bread making process, developed in the UK in 1961) that has changed food ingredients, and ignorance of the long term effects of the chemicals used in that process of industrialisation which has led us here. None of us were complaining as food became ever cheaper in real terms, due to mass production.  

Consumption of large amounts of fat calories also overwhelms the glycogen (carbohydrate) storage mechanism, raising blood sugar (bad in its own right) and causing our tiny little pancreas to work overtime making insulin. Eventually this system runs out of gas and Type 2 diabetes can result. This is what scientists mean when they refer to an “obesogenic environment”. Too much of a good thing is not good.  

Why are we all made this way? The neolithic human was a nomadic hunter gatherer. Modern studies of people still living a subsistence lifestyle show an incredible consistency in their metabolic balance over long periods of time: they are expending similar calories every day.  

In ancient times, the availability of food could vary significantly, a literal case of feast or famine. In such circumstances, evolution would favour those people who could pack away surplus calories for hard times. We are evolved to store excess calories because that trait kept our ancestors alive.  

Today though, we have both too many ready calories in front of us, many of them in unnatural forms that our bodies struggle to cope with, and too many labour saving devices that contribute to a sedentary lifestyle where that level of daily activity is far below that which our bodies evolved to ‘expect’.  

The points summarised above were combined into a homeostatic theory known as “set point” from the early 1980s, which postulates that each of us has a predetermined fat mass range “built in”, and this complex interplay of various hormones and cytokines creates compensatory physiological and psychological mechanisms that drive us toward this set point.  

Perhaps counter-intuitively, one is better off having a fat mass composed of more, but smaller fat cells than having a smaller number of hypertrophic cells. The name of this theory is rather unfortunate, because the set point can move upward due to the stimulatory effect of food via the signalling pathways mentioned previously.  

What does all of the above mean in simple terms? It is a grim conclusion, but one that needs to be stated. Losing weight through calorie restriction alone is unlikely to be successful; the deck is stacked against you. If it is combined with lifestyle modifications to increase daily metabolic load, then the weight may stay off. Whichever road you choose, you cannot get off it. It’s either lifelong exercise, or lifelong moderation.  

There are pathways that can be interfered with using drugs to break some of these reward systems or to switch off those signals that promote adipogenesis, or that convert white adipose tissue to brown adipose tissue (which burns calories to aid thermoregulation) and much research in this area is ongoing.  

“The drugs do work”” 

The final two paragraphs of the preceding section might seem like a perfect segway into explaining the excitement over GLP-1 obesity medications. If diet alone doesn’t cut it, and the causes of obesity are not, in fact, weaknesses of self, born of slovenliness or immoderation of appetite, but a complex clinical response to an unnatural environment, then bolstering the efficacy of calorie restriction and lifestyle interventions with pharmacological tools must be the answer.  

What are the metabolic benefits of GLP-1 analogues, independent of its core effect that it suppresses appetite and thus makes it less uncomfortable to endure a period of protracted calorific restriction?  

Tissue studies of GLP-1 analogues show that it does tilt the balance in favour of adipogenesis over hypertrophy when it comes to the storage of fat and this may explain why it has cardiovascular benefits that are independent of weight loss; it reduces the risk of the inflammatory cascade referred to earlier. This is good, but not necessarily linked to the sustaining of weight loss.  

GLP-1 analogues decrease leptin levels. This is unhelpful and may explain why there is such interest in dual and triple incretin mechanisms, to reduce the risk that hunger is not dampened enough. Again though, data for Lilly’s dual acting GLP-1/GIP “twincretin” Mounjaro (tirzepatide) shows significant rebound weight loss and a modesty of effect that will not turn the morbidly obese into a normal BMI. 

And these points are the key ones for us. There is no panacea for weight loss in the morbidly obese. It requires lifestyle modification and dietary changes for life. This is easier with bariatric surgery because it becomes physically impossible to eat a large volume of food. Everything else requires enormous and life-long commitment. The obesity crisis is not “solved” and we do not think that it will be “solved” in the foreseeable future.  

We always appreciate the opportunity to interact with our investors directly and you can submit questions regarding the Trust at any time via:  

As ever, we will endeavour to respond in a timely fashion and we thank you for your continued support during these volatile months.