Latest / Bloomberg Intelligence / Novo Undercuts Lilly’s Obesity Drug Price for Cash-Pay in US

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Novo Undercuts Lilly’s Obesity Drug Price for Cash-Pay in US · Bloomberg Intelligence

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  Speaker 1: Bloomberg Audio Studios, podcasts, radio news. You're listening to the
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  Speaker 2: I feel like we have to talk about what's going
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  Speaker 2: on in biotech. It's the m and a Monday, Paul,
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  Speaker 2: and there's been this trend of course of the big
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  Speaker 2: pharma company is desperate to refill their pipeline.
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  Speaker 3: It's getting competitive now and they're going competing on price.
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  Speaker 3: That's what I'm kind of noticing here went from b
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  Speaker 3: like a rare to find it now it's everywhere. Yeah,
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  Speaker 3: and now they're competing on price.
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  Speaker 2: So it's a good thing if you are looking to
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  Speaker 2: get in on the antiobest drugs and you're looking for
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  Speaker 2: a more affordable price, because the companies are doing what
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  Speaker 2: they can to appeal to consumers. Michael shat Is, Bloomberg
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  Speaker 2: Intelligence Senior Farmer, Senior pharm of Biotech analyst, joining us
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  Speaker 2: now and Michael Novo Nordoice is now undercutting Eli Lilly's
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  Speaker 2: obesity drug price. Tell us exactly what they're doing here
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  Speaker 2: because my understanding is that both these companies recently worked
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  Speaker 2: out a deal with the White House to reduce prices overall.
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  Speaker 4: Yeah, thanks, so absolutely, this is I mean, this is
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  Speaker 4: obviously ahead of the White House deal. So you're seeing
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  Speaker 4: starting doses being reduced two hundred dollars per month, and
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  Speaker 4: then doses thereafter being charged at an average of three
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  Speaker 4: hundred and fifty dollars per month compared to five hundred
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  Speaker 4: dollars previously. So I mean, you know, those prices kind
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  Speaker 4: of aligned to you know, the pricing in the in
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  Speaker 4: the White House statement coming from trump RX, but compared
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  Speaker 4: to Lily, I mean, they're undercutting them by about you know,
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  Speaker 4: one hundred dollars at each dose. And this is basically
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  Speaker 4: a ployed to basically compete for new patients starts. As
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  Speaker 4: we know, Lee's got the more effective product in terms
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  Speaker 4: of weight loss profile, and they're also you know, executing
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  Speaker 4: better on the launchers. And I think that's clear from
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  Speaker 4: three key results where we saw contrasting fortunes between those
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  Speaker 4: two particular drug makers.
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  Speaker 3: Mikey, give us a sense of this marketplace here, what
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  Speaker 3: percentage of the addressable market is actually taking these obesity
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  Speaker 3: drugs versus because it seems like as the price comes down,
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  Speaker 3: more and more people will be able to get access
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  Speaker 3: to them.
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  Speaker 4: Yeah. Absolutely, I mean it's a highly priced sensitive market.
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  Speaker 4: When we look at penetration rates in the US, you know,
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  Speaker 4: low single digits, that's obviously going to accelerate as these
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  Speaker 4: as these drugs become cheaper. Looking outside the US, penetration
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  Speaker 4: rates are even lower. So there's you know, still significant
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  Speaker 4: kind of you know, patient runway out there in terms
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  Speaker 4: of US penetration. I mean, you know, the deal, the
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  Speaker 4: White House pricing deal on GLP one drugs, you know,
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  Speaker 4: supports kind of use of these these GLP one drugs
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  Speaker 4: in Medicare, you know there we think that it can
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  Speaker 4: unlock you know, seven to eight million patients. According to
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  Speaker 4: a White House statement, I think they said ten percent
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  Speaker 4: of Medicare beneficiaries would become eligible for GLP one drugs
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  Speaker 4: based on the pilot program, and that's going to be
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  Speaker 4: introduced in twenty six, and I think it's going to
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  Speaker 4: become mandatory in twenty seven. And then they've also you know,
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  Speaker 4: loaded the price in Medicaid too. I think the uplift
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  Speaker 4: in terms of patients there is a bit harder to
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  Speaker 4: deduce or or to kind of model, given that you know,
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  Speaker 4: coverage is going to be on a state by state basis,
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  Speaker 4: and there's also kind of different qualifying criteria, which again
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  Speaker 4: is state dependent.
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  Speaker 2: What does this mean, Michael? For the companies like Hymns
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  Speaker 2: and Hers, the companies that make compounded copycat versions of
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  Speaker 2: these antiobesity drugs, they've done very well. And I know
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  Speaker 2: those stock for Hymns and Hers has been kind of
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  Speaker 2: all over the place, but it is modestly higher from
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  Speaker 2: where it was at the start of the year.
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  Speaker 4: Yeah, I mean I think that whole you know, the
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  Speaker 4: compounding situation. I believe that you know, one point two
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  Speaker 4: million patients are on compounding GLP one at the moment.
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  Speaker 4: That's based on kind of comments and Novo made during
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  Speaker 4: their three key results. Obviously, loaning down the price would
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  Speaker 4: kind of of the branded treatments would basically well, I
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  Speaker 4: mean it would it would you know, lessen the delta
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  Speaker 4: between you know, coffeecats and branded treatment. So I guess
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  Speaker 4: it's a negative for for for these you know, compounded
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  Speaker 4: jylpy one drug makers.
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  Speaker 3: Mikey. When I look at the big cap farm of names,
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  Speaker 3: is it as simple as I want to own the
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  Speaker 3: ones with exposure to obesity market and not own the
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  Speaker 3: ones that don't. Because I'm looking at your your slate
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  Speaker 3: of stocks and you're either up thirty percent or you're down.
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  Speaker 4: Yeah, I mean, I think you know there's a there's
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  Speaker 4: a few large farmer names which which has entered the space.
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  Speaker 4: You know, in the in the recent years, you've seen
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  Speaker 4: kind of deals with russ and Zealand for an Amlin drug.
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  Speaker 4: Most recently you've obviously got the fires and Metsarah m
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  Speaker 4: and A deal. I mean, I think OBESTI is obviously
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  Speaker 4: appealing given you know the size of the target population,
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  Speaker 4: how underpenetrated it currently is, and you know, if you're
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  Speaker 4: looking to you know, offset patent expirations later in the decade,
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  Speaker 4: you know there's an abundance of kind of jill point
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  Speaker 4: on products out there, as well as other assets too.
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  Speaker 4: So I think that's the appeal of the space. It's
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  Speaker 4: a large market, it's underpenetrated, and there's high demand for
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  Speaker 4: these treatments too.
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  Speaker 2: I mentioned em and A, and of course we know
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  Speaker 2: that JANJ is making a purchase to increase its pipeline
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  Speaker 2: to get away from relying on these older drugs that
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  Speaker 2: have lost patent protection. Is every farmer company doing the
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  Speaker 2: same things that you know they're not only strategy, but
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  Speaker 2: is that the way they move forward? Is there anyone
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  Speaker 2: who's kind of like in a good position and doesn't
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  Speaker 2: need to make a deal.
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  Speaker 4: I mean, I think that's always been part of the
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  Speaker 4: large farmer model. They supplement kind of in house innovation
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  Speaker 4: with extern of innovation, particularly if they want to get
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  Speaker 4: into areas perhaps outside of their core competency. But I mean,
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  Speaker 4: I think that's just the model in general. Biotechs always
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  Speaker 4: been the pipeline for large farmer companies or release help
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  Speaker 4: bell caut that pipeline.
• 6:09
  Speaker 3: Stay with us. More from Bloomberg Intelligence coming up after this.
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  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
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  Speaker 1: weekdays at ten am Eastern on Apple Coarclay and Android
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• 6:30
  Speaker 3: It is Merger Monday, and today we've got a financial
• 6:33
  Speaker 3: buyer making some headlines here. Clayton du Billier and Rice
• 6:37
  Speaker 3: now known as CDR. They agreed to buy Sealed Air
• 6:41
  Speaker 3: Corporation in a deal value in the packaging company that
• 6:44
  Speaker 3: invented the bubble brap six point two billion dollars. To
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  Speaker 3: break this deal down, Leanna Baker, managing editor of the
• 6:50
  Speaker 3: deal's team, joins us live here in our Bloomberg and
• 6:52
  Speaker 3: Directive Broker studio so CDR Sealed Air six point two
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  Speaker 3: billion dollars. Pretty interesting deal? Was this expected in the marketplace?
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  Speaker 5: Sure? So CD and R we had picked up last
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  Speaker 5: week had been in talks to buy Sealed Air and
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  Speaker 5: the biggest packaging deal in a long time. And today
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  Speaker 5: we see it get to the finish line on this
• 7:10
  Speaker 5: merger Monday. And what's interesting here is that while the
• 7:13
  Speaker 5: enterprise value is over ten billion, which is pretty big,
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  Speaker 5: the share price is sort of below where it's trading
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  Speaker 5: on the margin. So not a huge premium here, In fact,
• 7:22
  Speaker 5: no premium. It's sort of a take under. And if
• 7:24
  Speaker 5: you see where shares are trading, you know, investors aren't
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  Speaker 5: super thrilled, but it is you know, still a good
• 7:33
  Speaker 5: sign for this to get to the finish line. We
• 7:35
  Speaker 5: are seeing a lot of take privates in this m
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  Speaker 5: and a boom private equities putting their dry powder to work.
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  Speaker 5: This is the latest example.
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  Speaker 2: Was this an obvious candidate for takeout.
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  Speaker 5: It's funny that you asked, because packaging has been sort
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  Speaker 5: of a predictable area of revenue, and we were sort
• 7:53
  Speaker 5: of expecting a time of economic uncertainty that we would
• 7:55
  Speaker 5: see more packaging deals. But if you look at the data,
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  Speaker 5: packaging deals have been down compared to last year, where
• 8:02
  Speaker 5: other sectors, even in industrials, had been busy. So it
• 8:05
  Speaker 5: was a little surprising to see a big deal in
• 8:07
  Speaker 5: this space. But you know there could be more because
• 8:11
  Speaker 5: it's sort of a predictable area, you know, to to
• 8:15
  Speaker 5: invest in.
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  Speaker 3: Having been adjacent to the private equity world most of
• 8:18
  Speaker 3: my career, I think I learned a few things, which
• 8:20
  Speaker 3: is easy to raise money, It's easy to put money
• 8:23
  Speaker 3: to work. It's really hard to monetize those investments. Where
• 8:26
  Speaker 3: are we in that monetization because it's been kind of
• 8:28
  Speaker 3: a fallow market for the last four or five six years.
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  Speaker 5: So I'm surprised you said it's easy to raise money
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  Speaker 5: because I've seen my colleagues who focus on private equity
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  Speaker 5: have been writing about some issues in the fundraising market
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  Speaker 5: that it's not as easy as it used to be.
• 8:41
  Speaker 5: But definitely there's fewer and fewer public public traded companies
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  Speaker 5: for you guys to report on because there's just so
• 8:47
  Speaker 5: many of these take privates and the IPO market, which
• 8:51
  Speaker 5: is one way that these PE firm sponsors could get
• 8:55
  Speaker 5: some monetization, that's been like shut the past few years.
• 8:57
  Speaker 5: I know things are coming back a little bit by
• 9:00
  Speaker 5: these sponsors love to trade assets to each other, and
• 9:04
  Speaker 5: there were some other private equity deals today. Bain bought
• 9:07
  Speaker 5: a golf company from clear Lake for like a billion
• 9:10
  Speaker 5: or so dollars. So we do see like the steady
• 9:12
  Speaker 5: drum beat of private equities firms just trading assets to
• 9:16
  Speaker 5: each other, and then the occasional big tape private like
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  Speaker 5: this morning.
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  Speaker 2: So you mentioned that it's a little harder to fundraise
• 9:22
  Speaker 2: now than it was a few years ago. Presumably that's
• 9:24
  Speaker 2: because of where interest rates are. If interest rates do
• 9:28
  Speaker 2: decline in twenty twenty six, what does that mean for
• 9:30
  Speaker 2: fundraising efforts by PE.
• 9:32
  Speaker 5: So I would say that it's going to be easier
• 9:34
  Speaker 5: for firms to borrow for leverage buyouts, so we could
• 9:38
  Speaker 5: see more deal making and that could lead to monetization,
• 9:43
  Speaker 5: which could then lead to saying to investors, hey, we
• 9:45
  Speaker 5: have these great returns from these sales, maybe now is
• 9:48
  Speaker 5: the time to raise money. I do think that there's
• 9:50
  Speaker 5: also so many newer private equity firms emerging, and then
• 9:55
  Speaker 5: with private credit, like there's just a lot of things
• 9:58
  Speaker 5: competing for investors mention. But yeah, this is this is
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  Speaker 5: one for cdn R, you know, probably their largest deal
• 10:08
  Speaker 5: in a while, but there's probably more take privates in
• 10:11
  Speaker 5: the market for some of their competitors.
• 10:14
  Speaker 3: M A go on this deal. You see where the
• 10:16
  Speaker 3: advisors are, who's getting paid, which one of my buddies
• 10:18
  Speaker 3: are getting paid.
• 10:18
  Speaker 5: So it's funny. I don't have enough time to mention
• 10:21
  Speaker 5: how many banks are on the financing, so everyone is
• 10:26
  Speaker 5: on the financing, and it's funny. We reported late last
• 10:29
  Speaker 5: night that this deal was going to happen, and we
• 10:31
  Speaker 5: were trying to get the share price, and we were
• 10:33
  Speaker 5: kind of kicking ourselves because we didn't get that in time.
• 10:36
  Speaker 5: When everyone clear there was a poorly cut secret. A
• 10:39
  Speaker 5: lot of people knew we just they were you know,
• 10:42
  Speaker 5: mom's the word on the price.
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  Speaker 3: Well, there are ten investment banks getting paid, not part
• 10:47
  Speaker 3: of it for the private because I mean these investment
• 10:49
  Speaker 3: banks they have departments that their only job is to
• 10:52
  Speaker 3: call on private equity. That's it. They don't call on
• 10:54
  Speaker 3: they don't care about industries. They just so you got
• 10:56
  Speaker 3: to pay these people because they've been calling on you
• 10:58
  Speaker 3: all year, and when you finally do with you, you
• 11:00
  Speaker 3: got to pay all of them. Whereas the advisor, the
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  Speaker 3: seller was represented by evercore One.
• 11:05
  Speaker 5: Which used to be sort of a bootique name, but
• 11:08
  Speaker 5: now you know, they're pretty big and public and they're
• 11:11
  Speaker 5: you know, trying to eat the bulge brackets Launch for example.
• 11:14
  Speaker 5: So yeah, not many people left off that deal.
• 11:17
  Speaker 3: Stay with us. More from Bloomberg Intelligence coming up after this.
• 11:24
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 11:28
  Speaker 1: weekdays at ten am Eastern on Apple, Cocklay and Android
• 11:31
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• 11:34
  Speaker 1: you get your podcasts, or watch us live on YouTube.
• 11:38
  Speaker 3: It is holiday shopping season. I think it's really hard
• 11:42
  Speaker 3: to be a retail analyst. And you've got to be
• 11:44
  Speaker 3: right on the stock and valuation and earnings and all
• 11:46
  Speaker 3: that kind of stuff like every other animals. But then
• 11:48
  Speaker 3: you also have to kind of be right on fashion.
• 11:51
  Speaker 1: How do you do that?
• 11:51
  Speaker 2: How do you do that?
• 11:52
  Speaker 3: I have no idea. Married Ross Gilbert, that's her job
• 11:54
  Speaker 3: Bloomberg Intelligence Senior Echo Annals covering the retailers. Mary, talk
• 11:59
  Speaker 3: to us about a pair of and where are we
• 12:01
  Speaker 3: in the world of apparel these days? What's selling, what's
• 12:03
  Speaker 3: not selling? Are some companies getting it right? Because we're
• 12:07
  Speaker 3: right smack in the middle of the holiday shopping season.
• 12:10
  Speaker 6: Yes, so, Paul, you're absolutely right here we are in
• 12:13
  Speaker 6: the holiday season, and yes, there are some companies that
• 12:16
  Speaker 6: are getting it right. One of those companies includes Gap,
• 12:19
  Speaker 6: which they'll be reporting their earnings on Thursday, and we
• 12:23
  Speaker 6: see a lot of strength with their two largest brands
• 12:25
  Speaker 6: being Old Navy, so we're seeing tremendous strength and style,
• 12:30
  Speaker 6: their viral campaigns that they have there, and also with
• 12:33
  Speaker 6: their namesake brand, Gap, which is their second largest brand
• 12:37
  Speaker 6: for that company. So that's like seventy percent of sales
• 12:39
  Speaker 6: right there for those two brands, and we're seeing a
• 12:42
  Speaker 6: lot of strength and momentum and we think that continues
• 12:45
  Speaker 6: into twenty twenty six. For Gap Aritzia, which is expanding
• 12:50
  Speaker 6: in the US and is entering new markets, opening news
• 12:55
  Speaker 6: stores and then they're gaining on a comp sales basis,
• 12:59
  Speaker 6: So we're seeing a lot of strength with that brand
• 13:01
  Speaker 6: really taking off in the US, so it's still very
• 13:04
  Speaker 6: small here. You know, they have under seventy stores in
• 13:08
  Speaker 6: the US and most apparel brands have over two hundred,
• 13:11
  Speaker 6: So that's one that's faring well. And then of course
• 13:14
  Speaker 6: in the value segment and obviously Old Navy touches that.
• 13:17
  Speaker 6: But off price, we see strength and off price because
• 13:21
  Speaker 6: here you have the brands that consumers want, and it's
• 13:25
  Speaker 6: pretty prevalent across all the companies TJX, Ross Stores and
• 13:31
  Speaker 6: Burlington stores. Now on the department store side, we just
• 13:34
  Speaker 6: had Dillard's numbers out for the third quarter last week
• 13:38
  Speaker 6: and they're third quarter comp sales rows three percent. That's
• 13:42
  Speaker 6: a really nice figure there, and their margins came in
• 13:47
  Speaker 6: better than expected, and that's because they execute a full
• 13:51
  Speaker 6: price model. They're not promotional like Macy's or Kohl's at all.
• 13:55
  Speaker 6: They do have clearance sales and they're typically two times
• 13:59
  Speaker 6: a year, but they're showing their models working. But we
• 14:03
  Speaker 6: think that Macy's is showing some signs of improvement right
• 14:07
  Speaker 6: that we could see their comp sales also come in
• 14:10
  Speaker 6: higher when they go to report in early December. But
• 14:12
  Speaker 6: Coles they're still struggling. They you know, they still need
• 14:17
  Speaker 6: to get assortments right. We did notice their online traffic
• 14:21
  Speaker 6: was better than in store, and then of course when
• 14:23
  Speaker 6: they reported their second quarter, they were still seeing lower
• 14:27
  Speaker 6: sales for their credit card customers, and those are supposed
• 14:30
  Speaker 6: to be their most loyal absolute customers.
• 14:32
  Speaker 2: So Mary, I got to ask you about abercrom Fitch
• 14:36
  Speaker 2: because you did not mention that stock that company at all,
• 14:38
  Speaker 2: and that was like the star retail performer in twenty
• 14:42
  Speaker 2: twenty three when it's stock jumped almost three hundred percent.
• 14:45
  Speaker 2: In twenty twenty four, it gained about seventy percent. So
• 14:48
  Speaker 2: far this year it's down about fifty four percent. What
• 14:52
  Speaker 2: does abercrom mean not getting right or did it just
• 14:54
  Speaker 2: peak already? And you know now everyone else is, you know,
• 14:57
  Speaker 2: playing catch up.
• 14:59
  Speaker 6: We're just we're not seeing the strength and the namesake brand,
• 15:02
  Speaker 6: but in their Hollister brand, we are seeing strength. So
• 15:05
  Speaker 6: really their gen Z focus with Hollister, we're seeing strength,
• 15:11
  Speaker 6: and we're thinking they're going to report some strong numbers
• 15:14
  Speaker 6: for the third quarter. But the namesake brand, maybe it's
• 15:18
  Speaker 6: become a lot more competitive. You know, that customer that
• 15:21
  Speaker 6: shops at Abercrombie also shops at Aritzia, so they could
• 15:25
  Speaker 6: be getting more competition, and with some of the department
• 15:28
  Speaker 6: stores like a Macy's bringing in more relevant brands that
• 15:32
  Speaker 6: might also be taking share. So we are we're just
• 15:35
  Speaker 6: not seeing the strength that we had been seeing on
• 15:40
  Speaker 6: a comp sales basis. And then also we'll have to
• 15:43
  Speaker 6: see how they're faring with margins because they did have
• 15:46
  Speaker 6: a fair amount of exposure with India, and India is
• 15:49
  Speaker 6: now at fifty percent, but we think they'll be able
• 15:52
  Speaker 6: to shift yeah sourcing, you know, into those lower cost
• 15:56
  Speaker 6: Asian countries. Most of Asia is kind of near that
• 15:59
  Speaker 6: twenty percent range now, including China. So we think most
• 16:04
  Speaker 6: of these brands are doing a good job shifting sourcing,
• 16:07
  Speaker 6: and we think that tariffs can be overcome and we
• 16:10
  Speaker 6: think in the second half you will see margins improve
• 16:14
  Speaker 6: across the board. But there are certain retailers that are
• 16:17
  Speaker 6: not really experiencing the erosions such as Ralph Lauren. They're
• 16:21
  Speaker 6: really doing a great job generating strong sales at higher
• 16:25
  Speaker 6: price points and so they're getting the benefit of the
• 16:28
  Speaker 6: sales leverage and then also the full price selling and
• 16:32
  Speaker 6: at higher price points, and those are offsetting tariffs. So
• 16:35
  Speaker 6: you're just not seeing a negative effect. It's just so
• 16:38
  Speaker 6: you're not seeing the margin expansion you would typically see
• 16:42
  Speaker 6: with Ralph Law.
• 16:44
  Speaker 1: Stay with us.
• 16:45
  Speaker 3: More from Bloomberg Intelligence coming up after this.
• 16:51
  Speaker 1: You're listening to the Bloomberg Intelligence podcast. Catch us live
• 16:55
  Speaker 1: weekdays at ten am Eastern on Applecarcklay and Android Auto
• 16:58
  Speaker 1: with the Bloomberg Business Out. Listen on demand wherever you
• 17:01
  Speaker 1: get your podcasts, or watch us live on YouTube.
• 17:05
  Speaker 3: Taking some folks out the fear renews My favorite Italian
• 17:08
  Speaker 3: restaurant place is going to be packed. I mean, it
• 17:10
  Speaker 3: just seems like the restaurant business remains pretty darn strong.
• 17:13
  Speaker 2: But what do I know?
• 17:15
  Speaker 3: Michael Halen, Senior restaurant and food service analyst from Bloomberg Intelligence,
• 17:19
  Speaker 3: he joins us here. Hey, Mike, give us a CeNSE here.
• 17:21
  Speaker 3: I know you kind of you track this stuff really closely.
• 17:24
  Speaker 3: How are the restaurants doing out there? Does it depend
• 17:26
  Speaker 3: upon what segment of the market they're targeting?
• 17:31
  Speaker 7: Yeah, that's definitely part of it. We saw that in
• 17:34
  Speaker 7: last month's data find dining had a really nice rebound,
• 17:40
  Speaker 7: and I think part of it is because they're catering
• 17:42
  Speaker 7: to hire income consumers who own assets and are feeling
• 17:46
  Speaker 7: pretty good about things moving forward. You know right now,
• 17:52
  Speaker 7: you know, November is going to be a tough month.
• 17:54
  Speaker 7: There's no doubt about it. The government shut down has
• 17:58
  Speaker 7: definitely impacted sales and traffic for the chains we cover,
• 18:02
  Speaker 7: especially in the DMV area as well as in the
• 18:06
  Speaker 7: South where there's a lot of government workers. Also, last
• 18:10
  Speaker 7: November restaurant sales had a nice boost from the election,
• 18:15
  Speaker 7: and so we're going to be lapping tough, tough comps.
• 18:18
  Speaker 7: So November is not looking great, but the things should
• 18:24
  Speaker 7: bounce back a little bit here in December. And we're
• 18:27
  Speaker 7: not crazy bullish, but we're more bullish about the first
• 18:31
  Speaker 7: half of next year.
• 18:32
  Speaker 3: So how about quick Let's start with quick Quick Service
• 18:35
  Speaker 3: a dining talk to us about that marketplace. I think
• 18:38
  Speaker 3: back to McDonald's of the world and so on. How's
• 18:41
  Speaker 3: that varing?
• 18:43
  Speaker 7: Yeah, so Quick Service had a really difficult first half.
• 18:46
  Speaker 3: Of the year.
• 18:46
  Speaker 7: They were lapping strong comps and they and they kind
• 18:48
  Speaker 7: of lost their way when it came to value, right.
• 18:52
  Speaker 7: They just had implemented too big of price increases over
• 18:55
  Speaker 7: the last few years and customers started to push back,
• 18:59
  Speaker 7: especially low income consumers who have been you know, who
• 19:02
  Speaker 7: are really impacted by inflation. To a much greater degree
• 19:05
  Speaker 7: than middle and higher income consumers. So the first half
• 19:09
  Speaker 7: was difficult, but here in the second half of the year,
• 19:12
  Speaker 7: things have gotten better, largely because they've re established their
• 19:16
  Speaker 7: value propositions. You know, McDonald's has revamped its dollar menu
• 19:21
  Speaker 7: this year. They also reintroduced snap wraps at a three
• 19:24
  Speaker 7: dollars price point, which have boosted checks by you know,
• 19:28
  Speaker 7: people adding them on to their orders, as well as
• 19:32
  Speaker 7: bringing in some low income consumer traffic. But you know,
• 19:35
  Speaker 7: low income consumers are pulling back at a pretty big rate.
• 19:39
  Speaker 7: You know, we think part of that is the snap
• 19:42
  Speaker 7: benefit pullback right and so quick. But they've been able
• 19:48
  Speaker 7: to bring in some higher income consumers and middle income consumers.
• 19:51
  Speaker 7: So things are starting to look better, all right, McDonald's,
• 19:56
  Speaker 7: McDonald's especially, I mean McDonald's is going to be lapping
• 19:58
  Speaker 7: the E coli or right now is lapping the E
• 20:01
  Speaker 7: Coli outgate about them from last year, and so you know,
• 20:04
  Speaker 7: they're the eight hundred pound gorilla, and I think good
• 20:07
  Speaker 7: results out of McDonald's over the next few quarters should
• 20:09
  Speaker 7: boost the entire category.
• 20:12
  Speaker 3: How about the cost of beef, which you know, consumers
• 20:14
  Speaker 3: complain about across the board. I know companies are dealing
• 20:17
  Speaker 3: with it, and what I understand is we're not going
• 20:19
  Speaker 3: to see a material improvement in the cattle herd till
• 20:21
  Speaker 3: maybe twenty twenty eight. So how does that factor into
• 20:24
  Speaker 3: the profit margins of all these restaurants.
• 20:27
  Speaker 7: Yeah, and so the restaurants that are impacted the most
• 20:32
  Speaker 7: are you know, burger chains like Shake Shack or steakhouses
• 20:37
  Speaker 7: like Texas Roadhouse that own and operate all of their stores.
• 20:41
  Speaker 7: You know, to your point, beef inflation for these chains
• 20:44
  Speaker 7: is going to be in the mid teens in the
• 20:46
  Speaker 7: fourth quarter. So yeah, yeah, very high. So definitely a
• 20:50
  Speaker 7: lot of margin pressure for those chains. If you know. Luckily,
• 20:55
  Speaker 7: those two chains you know, have have driven traffic as
• 20:59
  Speaker 7: of late into the stores which you know, and driven
• 21:03
  Speaker 7: higher sales and been able to pass along price increases
• 21:06
  Speaker 7: and that has kind of helped their operating leverage, which
• 21:08
  Speaker 7: has helped offset the higher costs for the burger chains.
• 21:12
  Speaker 7: They there's less impact for the chains that we cover
• 21:14
  Speaker 7: for McDonald's, Wendy's, Jack in the Box because they're largely franchised,
• 21:18
  Speaker 7: so that the franchisees are the ones putting the bill
• 21:21
  Speaker 7: for the higher beef costs.
• 21:22
  Speaker 3: Why, like, why do not all change. Do like the
• 21:26
  Speaker 3: McDonald's franchise e model. What's the benefits of franchising or
• 21:30
  Speaker 3: what's the benefit of owning versus a franchise. I think
• 21:32
  Speaker 3: I thought I would. I saw the movie. I think
• 21:34
  Speaker 3: I understand the economics of franchising. It seems pretty good.
• 21:38
  Speaker 7: Listen the franchise business. That's a great business, you know,
• 21:41
  Speaker 7: and from where I sit as an analyst, you know,
• 21:44
  Speaker 7: we love it. It's easier to predict the earnings and
• 21:46
  Speaker 7: the free cash flow. It's it's a much more steady
• 21:50
  Speaker 7: business model. Franchising eliminates a lot of the operating leverage
• 21:53
  Speaker 7: and thus the risk to your margins out of the business. Right.
• 21:59
  Speaker 7: But if you are running a full service restaurant chain
• 22:03
  Speaker 7: where operations is very core to your business, think Darden,
• 22:07
  Speaker 7: think Texas Roadhouse, you want to own and operate your
• 22:12
  Speaker 7: source because you want to have control over those operations.
• 22:14
  Speaker 7: You want to make sure people are getting a good experience,
• 22:17
  Speaker 7: and they're just much harder to run than a McDonald's
• 22:21
  Speaker 7: or a Wendy's. And then I'd say, on the last
• 22:23
  Speaker 7: case would be somebody like shake Shack or wink Stop
• 22:27
  Speaker 7: or Kava. You know, when your cash on cash returns
• 22:31
  Speaker 7: are forty fifty sixty percent. We don't think it's a
• 22:36
  Speaker 7: bad thing to be greedy and you want to open
• 22:38
  Speaker 7: up as many stores as possible.
• 22:40
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