“The secret of getting ahead is getting started.”
– Mark Twain
The Evolution of Innovations
By Ray Ryan, CFA
Transformative innovations often emerge as if from thin air. They seem revolutionary. Yet, most are evolutionary, constructed on existing technology platforms. They succeed where prior efforts fell short.
The iPhone was not the first smartphone. Google was not the first search engine. ChatGPT was not the first Large Language Model (LLM – a form of generative artificial intelligence, or AI). Ozempic and Mounjaro are not the first GLP-1 drugs approved for the treatment of type 2 diabetes. The FDA recently approved them for weight loss under brand names Wegovy and Zepbound, respectively.
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Ray Ryan is the president of Patten and Patten, an investment management firm, and a registered investment adviser in Chattanooga. Ray is a CFA charter holder, a member of the advisory board for UTC’s College of Business, and an adjunct professor of finance at UTC. He is a graduate of Princeton University, where he had the privilege of taking a course taught by former Federal Reserve Chairman Ben Bernanke.
Transformative innovations all achieve mass adoption. Mass adoption requires broad recognition of value. Google and the iPhone were clearly transformative innovations.
Technologists criticized the virtual keyboard of the first-generation iPhone. Some wireless carriers waited until the third or fourth generation to provide coverage. Eventually, proliferation of iPhone apps and an incredible user interface contributed to mass adoption.
Thirty years ago, the novelty of the internet seduced people into staying up all night to surf the web. I never did. I saw little value in entering random web sites into a browser. Then, Google launched, and it was free. Suddenly, the internet had value for me.
The rest is history. Both ChatGPT and GLP-1 drugs have similar transformative potential.
Investor excitement over artificial intelligence and GLP-1 drugs contributed to their dominance over 2023’s stock market. However, neither AI nor the drug class are new. There were previous iterations in development for years.
Early AI models struggled with context. They didn’t “understand” complete sentences. Today, AI embedded in Word and Outlook “reads” sequences of words. Embedded AI models do a reasonably good job highlighting typos, misspellings, and grammatical mistakes. The identifications are helpful, yet often annoying, because AI now insists on finishing sentences.
Early reviews of Copilot, Microsoft’s AI assistant, are mixed. Copilot is Microsoft’s version of ChatGPT embedded in Word, Outlook, Teams, Excel, and PowerPoint. The software upgrade can summarize emails, generate text, create documents, presentations, and spreadsheets. It costs $30 per month. Some commentators already claim increased productivity. However, many beta testers argue Copilot is not worth $30 because it makes too many mistakes.
Without insurance, Ozempic and Mounjaro each cost approximately $1,000 per month. High prices have not, however, discouraged demand. The pharmaceutical companies cannot manufacture enough. Because of supply shortages, market penetration of both drugs is currently limited. That should change quickly as companies are investing heavily to manufacture greater volumes.
GLP-1 drugs are innovative therapies developed using advanced technologies such as micro- and molecular biology; computational biology. Decades of research has furthered knowledge of the human body as a complex, adaptive system. These breakthrough therapies relied on advances achieved by previous developments. Prior type 2 diabetes therapies struggled to achieve mass adoption because of technical limitations or side effects. Ozempic and Mounjaro are more effective than previous drugs with fewer side effects.
Demand for Copilot juxtaposed with demand for GLP-1 drugs provides insight regarding consumer preferences. On one hand, consumers seem unwilling to pay a $30 monthly subscription fee for a software upgrade that could significantly increase productivity. On the other hand, consumers appear quite anxious to pay $1,000 out of pocket each month for therapies that more effectively regulate blood sugar and assist with weight loss.
The lukewarm reaction to Copilot suggests consumers believe its value is less than $30. That perception could change if consumers become confident the AI add-on improves productivity. Consumers need applications to make that assessment. Consider email. Email had negligible value when only a few people had accounts. As more people communicated by email than by other methods, email became necessary and indispensable. It acquired value.
An innovation’s value increases with mass adoption. Mass adoption generally requires price deflation. America Online once charged for email. Today, email is included in network access charges or other applications. Its price is effectively zero. Thus, it is probable the price of Copilot falls to zero while its value increases exponentially. At that point, Copilot could be as indispensable as email, or even displace email as a productivity tool.
Wider adoption of Ozempic and Mounjaro requires price declines. Expanded insurance coverage should help in this process. Current market interest in the drugs suggests their ultimate market value could be gigantic. However, the value of healthcare innovations extends well beyond improved health of an individual. Value includes improved quality of life for a large percentage of the population.
An extensive continuum of care serves the diabetic population, including monitors, devices, and dialysis centers. Diabetes is a particularly pernicious disease that, if left untreated, progresses over time to damage vital organs and systems. By more effectively treating type 2 diabetes and weight loss, these new therapies could reduce prevalence of a long list of complications associated with diabetes. In the process, they could disrupt the established healthcare ecosystem for diabetes management. Eventually, they could achieve market penetration similar to statins, a class of anti-cholesterol drugs. Today, nearly 100 million people in the United States rely on statins. Analysts project market penetration of GLP-1 drugs could reach similar levels in the next five to 10 years. From this perspective, is $1,000 per month justified?
Transformative technologies eventually achieve ubiquity. To achieve ubiquity, innovations need to be transformative. Automobiles. Televisions. Household appliances. Smartphones. Should we add AI and GLP-1 drugs to that list? We shall find out in the next few years.
