Game Changers: Novo Nordisk’s obesity drugs

The success story of Novo Nordisk

Why write a game changers equity note on an European pharmaceutical company you might be thinking? Why is it even interesting? Novo Nordisk has been one of the winning stocks in Europe over the past 31 years delivering 20.4% annualised return since July 1991 including reinvestment of dividends. The engines behind its success has been its innovation on insulin against diabetes leading to an annualised revenue growth of 10.2% since 1992. During the same period the EBITDA margin has risen from 22.2% to 46.5% as the company has become increasingly more efficient. Its three decade winning streak has taken the company from the lower tiers in the equity market to the third most valuable European company with a market value of €288bn. There are many similarities in the growth journey of Novo Nordisk and the other long-term growth winner ASML from the Netherlands which now the fourth largest company in Europe on market value and considered Europe’s crown jewel. Investor confidence is high in Novo Nordisk seen from high P/E ratio at 30.1 times 2023 expected earnings. The share price is up 122% since March 2021 so most investors would think that it has become too speculative and overvalued. But what if there is a game changer underlying the acceleration in the share price?

A new beginning with saxenda

It all started with the company move into obesity care many years back with its first drug called Saxenda which work by mimicking the natural GLP-1 hormone and thus is effective for suppressing the chemical signals leading to excessive eating. From Q1 2016 to Q1 2021, Saxenda grew from zero revenue to a DKK 5.6bn a year business. Investors were excited as this new obesity care segment had grown to 4.6% of the total business - it looked like Novo Nordisk had found a new significant revenue leg. They had indeed, but it required a new drug. That drug is called Wegovy and is also mimicking the GLP-1 hormone but has a different active compound called samaglutide instead of liraglutide used in Saxenda. Both drugs are on prescription and the patients must have a BMI figure well above the normal range for most humans. Wegovy was FDA approved in early June 2021 and that was the starting point of the big repricing of the stock and the new growth engine.

Wegovy is rocket fuel for Novo Nordisk growth

Since Q2 2021, Wegovy has grown from DKK 100mn business per quarter to DKK 2.4bn per quarter in Q4 2022 and was one of the main drivers behind the revenue and earnings surprise including the FY revenue and operating outlook of 13-19% growth in constant currency. This is a quite high growth rate given the size of Novo Nordisk, but when you look at the numbers you will understand why. Before Wegovy, obesity care was an annual DKK 5.6bn business and now it is DKK 16.9bn in just seven quarters making up 12% of total revenue a big jump from 4% just seven quarters ago. Total revenue in the obesity care segment is up 123% y/y which is the highest growth rate observed for this segment dwarfing even the early days of the Saxenda launch – this alone is quite impressive. According to the Q4 2022 investor presentation, Wegovy is now launched in Denmark and Norway and more countries are expected during 2023.

Are investors getting too optimistic?

Investors might be carried away by the first mover advantage of Novo Nordisk providing an extraordinary opportunity to grab the highest market share for this new category. Novo Nordisk’s biggest competitor is Eli Lilly and the US pharmaceutical company is expected to get FDA approval and launch their own weight loss drug during 2023. The story of Novo Nordisk shows why big gains in equity markets require a catalyst and often a game changing product or business model. Novo Nordisk found a game changer and the future will tell how far it can take Novo Nordisk towards the absolute pinnacle of the global equity market.