Several months ago, we featured a piece on Novo Nordisk, the Danish pharma company that has seen its share price grow by almost 58.48% over the last year. At the time, the company was already popular among fund managers operating in the space. Professional and retail investors alike have continued to lap up the company’s shares and you would be hard pressed to find a European collective vehicle without it in their top ten holdings. Given the company’s extended run, we believe it is a story worth revisiting.
Novo Nordisk is part of a cohort of large European companies that, despite being domiciled in Europe, generate a large portion of their revenue from overseas markets. Wegovy, its weight loss drug, has had approval in the US for quite some time and demand has been high. Another main driver of the company’s continued success has been the approval of Wegovy in both the UK and Europe for widespread use. While competitors have started investing in obesity treatment, Novo Nordisk’s head start and the market dominance of Wegovy may make it hard to catch. As with any company operating in the sector, there are questions about whether new drugs will be approved, but the potential pipeline appears robust and strong cash flow has allowed the company to continue to reinvest in its future. The company may have experienced some reputational damage in the UK and its shares are trading at a historically high level, but this could be perceived as a reflection of the strength of its underlying products.
Previously, we discussed the concern of obesity in the western world. The potential size of the market and the lack of any real competition is what has fuelled the growth of Wegovy and Novo Nordisk over the past couple of years. However, things are changing and competitors are starting to emerge.
Wegovy has proven so popular that demand is outstripping supply in the US. While in one sense this is excellent for Novo Nordisk, it has also created an opportunity for competitors to enter the market. There are many notable threats to the firm’s market dominance as things stand but, to highlight a couple, Mounjaro (a drug from the same family developed by Eli Lilly) and Amgen 133 (a potentially effective drug developed by Amgen that is still in early-stage trials) could both become a serious threat. Mounjaro is already approved for use to treat diabetes and manufacturers hope it will gain approval as an obesity treatment in the US in the near future.
Amgen 133 might be some distance from gaining approval, but early study results indicate that it could help patients lose 15% of their body weight in just 85 days. The bottleneck in the production of Wegovy provides an opportunity for these companies to gain market share if they can position themselves correctly. In the UK, this opportunity may be marginally more pronounced as Novo Nordisk has recently been suspended from the Association of British Pharmaceutical Companies for failing to disclose that it had sponsored weight management training courses for healthcare professionals. Two further audits have been ordered on the firm’s marketing practices. This poses a real threat to the company beyond just a tarnished reputation and could create an opportunity for a rival with an effective product if they are seen as having a ‘cleaner’ ethical background.
On a more positive note, approval is hard to come by in pharmaceuticals and, with this in mind, Wegovy has recently had two boosts to its potential sales. The drug has been approved centrally in both Europe and the United Kingdom for widespread treatment of obesity. There is some advantage to being first movers as it often takes new drugs years of testing to gain approval in these markets. This allows NovoNordisk time to advertise its drug, build relationships with healthcare practitioners and patients and further solidify its market leading position. This makes it increasingly difficult for competitors to disrupt its position. Wegovy sales may have missed their Q1 target but still climbed over 346% year-on-year.
It only gained central approval late in the quarter and, as such, the company expects growth in the future. Despite the missed target, Novo Nordisk revised its sales and operating growth target up to 28%-34%.
Last year, we highlighted that there was a degree of concentration risk associated with the company as 70% of its revenue is generated from one single drug. The purchase of Forma Therapeutics towards the end of 2022 remains its most prominent recent addition. Its pipeline now consists of several new drugs for the treatment of a wide range of conditions from cardiovascular disease and rare blood disorders to Alzheimer’s and Sickle Cell disease. There are also upgrades to the Semaglutide drug that underpins its current generation of diabetes and weight loss treatments. The company is still heavily tilted towards the obesity and weight loss market and this does present a risk that must be considered when analysing it.
All in all, the major revelation for Novo Nordisk over the past few months has been the long-awaited European and UK central government approval. The floodgates have opened for obesity treatment in these markets and currently no other company has the same level of regulatory approval. The question going forward is whether Novo Nordisk’s growth can withstand the competition that is starting to emerge. The company is currently trading with a price-to-earnings ratio of over 30 which, in the current environment, feels eye wateringly high.
The company’s future will ultimately depend on its ability to produce better and more cost-effective treatments than its rivals and, while it has enjoyed an early mover’s advantage, this is inherently difficult to predict.
This article was taken from the
May 2023 issue of Market Insight. To subscribe to our investment publications, please visit
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