Investment Outlook Unpacked

Novo Nordisk (OTCPK:NONOF) reigns supreme in an industry fortified with formidable entry barriers, unyielding pricing power, and minimal demand responsiveness.

The company rides the enduring tailwinds of a burgeoning diabetic and obesity-afflicted population. This crucial demographic shift has paved the way for substantial reinvestment in organic growth, strategic acquisitions, and the expansion of production facilities.

Remarkable capital allocation, soaring returns on invested capital, stable revenues, negligible debts, and outstanding net income margins endorse its standing as a prized long-term investment. The continuous market favoritism has flabbergasted the predictions, surpassing initial expectations.

Corporate Overview

Novo Nordisk dominates the pharmaceutical landscape with a formidable stronghold in diabetes and obesity care. A surge in demand for its weight-loss marvel, Wegovy, has propelled the company to record-breaking earnings, thereby cementing its status as Europe’s most valuable enterprise with a colossal $460B market cap.

The insulin market, a dominion dominated by three colossi — Novo Nordisk, Sanofi (SNY), and Eli Lilly (LLY) — commands over 90% of the global market share. This oligarchic grip bequeaths them with sky-high margins, astronomic returns on capital, and unassailable pricing dominance.

Novo Nordisk’s primary revenue contributors and their proportional impact are:

• Injectable GLP-1: Ozempic and Victoza (43.6%)
• Oral semaglutide: Rybelsus (7.7%)
• Insulin products (22.8%)
• Obesity care: Wegovy and Saxenda (18.3%)
• Rare disease (7.6%)

Although only a handful of insulin products retain patent protection for the compound itself, a majority of insulin products are shielded by patents on the dosing pens and delivery devices.

This industry structure and the formidable barriers to entry have fueled Novo Nordisk’s revenue growth, clocking in at a staggering 10.5% CAGR over the last decade. Bestowed with a fundamental product commanding scarce demand elasticity, operating margins soar over 43%, while returns on invested capital stand imperiously at 32%.

In recent times, Novo Nordisk has honed its focus on the obesity segment, magnifying its revenue contribution from a mere 2% in 2017 to an impressive 18% of total revenue, surpassing all investor aspirations.

Exceeding Expectations

In my initial coverage of Novo Nordisk, I anticipated a 25% surge in revenues for 2023, followed by a 15% uptick in 2024. Miraculously, the company has galloped past my projections, with the stock catapulting to eclipse the previous fair price ($186 per share, $93 after the 2:1 split).

Following three incremental revisions to guidance throughout the year (in April, August, and October), revenue escalation is now poised to reach 29% for the entirety of 2023 (34% at CER), with net income margins surging above 36% (in contrast to 31.4% in 2022).

The staggering feats of the company in the past year are chiefly attributable to a spike in revenues from the injectable GLP-1 segment, witnessing Ozempic revenues surge by 53% over the initial 9 months. Simultaneously, the obesity care segment witnessed a seismic 167% surge in the same period, driven primarily by a stratospheric 481% spike in Wegovy’s revenues.

With Ozempic constituting nearly 40% of total revenues, any surge in demand precipitates a monumental impact on the overall financial performance. Meanwhile, Wegovy’s revenue contribution has surged from a modest percentage the previous year, owing to supply constraints (2.9%), to commanding 13% of total revenues during 2023, thanks to the ramp-up in production capacity to cater to the entire U.S. demand for the 2.4mg dose (though challenges persist in meeting the 1.7mg demand).

Geographically, GLP-1 diabetes products witnessed swifter growth outside the U.S., predominantly fueled by mushrooming demand in China (80% revenue upsurge), whereas the growth in obesity products was largely steered by the U.S., the primary market for this segment (comprising 79% of obesity revenues), where the company has fervently focused to meet the escalating demand.

In Europe, Wegovy has only been introduced in Germany, the U.K., Denmark, Norway, and Iceland, signifying substantial untapped potential.

In addition to surpassing the 2025 sales expectations for the obesity segment during 2023 ($3.7B), the company has revealed the findings of the SELECT cardiovascular trial, unveiling a statistically significant outcome and a substantial 20% drop in major adverse cardiovascular events compared to the placebo. This triumph broadens Novo Nordisk’s horizons to new market realms.

These milestones arrive at an opportune juncture following the FDA’s recent approval of Eli Lilly’s Zepbound injection for obesity treatment, which has showcased superior efficacy than Wegovy (although the latter remains applicable for treating pediatric patients).

The complete SELECT results were unveiled at the American Heart Association Congress in November, with a label indication expansion for Wegovy in the pipeline. The FDA has accorded a priority review, and the expansion could secure approval by May 2024.

While gauging the precise total addressable market proves challenging, given the substantial overlap between diabetes, obesity, and cardiovascular diseases, the label expansion for Wegovy could fortify Novo Nordisk’s market preeminence and incite insurance providers to extend coverage for Wegovy.