NOVO NORDISK: A HEFTY OPPORTUNITY

A weight loss pill that works with minimal side effects? The idea would have seemed like a scam just five years ago.  But now Novo Nordisk ($NVO) is charging ahead with new science that just may turn fantasy into reality. The leader in diabetes, Novo is well positioned to become the leader in the new field of obesity treatment. Pharmacy Analyst Dabin Im reports….

Background

Novo Nordisk (NYSE:NVO) is a Danish pharmaceutical company with 80 offices around the world and 33 products in 169 countries. For the past 100 years, Novo Nordisk has been a leader in providing innovative treatment for diabetes. In addition, it has the most market share for obesity treatment and the second most for hemophilia treatment. It also provides hormone replacement therapy for women’s health and therapy for growth disorders.

One of the company’s most popular classes of medications is glucagon-like peptide-1 (GLP-1) agonists, which copy the actions of GLP-1. GLP-1 is a natural hormone that stimulates the release of insulin. Without insulin, the body would not be able to turn sugar into energy. When there is too much sugar built up, it can lead to obesity and become the root cause of many diseases. To prevent this, GLP-1 lowers blood sugar levels and increases satiety, which decreases appetite. Novo Nordisk manufacturers two drugs in the GLP-1 agonist class: semaglutide (Brand names: Ozempic and Rybelsus) and liraglutide (Brand names: Victoza and Saxenda).

Novo Nordisk’s diabetes treatment comes with some special benefits. For the first time in history, Novo Nordisk has been able to formulate the big GLP-1 molecule into a tablet (Rybelsus) so that patients do not have to inject themselves like every other medication in this drug class. It is the Tesla of metabolic syndrome. Does everyone really need a self-driving car? No, but it does make life a lot easier. Better yet, Saxenda was approved to be used for weight loss by the FDA because it has been proven safe and efficacious in lowering the body mass index (BMI). Saxenda is an injectable medication, but Novo Nordisk filed for FDA approval in weight loss for Rybelsus (oral tablet of semaglutide), which is currently only approved to treat diabetes. So why aren’t most diabetic patients taking this drug? Well, the main limitation is, not surprisingly, the price. 

Weight of Obesity 

Insurance companies used to feel hesitant towards paying for obesity drugs due to its heavy implications with cosmetic use. However, more insurance companies are starting to realize the importance of combating obesity as it is a disease in itself that can lead to much more expensive expenses, such as hospitalizations and surgical procedures. In fact, they are now required to cover screenings and counselling for obesity at no extra charge. Diseases related to obesity make up 21% of total annual healthcare spending, which is $190.2 billion in America. Insurance also costs around 25-50% more for obese people than those with a Body Mass Index (BMI) below less than 30. Therefore, it is crucial to prioritize tackling obesity, and Novo Nordisk’s drugs allow them to do so. On average, semaglutide leads to a 15% reduction in weight, whereas liraglutide leads to an 8% weight loss. 

Americans spend an annual total of $33 billion on weight loss. If semaglutide and liraglutide are both used to treat obesity 50% of the time, Novo Nordisk’s revenue will increase by 79% from its current 2020 revenue of $20.8 billion. Even if semaglutide and liraglutide were used 10% of the time for obesity, its revenue will still increase considerably by 16%. 

Pipeline  

Besides its current drugs, Novo Nordisk has an optimistic pipeline with the right resources. For example, Novo Nordisk acquired two pharmaceutical companies: Corvidia Therapeutics and Emisphere Technologies. These acquisitions provide a promising future in cardio metabolic diseases, which are closely related to diabetes and obesity. One of its pipeline drugs, ziltivekimab, targets a specific population of increased atherosclerotic cardiovascular disease (ASCVD) risk and chronic kidney disease (CKD) risk with inflammation. Results from the clinical phase II trials are promising, and if the drug receives approval, that is another huge growth opportunity. Emisphere Technologies develops oral formulations of drugs that are hard to maintain the same efficacy when taken by mouth. The oral formulation, such as a tablet or capsule, is one of the main breakthroughs that helps Novo Nordisk stand out. If it could have more oral options for injectable drugs, then that would be the best of both worlds. 

With fourteen drugs in phase 1 development, four drugs in phase 2, seven drugs in phase 3, and two already filed for FDA review, Novo Nordisk continues to innovate and stay competitive in the market. In addition to creating new medications, Novo Nordisk is maximizing its current products to be used for other diseases. For example, Novo Nordisk started phase 3 development for using semaglutide as treatment for Alzheimer’s.

Stock Analysis

When looking at the stock price, it is important to keep in mind that Novo Nordisk is a long-term investment. Over the past year, its operating margin was 42.64%. The operating margin measures whether the company is making enough profit to keep it alive by being able to pay for all the costs associated with running the business. So out of the $100 that Novo Nordisk makes, $42.64 is what it gets to take home. For pharmaceutical companies, the median operating margin is 13.8%, while non-pharmaceutical companies from the S&P 500 Index has a median operating margin of 7.7%. 

Another reason to invest in Novo Nordisk is for its dividends. It offers a 1.8% yield, which is higher than the S&P 500 ETF dividend yield of 1.34%. Therefore, you get paid just for investing in this great long-term stock. 

In addition, Novo Nordisk’s Return on Invested Capital (ROIC) was 35.07 over the past 12 months with its weighted cost of capital (WACC) at 4.34. ROIC is how much money a company makes in relation to how much shareholders invested into it. WACC is the average investment cost that was put into the company. Because ROIC is higher than WACC, the shareholders are getting great value and returns out of Novo Nordisk. 

Company Outlook

Novo Nordisk is a great long-term investment because it focuses on the diseases that can lead to many other diseases. For example, obesity could lead to Type 2 diabetes, which could lead to various heart diseases and damage in the kidney, eye, foot and skin. In fact, 42.4% of American adults were obese in 2020, and this statistic is expected to increase to 48.9% by 2030. In addition, 10.2% of Americans have diabetes with 26.6% having prediabetes. These statistics are also expected to increase, with CDC predicting that 40% of adults in America will develop type 2 diabetes. Diabetes is a life-long disease that does not have a cure and cannot be reversed. It can only be controlled with medications. Therefore, Novo Nordisk will always be needed. Many diabetics are poorly controlled and do not stay adherent to their medications due to a variety of reasons, such as cost and not liking injections. Novo Nordisk can help increase adherence rates with its oral medication and increase sales, especially when more insurance companies start covering this medication.

Novo Nordisk’s goal of reaching one-third of the global market share for diabetes treatments by 2025 seems very feasible with its current market share of 29.2%. Another goal is to double the sales of its obesity treatments by 2025. This is also practical because the desire to combat obesity continues to increase among not only consumers but also insurance companies. The increasing demand of obesity and diabetes treatment can be attributed to the increase in this patient population. 

Over the past five years, the company’s revenue grew 4.63% on average annually. But due to the increasing demand of its products, Novo Nordisk’s profit is now expected to grow around 10%, from $20.8 billion in 2020 to $23.59 billion in 2021. Overall, Novo Nordisk has strong finances, healthy profitability, and a promising outlook. This stock could yield sweet profits for investors.