As a wealth management company, our operating principle is to seek investment opportunities that can withstand the highs and lows of the financial markets for our users and optimise returns on investments for managed funds. Hence, our team’s current focus is on companies and stocks that can remain resilient throughout the economic cycle.
We have added Novo Nordisk to our stock portfolio, one of the global leading pharmaceutical companies in obesity and rare diseases.
Investment Thesis
Novo Nordisk has demonstrated consistent and strong earnings growth, and compelling profit margins and has maintained its position as a market leader in the diabetes treatment market for the past 5 years.
Novo’s new obesity therapy Wegovy with other GLP1 therapies significantly expanding the obesity treatment market given their strong efficacy. They are poised to remain a key drug in the market until patent expiration in 2032.
We expect the company to maintain its position as a market leader and continue to roll out products from its pipeline that keep it at the forefront of the diabetes and obesity market.
Business Summary
Novo Nordisk is a global healthcare company and a world leader in Diabetes care. The company sells pharmaceutical products that help fight diabetes and improve insulin response in patients. It operates in two segments; diabetes & obesity care and rare diseases.
Novo is one of the global pioneers of diabetes care, the company has been operational for over 85 years and claims 32% of the $50B+ diabetes treatment market and roughly half of the more than $15B insulin market.
The prevalence of diabetes is expected to soar in the coming decades because of an increasingly overweight and an ageing Western population, and we expect Novo to maintain its wide moat as it continues to dominate in diabetes and obesity therapy innovation. Due to the increasing number of people with diabetes, the global pharmaceutical market for the treatment of diabetes continues to grow.
Several of the major international pharmaceutical companies have entered the diabetes market, specifically in oral products for the treatment of type 2 diabetes. In the global insulin market, Novo Nordisk, Eli Lilly and Sanofi are the most significant companies measured by market share.
Novo’s growth is largely coming from GLP-1 (Glucagon-like peptide 1) therapies, which include Victoza (daily), Ozempic (weekly), and Rybelsus (daily oral); strong efficacy and cardiovascular benefits have allowed Novo to continue to grow the sales of GLP-1 therapies in diabetes.
Novo received U.S. approval for Wegovy in obesity in June 2021 and is in phase 3 testing in areas like NASH, Alzheimer’s disease, and heart failure. Novo’s latest obesity therapy, Wegovy, is significantly expanding the obesity treatment market, given its strong efficacy. It is poised to remain a key drug in the market until its patent expires in 2032.
Business Performance
Novo’s revenue has demonstrated strong financial performance in the past 5 years. Revenue, gross profit and net income have grown at a compounded rate of 13.2%, 13.4%, and 12.5%, respectively. The company has maintained gross, operating and net income margins of 83.5%, 42.2% and 32.8% respectively, for the past three (3) years.
| $ B | 2018 | 2019 | 2020 | 2021 | 2022 |
| Revenue | 16.11 | 17.58 | 18.29 | 20.29 | 25.50 |
| Gross Profit | 13.58 | 14.69 | 15.28 | 16.88 | 21.40 |
| Operating Profit | 6.81 | 7.56 | 7.80 | 8.45 | 10.78 |
| Net Income | 5.57 | 5.61 | 6.07 | 6.88 | 8.00 |
Risk
During 2022, there was higher-than-expected demand and temporary capacity limitations at some of their manufacturing sites. There were periodic supply constraints for certain products, including the leading product by sales, Ozempic, for treating type 2 diabetes. This periodic supply constraint and related drug shortage across a few products and geographies are expected to continue in 2024 and may cap revenue generation potential.
In recent years, there has been a general trend in the United States of payers managing the cost of diabetes care to exert pressure on the price of Novo Nordisk’s and competitors’ products. In the United States, pharmacy benefit managers and managed care organisations have continued to leverage their increasing size and control to demand higher rebates which has impacted the net realised prices. Furthermore, competition has intensified, including the authorisation of the first interchangeable insulin in 2021, contributing to a downward pressure on manufacturers’ net prices.
In the healthcare and pharmaceutical sectors, there is always a risk of losing market share to competition if new novel products are not released. Despite Novo’s strong portfolio and pipeline projects, the company risks losing market share to competitors if it fails to manufacture products that cater to the needs of its market demographics.