2023-11-24 10:32:51 ET
Summary
- Novo Nordisk's stock price has risen by over 365% in the past 5 years, giving the company a market cap of $458 billion.
- Much of the valuation growth has been driven by a single drug, semaglutide.
- Semaglutide is approved in T2D as Ozempic, and in obesity as Wegovy - demand for the latter is off the scale.
- Eli Lilly's recently approved drug Zepbound is a major threat to Novo's market share in weight loss, albeit the market opportunity is large enough to accommodate both.
- The market clearly expects to see major revenue growth in the coming years - I believe Novo has the capacity to meet expectations, but the share price may have reached peak levels.
Investment Overview
Novo Nordisk (NVO), the Danish Pharma giant, has delivered phenomenal gains for shareholders across the past 5 years, its stock price has risen in value by >365%, giving the company a market cap of $458bn. Amongst global pharmas, only Eli Lilly (LLY) enjoys a higher valuation.
Amongst all listed companies, Eli Lilly has the 11th highest market cap, and Novo Nordisk is the 15th highest. In fact, Novo's market cap is higher than the entire GDP of Denmark!
Whilst Novo has driven some impressive revenue growth across the past few years, from ~$16bn in 2016 to $25.5bn last year, the market is much more excited about the company's future growth than it is about performance today, and that is primarily down to a single medication - semaglutide.
Consider the fact that Novo's revenues in 2022 - ~$25.5bn - represents less than 25% of the revenues earned by Pfizer (PFE) last year - >$100bn - yet Novo's market cap is >2x higher than Pfizer's, or that Novo's net income in 2022 - $7.85bn - was >$1bn less than French Pharma giant Sanofi's (SNY), yet Novo's valuation is >4x higher than Sanofi's, and you get some idea of the value the market attaches to semaglutide.
Semaglutide is approved in the US and Europe in 2 indications - for Type 2 diabetes ("T2D") under the brand name Ozempic, and for treating Obesity, under the brand name Wegovy. In 2020, 2021, and 2022, Ozempic earned revenues of ~$3bn, $4.8bn, and $8.5bn, and across the first nine months of 2023, $9.5bn. Wegovy earned $3.1bn across the equivalent period in 2023.
Semaglutide is a class of drug known as a glucagon-like peptide-1 ("GLP-1") agonist, which has the ability to harness the brain's GLP-1 receptors to curb appetite - essentially, the drug has the capability of making patients feel less hungry.
Originally developed following studies of lizard venom , to treat diabetes, doctors began to notice the drug's weight loss capabilities, turning a useful drug candidate into a drug with "miraculous" qualities. Recently, Novo has shared data that shows the drug may reduce the risk of heart failure by as much as 20% versus current standards of care.
Peak sales forecasts for Ozempic were originally pegged by analysts at >$10bn by the beginning of the next decade, which is impressive, albeit not large enough to support Novo's current valuation. The approval of Wegovy in obesity opens up an even larger market, however - semaglutide is now expected to bring in ~$33bn in peak annual revenues by 2032 - ~50% of a $71bn estimated market for GLP-1 agonists.
Why only a ~46% share of the GLP-1 market? Because semaglutide is not the only GLP-1 agonist to secure approval - in fact, it may no longer be the best-in-class "incretin mimetic". That honour may end up going to tirzepatide, a GLP-1 agonist developed by Eli Lilly with an additional twist - tirzepatide binds to two receptors, GLP-1 and GIP, another "incretin mimetic", and data suggests that it may have a slight edge over semaglutide on efficacy.
Semaglutide versus Tirzepatide - A Market Opportunity That Is Big Enough For Both?
This month, tirzepatide, already approved to treat T2D under the brand name Mounjaro, which earned $1.4bn of revenues in Q3, having been approved in May last year, secured its second major approval , under the brand name Zepbound, to treat obesity.
To date, Novo's rollout and revenues earned from sales of Wegovy have only been checked by a global supply shortage as demand for the drug exploded, in part driven by celebrity endorsements and a growing hype around the drug's miraculous ability to help anybody - not just diabetics and those with obesity - lose weight. With a new player in town, the supply pressures may soon start to lift on Novo, but not in a way that will please management or Novo shareholders.
After the Zepbound approval was announced on November 8th, Novo stock barely skipped a beat, as the company released some positive news of its own. Novo announced it plans to invest ~$6bn to expand production in Denmark, where it has >23k staff, with a new 170k meter squared active pharmaceutical ingredients ("API") facility planned.
The company released its cardiovascular outcomes data on 11th November and revealed it will invest ~$2.3bn expanding its production facility in Chartres, France, which has "capacity for GLP-1 products", in a press release today. The upshot is that Novo's share price is up a further 6.5% on a 1-month basis.
The market may also have been encouraged by a report from Global Data, suggesting that Zepbound is likely to achieve ~$4.1bn of revenues by 2031 in the US, with Wegovy expected to achieve revenues of $8.2bn. With that said, how accurate are these forecasts likely to prove?
In my opinion, they seem wide of the mark, for two reasons - one, the obvious scale of demand for the drugs, and two, the market's sky-high valuations of the two companies, suggest that peak revenues ought to be substantially higher.
Lilly revealed in its press release that:
Zepbound is expected to be available in the U.S. by the end of the year in six doses (2.5 mg, 5 mg, 7.5 mg, 10 mg, 12.5 mg, 15 mg) at a list price of $1,059.87 per month, which is approximately 20% lower than semaglutide 2.4 mg injection for weight loss.
Lilly added that commercially insured patients with Zepbound coverage could pay as little as $25 for a 1-month or 3-month subscription, while commercially insured patients without coverage would likely pay ~50% of the list price.
At its highest dose, in studies , Zepbound has led to an average 21% weight loss in patients, while Wegovy's pivotal study achieved an average 15% weight loss. It is not necessarily a good idea to compare studies, however, and likely that different patients will respond differently to the different drugs, and ultimately make up their own minds about which they prefer, based on factors beyond percentage weight loss, such as side-effects, or even the strength and reach of the two companies' marketing campaigns.
As I mentioned in my recent note on Lilly:
Lilly is spending nearly $3bn on 2 new manufacturing sites in North Carolina, plus a site in Ireland, and two more in Indianapolis, according to Chief Financial Officer Anat Ashkenazi, speaking at a recent healthcare conference .
The money being spent by both companies, the global demand for their "miracle" weight loss drugs - World Health Organisation data suggests ~42% of Americans suffer with obesity, with >9% having severe obesity - suggests to me that JP Morgan's estimate of a $71bn market by 2032 is much more accurate.
The second reason I am sceptical about the Global Data figures is that a peak revenue figure of ~8bn for Wegovy, and $4bn for Zepbound by 2031 would not come remotely close to justifying either company's current sky-high valuation. In its Q3 earnings release, Novo raised its FY23 guidance, stating that "sales and operating profit growth at CER are now expected to be 32-38% and 40-46%, respectively."
This translates to a FY23 revenue figure of ~$34.4bn, and an operating profit of $15.6bn, or a forward price to sales ratio of ~13.3x, and a forward price to operating profit of ~29.5x. If we compare this to the industry average (ex Novo and Lilly) of ~4x P/S, and 24x price to earnings, we can see that, as mentioned in my intro, the market is demanding a sustained period of revenue and profitability growth that is likely to be challenging for Novo to deliver.
As such, in terms of whether Lilly's launch of Zepbound will have a negative impact on Novo's share price and valuation, assessing the potential market opportunity in play is critical. If these two companies are fighting over a <$15bn future market opportunity, as Global Data is suggesting, then the likelihood that Novo's valuation bubble will burst sooner rather than later is high, and the same applies to Lilly - either GLP-1 agonists are the future of diabetes/weight loss treatment, or these companies valuations are destined to fall hard.
If, as JP Morgan is suggesting, the market opportunity is >$70bn, with Novo potentially earning close to a 50% share, then it is possible that by 2030, Novo could reach a revenue figure of ~$75bn based on growing semaglutide sales alone, growing at a compound annual growth rate of ~12%. That represents a long-term forward P/S of ~6x, much closer to the sector average, and a long term price to an operating profit of ~13x, which is an improvement on the sector average P/E ratio, although taxes/interest expense, etc. would also need to be deducted.
Concluding Thoughts - Tirzepatide & Semaglutide Can Coexist Without Damaging Novo Valuation - But Further Upside May Be Restricted
To conclude this discussion, it's my opinion that Novo's share price will not necessarily be affected by Lilly's successful approval for Mounjaro and Zepbound, although the case for the company's shares realising further upside is questionable.
The hype around first Ozempic, and then Wegovy has been as frenzied as around any drug in living history, including the likes of Prozac, Viagra, Gilead Sciences HCV drugs, the statin medication Lipitor, however, the data is clear, and it is positive, and it's possible that semaglutide, in its twin indications, could outsell all of these drugs.
At this point in the semaglutide story, however, it's becoming clear that hype will no longer sustain Novo's share price growth, rather the market will begin to look at revenue and profitability as a means of establishing value, not future promise.
The key question is what that future will look like - can Novo resolve its manufacturing issues, face down the competition from Lilly's tirzepatide, and deliver the ~$75bn plus revenues the market appears to want to see before the end of the decade?
The biggest challenge may come from next-generation GLP-1 agonists. Lilly is already sharing best-in-class data in weight loss from a candidate that targets a third hormone besides GLP-1 and GIP, glucagon, earning it the monicker "Triple G". The likes of Amgen ( AMGN ) and Pfizer ( PFE ) are also reportedly working on launching GLP-1 agonists into the market.
Novo has been in the diabetes business for >100 years, however, and the company is a crown jewel of the Danish economy with a product that seemingly has the potential to transform the healthcare landscape.
According to Reuters , mentions of "GLP-1", "obesity", or "weight loss medication" were featured >250 times in third-quarter earnings transcripts across 29 earnings calls for major healthcare and pharmaceutical companies - double the number from the same second-quarter transcripts.
As such, and based on the above discussion, my conclusion is that semaglutide can live up to the higher end of analysts' expectations and that this can be the catalyst that sustains Novo's share price at its current - astonishingly high - levels.
I would not be optimistic about share price growth, as merely living up to the market's future revenue expectations, whilst competing against Lilly's Mounjaro and Zepbound, will be a major challenge even for a diabetes specialist like Novo.
For further details see:
Novo Nordisk: Eli Lilly's Zepbound Approval Is Not A Threat To Valuation