Novo Nordisk A/S (NVO, Financial) is the largest Danish pharmaceutical company focusing on developing medicines to combat obesity, diabetes, cardiovascular diseases and non-alcoholic steatohepatitis.
Since the beginning of 2024, the company's share price has risen more than 20% thanks to hype around the new wave of weight loss agents, as well as excellent financial results for the fourth quarter of 2023. Earnings per share for the three months ended Dec. 31 amounted to 71 cents, an increase of 61.40% year over year and beating analysts' expectations by 5 cents.
Moreover, Novo Nordisk management expects its total sales in 2024 to grow by 18% to 26% relative to 2023, even in the face of increased competition in the global insulin market, as well as the negative impact of Biden's Inflation Reduction Act. In addition, the company's free cash flow is expected to be between 64 billion Danish krone ($9.18 billion) and 74 billion krone, continuing to increase year over year.
Source: Novo Nordisk.
In our assessment, one of Novo Nordisk's key products is Ozempic (semaglutide), which was first approved by the Food and Drug Administration on Dec. 5, 2017, for the treatment of type 2 diabetes. Subsequently, due to its extremely high efficacy in reducing A1c levels, the risk of major adverse cardiovascular events, reducing body weight in patients and its favorable safety profile, the U.S. health regulator expanded its number of indications for use.
Author's elaboration, based on based on Novo Nordisk press releases.
Its sales were about 30 billion krone in the fourth quarter of 2023, up 77.10% year over year due to an increase in its share of the global type 2 diabetes treatment market, expanding geographic use as well as the switching of patients from Victoza (liraglutide) since the launch of its generic versions is expected in mid-2024.
Source: Author's elaboration, based on quarterly securities reports.
In addition to the company's improving financial position, as well as its rich portfolio of experimental drugs, another investment thesis we highlight is its management's aggressive use of a share repurchase program.
Novo Nordisk spent about $1.43 billion in the fourth quarter of 2023, which is 33.10% more than the previous year. According to GuruFocus, this reduced the number of outstanding shares from 4.50 billion to 4.46 billion.
Source: Author's elaboration, based on GuruFocus data.
On March 21, the board of directors authorized a new share repurchase program of up to 20 billion krone, which we estimate is sufficient to minimize the negative impact of rising geopolitical tensions in the Middle East and uncertainty regarding the Federal Reserve's interest rate reduction timeline.
As such, we initiate our coverage of Novo Nordisk with an outperform rating for the next 12 months.
Fourth-quarter financial results and outlook for 2024
Novo Nordisk's revenue for the fourth quarter of 2023 was about $9.64 billion, exceeding our expectations by around $440 million and, more importantly, growing 40.70% year over year.
In addition to Ozempic, we also highlight Wegovy (semaglutide), which will continue to make a significant contribution to improving the company's Ebit margin in the long term. Wegovy is the first FDA-approved once-weekly weight loss drug whose mechanism of action is based on its ability to bind to the glucagon-like peptide 1 receptor (GLP-1R), which ultimately leads to lower blood glucose levels and also reduces food cravings.
Source: Author's elaboration, based on based on Novo Nordisk press releases.
According to the CDC, the prevalence of obesity among U.S. adults is about 41.90%, while among children and adolescents, this figure reaches 19.70%. Given that obesity is associated with the development of many serious health conditions, such as diabetes, cardiovascular disease, NAFLD, cancer and liver disease, it poses a threat to public health. Ultimately, we believe combating obesity presents significant commercial opportunities for Novo Nordisk.
On March 8, the FDA approved Wegovy to reduce the risk of major adverse cardiovascular events in overweight adults and those with known cardiovascular disease. The U.S. health regulator's favorable decision was based on extremely positive results from a phase 3 clinical trial in which the company's blockbuster drug demonstrated, among other things, a 28% reduction in the risk of non-fatal myocardial infarction and a 19% reduction in the risk of death from any cause compared to placebo.
Total sales of Wegovy were 9.61 billion krone in the fourth quarter of 2023, an increase of 293% year over year due to its label expansion, as well as numerous studies demonstrating high efficacy in the fight against obesity and other diseases, which ultimately affects the growing demand for it in the U.S. and Europe.
Source: Author's elaboration, based on quarterly securities reports.
According to the annual report, the drug's key U.S. patents expire in 2032, while it will lose patent protection in Europe in 2031. As a result, there are not any notable factors poised to diminish the demand for Wegovy, including the fact that Eli Lilly's Zepbound and Mounjaro (LLY, Financial) are in a shortage.
Source: Author's elaboration, based on annual report 2023.
Moreover, we believe it will continue to be a cash cow for Novo Nordisk, thereby helping to maintain the extremely high pace of development of next-generation drugs, many of which are demonstrating in Phase 1/2 clinical trials greater efficacy in lowering A1C levels, body weight and also have fewer side effects relative to competitors.
The Danish pharmaceutical company is expected to release first-quarter financial results on May 5. Analysts forecast Novo Nordisk's revenue for the period to be between $8.47 billion and $9.5 billion, up slightly from their expectations for the previous quarter.
Source: Author's elaboration, based on GuruFocus data.
Simultaneously, according to our model, this financial metric will be $9.20 billion, which is $110 million above the median of the range described above, thanks in part to more optimistic expectations for sales of its GLP-1 agonists as well as Sogroya (somapacitan-beco), a once-weekly growth hormone.
Source: created by Author.
Thanks to the label expansion for Wegovy and the start of commercialization of Sogroya and Rivfloz in 2023, Novo Nordisk's operating income margin continued to grow at a significant pace year on year, amounting to about 40.60% for the three months ended Dec. 31, 2023.
Moreover, this financial metric is significantly higher than that of its key competitors, such as Eli Lilly (LLY, Financial), Sanofi (SNY, Financial) and Roche Holding (XSWX:ROC), which indicates the continued effectiveness of business strategies implemented under the leadership of Lars Fruergaard Jørgensen, who has been Novo Nordisk's CEO for more than seven years.
Source: Author's elaboration, based on GuruFocus data.
Analysts forecast Novo Nordisk's first-quarter earnings per share to range from 73 cents to 79 cents, up 17.90% year over year. According to our model, the company's earnings will be 4 cents above the median of this range and reach 80 cents.
Source: Author's elaboration, based on GuruFocus data.
Novo Nordisk's trailing 12-month non-GAAP price-earnings ratio is 45.3, indicating it is trading at a significant premium to the health care sector. However, it is a growth stock, showing significant year-over-year increases in sales of its blockbusters, which, together with Eli Lilly (LLY, Financial), are leaders in the global type 2 diabetes treatment market. This market is estimated to be worth more than $130 billion by 2030.
As a result, we believe it is justifiable that it continues to trade at high multiples because many of its experimental drugs are demonstrating extremely high efficacy not only in treating obesity and type 2 diabetes, but also multiple rare diseases.
According to GuruFocus, Wall Street's average target suggests an upside of about 18% from the company's current price of $122.
Source: GuruFocus data.
More globally, its strong Ebit growth rate is expected to push its price-earnings ratio down to 16 by 2029, which we estimate is an attractive value for long-term investors.
Source: Author's elaboration, based on analyst data.
Conclusion
In our assessment, increased competition in the global diabetes therapeutics market from Eli Lilly and Sanofi (SNY, Financial), as well as the Biden-Harris administration's desire to tighten regulation of drug prices, are two risks that financial market participants need to consider.
On the other hand, the company's high Ebit growth rate year after year, the continued extremely high demand for Ozempic and Wegovy and management's aggressive R&D policy are the key investment theses that make Novo Nordisk an attractive asset for investors looking for pharmaceutical companies with a strong balance sheet and an extensive portfolio of product candidates. So, its most promising developments are amycretin, etavopivat and CagriSema, which demonstrate competitive advantages relative to "gold standards" in the treatment of obesity and thalassemia.
Source: Novo Nordisk.
In addition, the total debt/Ebitda ratio has continued to decline significantly over the past three years, standing at around 0.24, indicating low odds that Novo Nordisk will have difficulty servicing its debt.
Source: Author's elaboration, based on GuruFocus data.
We initiate our coverage of Novo Nordisk with an outperform rating for the next 12 months.
