Head of Equity Strategy
Summary: Novo Nordisk is now less than 5% away from becoming the most valuable company in Europe after trial data show that Wegovy reduces heart risks by 20%. This will likely open the path to broad reimbursement from US health insurer and thus significantly expand the market for Wegovy. Novo Nordisk is expected to report revenue growth of 34% y/y tomorrow's Q2 earnings release and the market will focus on its ramp up of production of Wegovy, more details on future growth, and potentially a higher revenue guidance for this year.
Back in February we wrote an equity note highlighting Novo Nordisk’s obesity drug Wegovy as a game changer for the company, but Wegovy is also a game changer in fighting the obesity epidemic and it is basically creating a whole new category in the pharmaceutical industry. Demand for Wegovy has been insane and Novo Nordisk has had troubles expanding production capacity fast enough.
Yesterday, the fairytale just got better for Novo Nordisk as the company announced the headline results from the SELECT cardiovascular trial using 2.4 mg Semaglutide (Wegovy) on 17,604 adults aged 45 years or older since the trial started in 2018. The results show that Wegovy reduces the risk of major adverse cardiovascular events by 20% in adult with overweight or obesity. The results were in with some of the best-case scenarios that had been circulated among analysts and it is widely recognised that the Wegovy’s benefits likely meet the threshold for broad reimbursement. If that becomes the case, then the potential market for Wegovy will dramatically expand and the affordability for more people will do down. Consensus is expecting Wegovy revenue of DKK 92bn in FY28 which at that time would translate into roughly 23% of total revenue.
Investors were excited about the trial data and what it means for future demand sending Novo Nordisk shares 17% higher yesterday. In today’s trading session the share price is down 1.5% putting Novo Nordisk at a market value of €387.3bn making the company the second most valuable in Europe just €18bn behind the top spot LVMH. If Novo Nordisk shares gain 5% more relative to LVMH then Novo Nordisk will overtake the thrown as the most valuable company in Europe. It might be that Europe lost the battle for leadership in computer technology, but the continent has an emerging group of crown jewels each dominating their industry: LVMH, Nordisk, ASMl, and Nestle.
The new trial data on cardiovascular effects will undoubtedly cement long-term growth for Novo Nordisk, which is also why investors bid up the market value of the company. Novo Nordisk will report Q2 earnings tomorrow at 05:30 GMT and the question is whether company can leave up to the high expectations and especially if they can show that a faster production ramp up of Wegovy.
Analysts expect Q2 revenue of DKK 55.1bn up 34% y/y and EBITDA of DKK 25.7bn up from DKK 20bn a year ago as the obesity care segment is expected to continue growing at a rapid pace. The obesity care segment revenue hit DKK 7.8bn in Q1 up 131% y/y, the highest growth rate for this segment since Q1 2016, hitting 14.7% of overall revenue. This segment will continue to grow at a rapid pace only constrained by Novo Nordisk’s ability to expand production and the consensus on Wegovy revenue in FY28 of DKK 92bn before the trial announcement yesterday might turn out to be too conservative. Back in December 2022, Axios highlighted that the global revenue of all obesity drugs expected to total $30bn in 2030, which again could easily prove to be underestimating the growth ahead.
It is estimated that obesity costs the US health care system $226bn annually in direct and indirect costs according to estimates from the Centers for Disease Control and Prevention (CDC) and the Harvard T.H. Chan School of Public Health. It is estimated that obesity costs 2% of global GDP annually. The costs come through more illness, sick days, and disabilities. If Wegovy and other weight loss drugs can reduce the negative effects of our obesity epidemic, then Wegovy could potentially a bigger productivity booster for our economy than AI, especially in the short run. With the demographic drag kicking in over the coming decades in the developed world reducing illness from obesity will free up more productive resources in the labour market.
Eli Lilly, the US-based pharmaceutical company and Novo Nordisk’s biggest competitor, also saw its shares rose yesterday as the company lifted fiscal year revenue guidance on higher than expected demand for its weight-loss drug Mounjaro. Eli Lilly shares also got a boost from the Novo Nordisk announcement as the market expects similar strong results on cardiovascular risks from Mounjaro.
The high demand expected from these new types of weight-loss drug have naturally boosted the valuation of both Eli Lilly and Novo Nordisk which both will likely dominate this market in the future. Novo Nordisk is valued at 2-year forward EV/EBITDA of 21.1 compared to 29.2 for Eli Lilly. This valuation difference is at odds with some or less similar expected revenue growth rates over the next five years and similar EBITDA margin. For some reason investors just want to pay a premium for US equities over European equities as also described in our equity note this Monday.
Eil Lilly’s Mounjaro seems to be causing higher weight loss in patients, which may explain the valuation premium, but the jury is still out and more trial data will come out over time. One thing is to have a slightly better product, but being a first mover is also an advantage. In the case of Novo Nordisk, the first mover advantage means that Wegocy will likely do around $3bn in revenue in 2023 compared to around $1bn for Mounjaro. Being a first mover also means that you get more data on drug safety and you expand your distribution faster which easily outweigh a less inferior drug. In any case, the market for weight loss drugs is big enough for both companies.
What about side effects? Recently several side effects have been reported related to Wegovy. Two things can be said about side effects. The benefits for obese patient exceed the short term side effects that have been reported, but it is the longer term side effects that people are worried about. It is important to note that side effects whether it is from radiation or a drug have a distribution over time. This means that if there are critical long-term side effects some people will get these effects much earlier than most people affected by the drug. As Wegovy is rolled out to many patients it will become clear very fast if longer term effects are really there, so confidence in longer term side effects quickly go up as the drug is rolled out to more and more people.
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