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pharmaceuticals

Founded in 1923, Novo Nordisk (NVO) is a global healthcare company headquartered in Denmark. Its focus is on diabetes and other serious chronic conditions, such as obesity, as well as rare blood and endocrine diseases.

The company is the global powerhouse in diabetes treatment, with about 30% of the $50+ billion global diabetes market and around half of the $20 billion insulin therapy market.

And now, Novo Nordisk is set to become a major force in the weight loss market, thanks to its drug, Wegovy (chemical name semaglutide).

The World Is Fat

For many decades, doctors approached obesity as an individual problem, best treated with lifestyle modifications like diet and exercise. But now, there is a growing body of scientific research that supports the use of pharmaceuticals in weight management.

This new way of treating obesity couldn’t come at a better time. Here’s why…

Over the past four decades, statistics show that obesity rates around the world have outpaced global population growth. That’s the main reason why analysts at Morgan Stanley forecast that these obesity treatments could soon be among the top-selling drugs globally, with sales soaring from just $2.4 billion in 2022 to as much as $54 billion by 2030.

This brings us to Novo Nordisk’s Wegovy. The drug works by mimicking a hormone known as GLP-1, which is made in the intestines when we eat and helps to regulate appetite. The drug also helps to slow down the movement of food from the stomach to the small intestine, meaning patients feel full more quickly and for a longer period of time.

Synthesized GLP-1 medicines were originally developed to help people with type 2 diabetes better manage the disease by increasing the release of insulin from the pancreas, which aids in the removal of excess sugar from the blood following a meal. One such leading drug is Novo’s Ozempic, which is a multi-billion-dollar seller.

When researchers studied patients on these drugs, they quickly noticed the weight loss and decreased appetite in diabetics taking GLP-1 drugs. So, they then began studying the potential of these drugs in the treatment of obesity.

In 2014, Novo’s Saxenda became the first GLP-1 drug to receive FDA approval for use in weight management. However, Wegovy is far superior because it’s given as a once-weekly injection, instead of being administered daily. And even more importantly, Wegovy produces more weight loss and comes with better cardiovascular outcomes for patients.

Novo’s Supply Chain Woes

It looked like Novo Nordisk would have the obesity treatment market to itself when supply chain issues struck. Late in 2021, a contract manufacturer filling syringes for Wegovy pens for the U.S. market had temporarily stopped deliveries and manufacturing following issues with “good manufacturing practices.”

In turn, Novo Nordisk paused the marketing and distribution of Wegovy. Production resumed by the second quarter of 2022, but manufacturers couldn’t keep up with surging demand, so the company was forced to restrict doses of Wegovy to patients who had already begun using it.

Wegovy has generated about $700 million in sales to date, far short of the $2 billion expected before those supply chain issues struck. However, during the October earnings call, Novo’s management reaffirmed plans to fully launch the drug by the end of the year.

That particular contract manufacturer is still experiencing some problems, so, it is good news for Novo Nordisk that another manufacturer is scheduled to begin producing Wegovy in the second half of 2023, taking the total number of filling sites to four.

The company’s supply chain woes opened the door to a possible rival GLP-1 drug from Eli Lilly (LLY), Mounjaro (tirzepatide). In October 2022, the FDA announced it had granted fast track designation to the medicine, meaning it will enjoy an expedited regulatory review process. Phase III clinical trials should conclude in the spring of 2023, so it’s possible that Lilly’s drug could be on the market around the start of 2024.

Novo Nordisk Is the Clear Leader

Despite the supply chain hiccups, Novo Nordisk remains the clear leader in the GLP-1 market.

Even a cursory glance at Novo Nordisk’s numbers confirm this. Constant-currency demand growth for the company’s GLP-1 products during the first nine months of 2022 showed a jump in diabetes treatments of 44% and in obesity treatments of 75%!

Management once again raised its outlook for 2022 on that news, and is now expecting 14% to 17% constant-currency sales growth (up from 12% to 16%), and with a 10-percentage-point additional boost from currency tailwinds.

While insulin accounts for roughly 50% of Novo’s top line, its GLP-1 franchise (Rybelsus, Victoza, Saxenda, Ozempic, Wegovy) is where the growth lies—it now makes up roughly 40% of sales.

Morningstar analyst Karen Andersen believes Novo Nordisk will have a more than a 60% share—$25 billion of the nearly $40 billion global GLP-1 market—across indications by 2026.

The prevalence of diabetes is expected to soar in the coming decades, as a result of an increasingly

overweight and aging global population. That will only benefit Novo Nordisk as it continues to dominate in diabetes and obesity treatments. And keep in mind, the company is only beginning to feel the impact of soaring demand for Wegovy.

While Novo trades at about 31 times next year’s forecast earnings (far cheaper than rival Eli Lilly at 41 times), I believe NVO stock will be a big winner, outperforming its peer group by a large margin—as it did during the past decade. The stock is trading around $132 a share, up 21%% year-to-date. It’s a buy in the $120 to $140 range.

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