As a Danish pharma company, Novo Nordisk (NVO +0.21%) doesn't usually get much attention from American healthcare investors. However, it's about to have its time in the Sun. Thanks to its trio of diabetes and weight-loss medicines, it's positioned to ramp up its revenue for years, potentially making its shareholders a lot wealthier along the way.
But as experienced investors know, there are quite a few wrinkles with this stock, and it's important to know them so that you can set your expectations appropriately. Let's learn about three of those wrinkles right now.
NYSE: NVO
Key Data Points
1. Semaglutide's growth is just getting started
Novo Nordisk's claim to fame in recent years is its drug semaglutide, which is marketed under the names Wegovy, Ozempic, and Rybelsus. Originally derived from the venom of a Gila monster, semaglutide is indicated for treating diabetes as well as helping with weight loss for people diagnosed with obesity.
Sales of the drug were a major driver behind Novo Nordisk's 25.5% top line growth to more than $25 billion last year. In 2022, the company sold 84% more of its obesity-care therapies than the year before, thanks largely to surging sales of Wegovy -- and it didn't even offer all of the different dosages of the drug in the U.S. until December. What's more, management is estimating that company revenue could rise by as much as 19% in 2023.
But Novo Nordisk is also in the process of several phase 3 clinical trials to see if semaglutide might be useful to treat conditions like non-alcoholic steatohepatitis (NASH) and Alzheimer's disease, among others. Separately, by 2025, it hopes to stake out a share of more than 33% of the global market for diabetes therapies.
That means its annual haul from sales of the drug could be even larger in the years to come, even if its attempts to commercialize semaglutide for additional indications fall short. And smart investors know that for a big pharma business, Novo Nordisk is in an extremely enviable position.
2. It isn't a great dividend stock
While Novo Nordisk has a positive future, it isn't necessarily a great investment for investors seeking dividend income -- for multiple reasons. First, its forward yield is currently 1.1%, which is on the low side. Second, management doesn't make any guarantees about increasing the dividend over time; in fact, the payout gets hiked and cut from quarter to quarter, with only a modest upward trend in its size even over periods as long as 10 years.
So even if the company continues to grow (and it will), the amount of dividend income you'll get from its shares may never be significant, even with ultra-long holding periods befitting investors like Warren Buffett.
On the bright side, with free cash flow (FCF) of more than $9 billion in 2022, the company can afford to return plenty of capital to its shareholders in the form of share buybacks, and management appears to be comfortable with gradually allocating more and more money to do so. Last year, it spent more than $3.4 billion on repurchasing its stock, a 37% rise over the total repurchased back in 2012.
There's no guarantee that the buybacks will continue if financial conditions worsen, though.
3. It's a pricey stock right now, and it might not get any better
Skilled investors appreciate that one of the potential deal breakers with the stock right now is that it's priced like a fine wine. Whether you look at its price-to-earnings ratio or other valuation metrics, there's no way around it: Novo Nordisk stock is expensive. Look at this chart comparing the stock with some of its competitors like Pfizer, Merck, Novartis, and Sanofi:
NVO PE Ratio data by YCharts.
As you can see, Novo Nordisk is the most expensive of them all right now. And that introduces a couple of additional risks to be aware of, starting with the chance that the company's profits from sales of semaglutide will fail to outperform the already-inflated expectations of the market. Such an undershot would probably not cause its share price to crater, but it'd likely leave a dent.
Likewise, there is a risk of the semaglutide hype bubble bursting spontaneously, say, if side effects that haven't been documented yet occur. While that isn't likely -- the medicine has been on the market in various forms for a number of years and went through careful clinical trials for safety and efficacy -- it isn't a risk that smart investors dismiss, especially given the stock's high valuation.
