Novo Nordisk (NVO -0.86%) has been experiencing some terrific growth thanks to Wegovy and Ozempic, which consumers have been feverishly using for weight loss (even though Ozempic isn't approved for that indication yet). The drugs have tremendous potential for revenue growth, and they are likely to be cornerstones for the business for many years ahead. Here's why they could become cash cows for Novo Nordisk.
Strong demand has led to shortages
On average, adults lose about 15% of their weight using Wegovy. And in some cases, the weight loss can be as high as 20% or more. While Ozempic isn't approved for weight loss, it's also an injection that contains semaglutide, which is in Wegovy. The key difference is Wegovy is a higher-dose treatment option. Although they aren't interchangeable, that hasn't stopped consumers from using Ozempic for weight loss, and there has been a shortage of both treatments in the U.S.
Novo Nordisk has been working on improving production so the situation should improve in the near future. And with new patients using these products, there's a big incentive for the healthcare company to continue ramping up production as those patients may be on the drugs for the long haul.
Continued treatment may be needed
One of the drawbacks of these drugs is that people have to continue using them for as long as they want to keep the weight off. Data has shown that if people stop using Wegovy or Ozempic, they will gain some weight back. Within just a few years of stopping the treatments, people can expect to regain 50% of the weight they lost. And in some cases, the weight gain could even exceed how much people ended up losing while on the drugs.
The weight loss doesn't appear to be permanent, and so that means people who take these drugs for weight loss may end up staying on them for as long as they want to keep the weight off. While that may be a negative for consumers, that could result in some strong recurring income for Novo Nordisk.
What's exciting for the company is that there is still a significant need out there to manage obesity. According to Novo Nordisk's sources, more than 750 million people in the world are obese, but only 2% of them treat it using medication.
As the company's treatments reach more people, the potential for revenue growth could be significant. And if many of those customers remain on Wegovy or Ozempic indefinitely, that can lead to a strong source of cash flow for the business. Wegovy is a relatively new treatment, with the Food and Drug Administration approving it for chronic weight management in 2021, the first such approval since 2014.
Novo Nordisk stock could move higher
Last year, Novo Nordisk generated more than 64 billion Danish kroner ($9.6 billion) in free cash flow, putting it in a great position to continue investing in its business and expanding into its manufacturing, which should help sales of Wegovy and Ozempic rise higher in the future. At just 6.2 billion Danish kroner ($930 million), Wegovy's sales were about 1/10th the size of Ozempic, but they are likely to be much higher as supply catches up to demand.
Novo Nordisk's strong 31% profit margin also means that as revenue increases, so too will the company's bottom line. And so, while the healthcare stock and its price-to-earnings multiple of 44 may seem expensive right now, it could still be a relatively cheap buy if you're holding for the long term.
