Pharmaceutical companies with robust drug portfolios and pipelines can generate substantial wealth for investors over time. That's because they have the vital ingredients necessary to power revenue and profits higher: needed products that help patients. And this translates into capital appreciation.
Few companies better exemplify this pattern than Danish pharmaceutical giant Novo Nordisk (NVO 1.13%). In just five years, the company has turned a $10,000 investment into $39,000, including reinvested dividends. By comparison, the same amount invested in the S&P 500 would now be worth just $17,000 with dividends reinvested.
For an idea of what drove these sizzling returns -- and what could lay ahead -- let's examine Novo Nordisk's fundamentals.
A focus on tackling diabetes and obesity
Dating back a century to two small Danish companies named Nordisk Insulinlaboratorium and Novo Terapeutisk Laboratorium, Novo Nordisk has grown immensely throughout its corporate history. The company's $354 billion market capitalization positions it just behind Eli Lilly and Johnson & Johnson as the third-largest drugmaker on the planet.
In the past five years, Novo Nordisk has positioned itself well within the treatment areas of diabetes and obesity, with numerous treatments for diabetes like long-acting insulin, premixed insulin, and fast-acting insulin. These two treatment areas accounted for about 88% of the company's total revenue in 2022, with the remainder coming from its rare-disease segment.
Novo Nordisk's top-selling drug, semaglutide, was approved by the U.S. Food and Drug Administration to treat type 2 diabetes in 2017, and marketed as Ozempic. It was also approved to treat obesity in 2021 -- marketed as Wegovy, in higher doses -- which has made the drug franchise into a megablockbuster (that is, at least $5 billion in annual sales).
These two approvals, along with the FDA approval of Rybelsus in 2019 for type 2 diabetes, allowed the company's total sales in Danish kroner to surge 58.4% higher from 111.7 billion in 2017 to 177 billion in 2022. This top-line growth largely powered the Danish drugmaker's market-smashing returns in recent years.
And as more countries become economically developed, the incidence rates of diabetes and obesity are likely to grow as well. This could result in a meaningful increase in demand for Novo Nordisk's medicines. Given the company's solid drug portfolio, analysts anticipate that Novo Nordisk's earnings will grow by over 40% between now and 2025.
Image source: Getty Images.
Don't let the small dividend fool you
Novo Nordisk's 1.1% dividend yield won't stand out in comparison to the S&P 500's current yield of 1.6%. But the company doesn't need to focus on paying tons of dividends to its shareholders. It mostly creates value by retaining its capital for acquisitions and future growth opportunities. That is precisely how Novo Nordisk created far more wealth for shareholders than the S&P 500 index in recent years.
And the company should be positioned to keep generating strong capital appreciation for shareholders. Novo Nordisk's dividend payout ratio is positioned to come in at around 35% in 2023. That gives the company the funds needed to reinvest in its business and provide high returns for shareholders years down the road.
Buy the stock on any weakness
Novo Nordisk is an exceptional business with a bright future, and the market has seemed to recognize this fact. The stock has soared 36% in just the past 12 months. This has pushed Novo Nordisk's forward price-to-earnings ratio up to just over 28 -- well above the drug manufacturing industry's average of about 13. The current valuation may not seem like a bargain. But based on its growth prospects and track record of wealth creation, the stock is worth watching for now, and buying on any pullbacks or corrections.
