It's probably safe to assume that you've seen a commercial or heard a catchy jingle for any (if not all) of the following medications: Ozempic, Rybelsus, Saxenda, and Wegovy. While you may be familiar with the names and functionality of these treatments, did you know that all of them are developed by the same company? That's right -- Danish pharmaceutical company Novo Nordisk (NVO 0.75%) specializes in diabetes and obesity drugs, and each of the treatments above are core pillars in the company's extensive portfolio.
Novo Nordisk just reported earnings for the period ended Sept. 30. Similar to prior periods, Ozempic and Wegovy were the hallmarks of this quarter's earnings. As demand continues to surge, some investors may want to take a close look at the stock. Despite its rich valuation, investors have lots of reasons to believe the stock could go much higher. Let's review the latest quarterly report, and assess if the risk factors associated with Novo Nordisk outweigh the pros of owning the stock.
On Sept. 20, the company conducted a 2-for-1 split on its American Depository Receipts (ADRs), trading on the NYSE, in line with a similar 2-for-1 split done a week earlier to its class-B shares that trade on the NASDAQ Copenhagen. Post-split, the ADRs have been trading between $87 and $102, with the stock closing at $100 on Wednesday.
While a stock-split itself doesn't cause a fundamental change in the company's value, it's worth noting that shares that suddenly seem "affordable" in light of their lower dollar values hold greater allure, especially for retail investors, resulting in the stock ticking up higher on the back of bigger trading volumes and better liquidity.
The demand is off the charts
Novo Nordisk is a massive operation that sells its treatments all across Europe, China, and the U.S. While there are myriad numbers and key performance metrics that I could harp on, my goal is not to bombard you with numbers salad. I'm going to focus on the bigger trends.
Through the first nine months of the year, Novo Nordisk increased revenue 33% to 166 billion Danish kroner (roughly $24 billion USD). What's even better is the company is expanding its profitability profile, boasting 37% growth year over year through Sept. 30.
The growth is underscored by eye-popping demand for Ozempic, Wegovy, Rybelsus, and Saxenda in particular. Ozempic and Rybelsus are considered Glucagon-like peptide-1 (GLP-1) treatments. Both of these medications combined account for 58% GLP-1 market share with Ozempic, accounting for 46% alone.
On the obesity side, Wegovy and Saxenda are proving to be dominant players. Obesity care sales were up 174% through the first nine months of the year. This growth was primarily attributed to 244% growth in the U.S. alone, and 52% internationally. Wegovy launched in five new markets overseas, while growth in the U.S. has risen almost 500%.
The general theme here is that these growth rates are downright startling. It's pretty clear that the company doesn't have a demand issue. But with that said, too much demand can often lead to supply constraints. And in the next section you'll see why Novo Nordisk's performance could actually be even better.
Image source: Getty Images.
There are some risks to consider
Like pretty much all medications, Novo Nordisk's treatments do not come without some side effects. As more people begin to take Ozempic or other treatments developed by Novo Nordisk, it is highly likely that doctors and researchers will begin to uncover more data around these side effects and how to best combat them.
Another risk factor to consider is the company's unprecedented demand. But wait, isn't high demand a good thing?
Demand is a double-edged sword. While rising demand directly correlates to rising sales, it can actually also lead to increased costs. The reason for this boils down to some granular details around the law of supply and demand. Novo Nordisk's leadership has told media outlets and investors alike that demand for some of its weight-loss supplements is so high that fulfilling these levels today is not feasible. In other words, while revenue and profits are up big time, they actually could be even better.
In order to better position itself, Novo Nordisk will be investing heavily into additional manufacturing to increase its output. In the short term, it's likely that investors will see some areas of rising costs that could impact margins and profitability. However, the trade-off here is that by doubling down on manufacturing, Novo Nordisk will be able to increase capacity and fulfill demand quicker.
In essence, this should lead to further top-line growth and margin expansion, which will yield increasing profits and cash flow over the long term. This will provide Novo Nordisk with additional financial flexibility, which the drug maker can use for a number of strategic initiatives such as mergers and acquisitions, increased research and development, share buybacks, or even increasing its dividend.
A close look at Novo Nordisk's valuation
NVO PE Ratio (Forward) data by YCharts.
There are many ways to value a stock. The chart above illustrates the forward price-to-earnings (P/E) multiple of Novo Nordisk benchmarked against a cohort of other leaders in the pharmaceutical space, including Eli Lilly, Pfizer, and AstraZeneca. I would say that Eli Lilly is the company's closest competitor given its own appetite-curbing medications Jardiance and Mounjaro.
Interestingly, Novo Nordisk trades at meaningful premiums to both Pfizer and AstraZeneca. However, the disparity in forward P/E multiples between Eli Lilly and Novo Nordisk is striking. My suspicion is that Wall Street analysts are forecasting meaningful growth given how successful Mounjaro's commercial launch has been for Eli Lilly. Nevertheless, the delta between Novo Nordisk's forward P/E relative to its closest peer is hard to ignore. But with the stock already up 50% so far in 2023, should investors realistically expect more market-beating returns?
I think when it comes to growth stocks, it's important for investors to zoom out and consider the bigger picture. Novo Nordisk has generated several consecutive quarters of revenue and profits, thereby signaling strong demand for its variety of weight-loss supplements. And while there are some inherent risks that investors should consider, I view them as largely nominal.
In other words, while the company is going to be investing significant capital into additional research and development and manufacturing costs, it's in a financial position to do so. Moreover, by doubling down on manufacturing as well as continuing to study the side effects of its treatments, Novo Nordisk is putting itself in a position to increase commercialization, reach a broader base of consumers, and do so while putting patient care first.
While the stock is trading near its 52-week high, I would say that waiting for a pullback is a mistake. Trying to time the perfect moment to buy a stock is often an exercise in false precision. To me, Novo Nordisk represents a market leader in a large and growing addressable market and has a prolific portfolio of treatments that appeal to patients across the globe. I think now is a tremendous opportunity to buy the stock post-split and begin building a long-term position.
