With best-selling medicines for type 2 diabetes and obesity in hand, Novo Nordisk (NVO +0.59%) isn't content to let the chips fall where they may when it comes to patients having access to Ozempic and Wegovy. Thanks to the two drugs becoming a social phenomenon in the developed world, demand is running far above the company's ability to supply doses, potentially crimping its pace of revenue growth.
But where there's a shortage, there's money to be made in closing the gap, and that's exactly what Novo Nordisk is doing. But will it be able to satisfy consumers before competitors make inroads in the market? Let's explore the issue a bit further and determine how it might impact a person's decision to invest.
NYSE: NVO
Key Data Points
Big manufacturing moves mean more revenue, and soon
Since its first approval by the Food and Drug Administration (FDA) in 2021, more than 1 million people in the U.S. have taken Wegovy for weight loss. In 2023, revenue from the company's obesity care segment skyrocketed by 147%, nearly reaching $6 billion, with Wegovy doubtlessly being the segment's knight in shining armor. Given Novo's total 2023 sales of $33.7 billion, the drug's importance as a driver of growth is difficult to understate. But capturing all the growth possible isn't going to happen if there aren't enough doses to go around.
As early as the first quarter of 2022, the medicine was listed by government sources as being in a state of shortage. In May 2023, the pharma company implemented limits on the number of new patients who could start taking certain strengths of Wegovy as it could no longer guarantee being able to produce enough doses to supply the existing patient population. It's obvious that discouraging patients from signing up for treatment will keep revenue growth depressed and below its potential. But after more than a year of working on increasing supply capacity, and even more actions that'll increase capacity over the course of this year and next, there's plenty of evidence that there will soon be more than enough Wegovy to serve the existing level of white-hot demand.
Novo Nordisk has now started to ship starter doses once again. Furthermore, the number of doses available for U.S. consumers should be in the process of more than doubling. To accomplish that, the company massively expanded its drug production footprint in the European Union throughout last year. After investing $3.6 billion in capacity upgrades in 2023, it plans to make another $6.5 billion investment in 2024. But for now, demand still exceeds supply significantly and management is still cautioning people that it may be hard to fill their prescriptions despite lifting the hold on allowing new patients to enroll in treatment.
On Feb. 5, Novo Holdings, the parent company that owns a controlling interest in Novo Nordisk, announced that it would be acquiring Catalent, a pharmaceutical manufacturing contractor, for $16.5 billion in cash. The plan is to sell Novo Nordisk two of Catalent's European manufacturing sites and one of its U.S.-based sites right after the deal winds up; the transaction is slated to close sometime before the end of the year. In total, Novo Nordisk will pay $11 billion for the sites, which it plans to finance using debt.
As soon as those factories are in its control, it'll be using them to crank out even more doses of Ozempic and Wegovy. In other words, the shortage should be over soon enough, and it'll be a mighty tailwind for the top line.
The case for buying the stock is as strong as ever
It is a rare situation for non-life-saving pharmaceuticals to sell as quickly as $1 oysters at an oceanside eatery. If you were thinking about buying Novo Nordisk shares before it opened the Wegovy prescription floodgates once again, it is hard to imagine how the latest pieces of news could be interpreted as anything other than a bullish signal.
Barring a major hiccup, patients will need to take Wegovy on an ongoing basis to maintain their weight loss. There is no indication that the bottom of the market is anywhere in sight. Plus, CFO Karsten Munk Knudsen said he does not see any indication that the business is competing for market share with peers like Eli Lilly. And it's going to keep developing new therapies for obesity and seeking new indications for its existing therapies to keep penetrating the market even further for years to come. All of that suggests the bull thesis for buying shares of Novo Nordisk is alive and kicking even after the company's recent run of financial successes and challenges with serving demand.
The main barrier to investing at the moment is valuation. The stock's trailing-12-month price-to-earnings (P/E) ratio is 44, which is significantly higher than the market's average of 25. Still, paying for quality isn't something to shy away from unless you're a stickler for traditional value investing principles, so this stock is worth buying even if it's pricey.
