Novo Nordisk (NOVO B) will release its full-year earnings on January 31 at 07:30 Central Eastern Time.
Novo Nordisk has sprinted ahead in Europe's pharmaceutical sector and the Morningstar Europe Index on the back of an overwhelming demand for its diabetes and weight loss drugs. Achieving its 2023 targets seems likely, given the robust financial performance in the first nine months of 2023, with a 33% increase in sales and a 37% growth in operating profit at constant currencies.
Earnings Guidance Elevated
The updated 2023 guidance in the earnings report for the third quarter, projected at 32%-38% top-line growth and 40%-46% operating profit growth, slightly surpassed previous expectations. The strong performance is attributed to higher-than-anticipated US sales of GLP-1 therapies, particularly driven by the diabetes drug Ozempic and the obesity drug Wegovy.
High Expectations for Novo Nordisk Shares
The surging demand for the diabetes and weight loss products has led to high market expectations for the upcoming earnings report.
"There are certainly very high expectations, and we're assuming the firm can see 28% revenue growth and 37% operating profit growth," says Morningstar equity and credit analyst Karen Anderson ahead of Wednesday.
"I think Novo Nordisk and Eli Lilly are poised to dominate this market for at least the next several years, while competitors try to play catchup and design more convenience orals, or products with fewer tolerability issues. Overall, we see a more than $100 billion market for obesity/overweight drugs by 2031, when Novo’s key patent expires."
However, the upcoming challenge lies in how quickly the firm can adapt its manufacturing scale to meet new demand for its blockbuster drugs Ozempic and Wegovy, while fending off competition from Eli Lilly & Co.'s Mounjaro and Zepbound.
"Lilly is very new to the obesity market, with the recent approval of its diabetes drug Mounjaro as Zepbound for obesity," she says.
"Zepbound looks more effective than Wegovy, so we expect it to quickly gain significant share of this market – but there is plenty of room for both firms to see strong double-digit growth for years".
Weight Loss Treatments: How Long do They Last?
The market also wants to know how long the average patient remains on weight loss therapies. Do they continue beyond their plateau point when they have stopped losing weight?
"All the data points to a need to continue therapy to maintain weight loss, and we think patients will be motivated to stay on therapy longer term, although we do see some patients dropping off therapy due to affordability or tolerability issues", Andersen explains.
In terms of Novo Nordisk's pipeline, the analyst says we could see early data for a next-generation oral obesity drug in conjunction with earnings. Later in the year she's expecting more data on the firm's oral semaglutide (the drug also used in Ozempic and Wegovy).
"Although we think the launch is likely to be delayed due to supply concerns (a much higher dose is needed for oral delivery of this drug) the most important pipeline drug for Novo at this point is cagrisema, which could be a more effective and more tolerable treatment in both obesity and diabetes.
"Phase 3 data in obesity is coming later this year, as well", she adds.
Are Novo Nordisk Shares Overvalued?
At the end of November 2023 Morningstar's analyst raised Novo Nordisks fair value estimate to DKK 540 (£61.72) per share from DKK 475, after significantly raising the assumptions for uptake of GLP-1 therapies in diabetes and obesity as well as adding sales for overweight patients.
"We expect Novo's obesity sales could peak at $28 billion (£22 billion) by 2031, ahead of semaglutide's 2032 patent expiration," Anderson wrote in a note published 29 November.
"In obesity, semaglutide forms the basis of injectable obesity medicine Wegovy as well as a potential oral, high-dose semaglutide that recently generated positive data in a phase 3 trial".
Novo's Moat Rating
As a pioneer in diabetes care, Novo has been in the business for over 85 years and claims 32% of the $50 billion-plus diabetes treatment market and roughly half of the more than $15 billion insulin market. Diabetes' prevalence is expected to soar in coming decades as a result of an increasingly overweight and ageing population. Morningstar expects Novo to maintain its Wide Moat as it continues to dominate the treatment marketplace.
Semaglutide's potential in new indications also gives Morningstar's analyst confidence in Novo's wide moat. The drug received US approval as Wegovy in June 2021 and is in phase 3 testing in areas like non-alcoholic fatty liver disease, Alzheimer's disease, and heart failure.
Novo is also testing new combination regimens like cagrisema that could offer even more compelling blood sugar control and weight loss, which could help it maintain a solid positioning against Lilly.
Key Morningstar Metrics for Novo Nordisk
• Fair Value Estimate: 540 DKK;
• Current Price: 732 DKK;
• Morningstar Rating: ★★;
• Morningstar Economic Moat Rating: Wide;
• Morningstar Uncertainty Rating: High.
