Last year, Tesla founder Elon Musk shared his success story of losing weight with the help of Novo Nordisk's "miracle weight-loss drug". As the demand for the weight-loss drug increased, so did Novo Nordisk's stock price. Recently, after the weight-loss drug entered the European market, Novo Nordisk's stock price exceeded that of LVMH Group, a luxury goods company, becoming the most valuable company in Europe.

Is the weight-loss drug actually effective? And what potential opportunities and risks come with investing in weight-loss drug companies? Investors may worry about not understanding medical jargon, but fear not! Join us as we delve into the thriving weight-loss drug industry chain with this easily comprehensible analysis article.

What is the principle of weight-loss drugs?

Given the growing concern among many individuals about their body shape and the need to lose weight, traditional methods such as reducing food intake and exercising can often be difficult to approach due to a reliance on willpower. However, in recent years, injectable weight loss drugs have emerged as an alternative that does not require one's willpower.

The key ingredient in these drugs is GLP-1 (glucagon-like peptide 1), which was originally discovered to lower blood sugar. Several academic papers have confirmed that it can also promote the feeling of fullness and suppress appetite.

However, GLP-1 is easily degraded in the body, so an artificially synthesized version called GLP-1RA was created. Its longer half-life and reduced degradation make it suitable for treating diabetes and obesity. Currently, there are seven approved GLP-1RA medications in the United States, categorized by their administration method and duration of effectiveness: long-acting, short-acting, and oral.

Let's now introduce the real focus of today - semaglutide. It's a GLP-1RA medication that interacts with parts of the brain responsible for suppressing appetite and signaling fullness. Not only does it aid in weight loss, but it also reduces the risk of cancer, diabetes, and heart disease.

At present, the FDA has approved only six weight loss drugs. Among them, semaglutide is considered the most effective and highly regarded.

As of the end of 2022, the global GLP-1RA market has surpassed $22.4 billion. It's expected that semaglutide will lead the GLP-1RA market to achieve sustainable growth at a compound annual growth rate of 9.6% from 2023 to 2032.

The business moat of Novo Nordisk

Now, let's introduce Novo Nordisk to the stage.

Novo Nordisk A/S (NYSE: NVO) is a leading global pharmaceutical company founded in 1923 and based in Bagsvaerd, Denmark. The company conducts research, development, manufacturing, and marketing of drugs worldwide. It has two main divisions: diabetes and obesity care, and rare diseases.

The company's weight loss drugs include Saxenda, which contains liraglutide (another approved GLP-1RA medication) as its primary ingredient, and Wegovy, which contains semaglutide as its main ingredient. Both drugs are injectable medications, with semaglutide being the most effective, as mentioned earlier.

According to Deutsche Bank's analysis, since 2023, the total prescriptions of Novo Nordisk's Wegovy for treating obesity in the United States have exponentially increased, surpassing other treatment drugs by a significant margin, indicating its growing popularity among patients.

It's worth noting that Novo Nordisk also offers Rybelsus, an oral semaglutide product, and Ozempic, an injectable semaglutide product. However, both drugs are approved for lowering blood sugar and aren't strictly considered official weight loss medications.

Due to the high demand for Novo Nordisk's Wegovy, there is currently a global shortage of the drug so only limited stock available in certain regions. Novo Nordisk CEO Jorgensen stated that despite investing billions to increase production, supply constraints on Wegovy will continue until next year.

Although the demand outweighs the supply, where there's a will, there’s a way. According to UCLA Health, as interest in semaglutide for weight loss continues to grow, healthcare professionals are exploring new methods to manage demand. Since the active ingredient is semaglutide, why not shift focus and use other drugs containing the same active ingredient instead? As a result, many people use other semaglutide-containing drugs such as Ozempic and Rybelsus to achieve weight loss goals.

Novo Nordisk owes its success mainly to the triumph of Wegovy and Ozempic, as reflected in the company's financial reports showing impressive revenue growth over the past few years.

According to Deutsche Bank's forecast, Wegovy and Ozempic will generate more than half of Novo Nordisk's revenue. As these drugs continue to be popular among people seeking weight loss and the company's commitment to promoting Wegovy in more markets, this proportion may increase further.

The surging sales have also boosted the company's profit expectations, resulting in Novo Nordisk raising its full-year financial forecast three times this year. Novo Nordisk CEO Jorgensen anticipates that demand for Wegovy worldwide will remain very high in the foreseeable future. Sales in local currencies are expected to grow by 32% to 38% in 2023, with a projected EBIT growth of 40-46% for the full year.

Is Novo Nordisk still a good option despite its high valuation?

Novo Nordisk's stock price surge has led investors to associate it with the success of its weight loss drugs. Since January 2023, the company's stock price has skyrocketed by 53% year-to-date and 99% over the past 12 months as of October 14th. However, the stock price seems to have reflected only short-term growth, with a Trailing Twelve Months (TTM) P/E ratio of 48 times as of October 16. This is higher than the market's expected P/E ratio, which is only 36 times, making it appear unattractive from a surface value perspective.

Despite this, The Motley Fool analysts believe that the company will continue selling large quantities of Ozempic and Wegovy, with long-term profits expected to grow by an average of 20% per year. If the company can sustain its projected rapid growth, it may not be as expensive as it appears.

Citigroup forecasts that Novo Nordisk's GLP-1 series will grow from $23 billion in 2023 to $73 billion by 2035. As such, it raised the stock's target price from DKK 600 to DKK 745 and maintained a buy rating.

Potential future opportunity for Novo Nordisk

1. Expanding into the global market

Novo Nordisk has a potential market of up to 139 million patients in the United States alone, with a population of approximately 335 million and a 42% obesity rate.

Furthermore, the company is actively promoting the launch of Wegovy in European countries and regions. According to data from the Organisation for Economic Co-operation and Development (OECD), nearly one-third of adults in the UK are obese, which is the highest level in Europe.

As of September 2023, Novo Nordisk has launched Wegovy in several European countries, including Denmark, Norway, Germany, and the United Kingdom. The company's smooth entry into Europe propelled it to become the most valuable company in Europe, surpassing French luxury goods group LVMH.

2. Efficacy is not limited to weight loss

According to a BBC news, a new trial has shown that Wegovy can reduce the risk of stroke and heart disease in overweight people with heart disease by a fifth. Novo Nordisk CEO Jorgensen said that the regulatory process to expand the label to include the heart benefits identified in the late-stage study called SELECT would likely take a "good part of next year".

Moreover, analysts at Citigroup Bank revealed that in a trial called FLOW, GLP-1 demonstrated effectiveness beyond assisting in weight loss and blood sugar control. It can also delay the progression of chronic kidney disease and lower the risks of cardiovascular and kidney-related deaths. The trial was prematurely stopped due to its significant effectiveness.

Potential future risks for Novo Nordisk

1. Possible Side Effects of Weight Loss Drugs

The Motley Fool reports that while weight loss drugs like Ozempic and other GLP-1RA drugs have undergone strict regulatory approval, they are still in the early stages of development, making it difficult to determine their possible long-term side effects.

Researchers at the University of British Columbia conducted an epidemiological study and found that such drugs may increase the risk of gastric paresis, a condition where the stomach cannot empty properly. Media reports also suggest that these drugs may increase the risk of intestinal obstruction. Additionally, European regulators are concerned about whether these drugs increase the risk of thyroid cancer. These symptoms and side effects may not have been identified during clinical trials, and if confirmed in the future, they could impact Novo Nordisk's business performance and stock price.

2. Competitor Risk

The Motley Fool also highlights that Novo Nordisk faces potential competition from other pharmaceutical companies in the weight loss drug market. Eli Lilly, a competitor, is seeking approval for its diabetes medication, Mounjaro, to be used as a weight loss drug. Clinical trials have shown that it not only helps people lose weight but is even more effective than Novo Nordisk's Wegovy and Ozempic.

In addition, Pfizer has been committed to developing danuglipron, a weight loss drug with similar effectiveness to Ozempic but requiring higher doses. These competitors pose a risk to Novo Nordisk's dominant position in the market, and the company will need to innovate and continue to provide superior products to maintain its success.