【November 2024】The explosive emergence of the miraculous weight-loss drug Wegovy! How should novo-nordisk a/s performance be viewed?

In recent years, one of the best-performing pharmaceutical stocks in the US stock market is novo-nordisk a/s.$Novo-Nordisk A/S(NVO.US)$It is definitely one of them. Even in the significant adjustment of the US stock market in 2022, novo-nordisk a/s stood out with the popular weight-loss drug Wegovy, with a stock price increase of over 20%. Since the beginning of 2019, the stock price has multiplied more than 6 times.

The remarkable performance of novo-nordisk a/s in the capital markets is inseparable from its solid financial performance. On November 6th, novo-nordisk a/s will announce its latest financial results. Each time the company releases its financial results, it may also imply a good trading or investment opportunity. Before that, investors need to understand how to interpret its financial performance.

So how should we interpret novo-nordisk a/s's financial performance? We can focus on 4 key points: revenue growth, market share changes, profitability changes, and shareholder returns.

1. Revenue Growth

For pharmaceutical companies, revenue growth mainly relies on the sales promotion of various product lines. Some pharmaceutical companies have very balanced product lines, hence their revenue is stable. Others may have mediocre performance most of the time but could experience explosive growth with the success of a particular drug.

Historically, novo-nordisk a/s is considered a steady performer. Looking at the revenue, since the year 2000, except for maintaining a flat growth in 2017, novo-nordisk a/s has shown growth in revenue every year for over 20 years. The growth of novo-nordisk a/s's net profit has been consistent post-2000.

In the past two years, novo-nordisk a/s has shown explosive growth in financial performance. With the popularity of products like the weight-loss drug Wegovy representing the GLP-1 diabetes and obesity management products, novo-nordisk a/s's growth has accelerated. Revenue grew by over 25% year-on-year in 2022, exceeding 30% in 2023, while net profit in 2023 increased by over 50% year-on-year.

So, in the future performance, can novo-nordisk a/s's high growth performance continue? This may mainly depend on two aspects. On one hand, it's whether the strong demand for products like Wegovy and other GLP-1 products can continue, which has been a significant driver of potential high growth in recent quarters.

On the other hand, it depends on the progress of the potential research and development pipeline. After all, demand for a single product may be limited, and when revenue reaches a higher base, high growth may also be difficult to sustain. Therefore, we also need to closely monitor novo-nordisk a/s's other new products, especially breakthroughs in new products with high market potential.

2. Changes in Market Share

Novo-nordisk a/s mainly focuses on diabetes and obesity care as well as rare disease management, with the former accounting for over 90% of revenue, which is also our focus.

Among them, the diabetes market is novo-nordisk a/s's birthplace and has always been its strength. In recent years, its market share has continued to expand, accounting for one-third of the global market in 2023.

The obesity management market is one of the rapidly rising areas for novo-nordisk a/s in recent years and is also a focus of the market's attention. By November 2023, Wegovy and Saxenda, two weight loss drugs under novo-nordisk a/s, were the only two drugs approved by the FDA, making it a dominant player. In 2023, novo-nordisk a/s held a market share of 54.8% in the GLP-1 drug field, dominating the market.

However, after November 2023, Eli Lilly's heavyweight weight loss drug Zepbound was also approved by the FDA, starting to erode novo-nordisk a/s's market share. The competition between these two giants for market share in the weight loss drug market has also become a focus of the market.

Compared with Eli Lilly's Zepbound, novo-nordisk a/s's Wegovy has the disadvantage of a considerably higher price. According to data disclosed on the official websites of both products, Wegovy costs about $1349 per month, nearly 30% more expensive than Zepbound at $1060. In terms of weight loss effects, although Eli Lilly claims that its product has better results based on Phase 3 trial data, there is no definitive conclusion as there has been no head-to-head positive PK experiment between the two.

Novo-Nordisk's Wegovy advantages lie in the earlier launch time, with a first-mover advantage in brand and channel development. Weight loss drugs have attributes of health management and medical aesthetics, Novo-Nordisk's commercialization of Wegovy is earlier, the channels may also be wider, and the brand influence among consumers is deeper.

In addition, Wegovy's production capacity construction started earlier. Currently, both Wegovy and Zepbound are in short supply, but Wegovy had a longer preparation time for production capacity, which is conducive to increased shipments and market share expansion.

Therefore, in the field of weight loss drugs, we need to pay attention to the showdown between Novo-Nordisk and Eli Lilly, as well as the changes in their market shares. In the diabetes field, we can observe whether Novo-Nordisk can continue to consolidate its leading position in the future. Zepbound's market share has been steadily increasing in recent months, posing a significant challenge to Novo-Nordisk's weight loss drugs, which is also an important reason for the price adjustment of Novo-Nordisk in recent months.

3. Profitability

Novo-Nordisk's solid operation and leading position in the diabetes and obesity management markets are also reflected in profitability.

From historical data, Novo-Nordisk's profitability is very stable and at a relatively high level. We can observe three indicators.

The first indicator is gross margin. From 2014 to 2023, Novo-Nordisk's gross margin has remained stable at around 84% each year, with fluctuations not exceeding two points per year, indicating remarkable stability. Novo-Nordisk's ability to maintain such an excellent gross margin level may be related to its strong competitive position and relatively high bargaining power.

The second indicator is net profit margin. Since 2015, Novo-Nordisk's net profit margin has been around 33%, with minimal fluctuations not exceeding two points. Similarly, it has been very stable. By 2023, driven by the scale effect of revenue growth, Novo-Nordisk's sales expenses and R&D costs were diluted, leading to an increase in the net profit margin by several percentage points, reaching about 36%.

The third indicator is the return on equity (ROE), Munger once said that in the long run, the stock return rate is consistent with the company's ROE, so this may be one of the indicators that shareholders are most concerned about. Since 2015, novo-nordisk a/s' ROE has basically maintained at over 70%, reaching a very high level of around 88% in 2023.

In future performance, we can continue to pay attention to the changes in several profit indicators of novo-nordisk a/s, in order to determine the changes in its competitive environment and overall profit capabilities.

4. Shareholder Returns

For many mature pharmaceutical stocks, research and development expenses have become stable, and production capacity construction is also being gradually promoted in an orderly manner. Therefore, with money earned and unspent, there is naturally sufficient cash flow to reward shareholders.

The ways in which listed companies reward shareholders mainly include two aspects: dividends and share buybacks. Among them, dividends directly give cash to shareholders, which is the most direct way to reward shareholders, while share buybacks can increase the company's return on equity and earnings per share, and inject additional liquidity into the market, which can be said to be killing two birds with one stone and is also very popular among shareholders.

As a traditional giant in the pharmaceutical industry, novo-nordisk a/s is also equally dedicated to rewarding shareholders. The primary methods of rewarding shareholders are dividends and share buybacks in a 50-50 split. For example, from 2011 to 2023, novo-nordisk a/s' total repurchase amount was 221.4 billion Danish krone, while the total dividend amount was approximately 227.8 billion Danish krone. During this period, novo-nordisk a/s' total net profit was 507.8 billion Danish krone, with dividends and buybacks making up 88.5% of the net profit, the vast majority of net profits are distributed to shareholders, which can be said to be very generous.

However, in 2023, this proportion decreased to around 74%. Considering the company's need to invest a large amount of funds to expand the production capacity of drugs like Wegovy, the decline in dividends is also reasonable. We can continue to observe whether the shareholder return ratio can return to the previous nearly 90% after the company's production capacity construction returns to normal.

Seeing this, you may have some new insights on how to interpret novo-nordisk a/s' performance. It is worth noting that for many star companies, each earnings release may represent a rare trading opportunity for different types of investors.

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Conversely, if investors believe that the latest performance of a certain company will not be optimistic and will bring pressure on the short-term stock price, investors may consider short selling, which can be done by considering margin selling or buying put options.

Of course, if investors think that the bullish and bearish direction of a company's performance is unclear, but the stock price may experience significant fluctuations after the performance release, then investors may consider the straddle strategy of buying call and put options to capture potential opportunities.

Finally, to summarize,

For the performance of Novo Nordisk, we can focus on 4 key points: revenue growth, market share changes, profitability and shareholder returns.

For revenue growth, we should pay attention to both the sustained explosive growth of existing star products and the progress of heavyweight R&D pipelines.

For market share changes, we can focus on the battle of the weight-loss drug market giants and the sustainability of Novo Nordisk's leading position in the diabetes market.

For profitability, our key focus is on whether gross margin, net profit margin, and return on assets can maintain their current high positions.

For shareholder returns, we can focus on the proportion of dividends and repurchases to net profit, and whether it can return to around 90% after the end of centralized production capacity construction.