(all figures reported in USD unless otherwise stated)
Novo Nordisk represents one of the top 7 investment positions in the Gnostic Model Portfolio
Novo Nordisk, a Danish company, is the largest producer of diabetes and prescription weight loss medicines on the planet today. 88.8% of Q3 revenues were generated from sales in diabetes and obesity care. The company holds a global market share of 31.6% in diabetes care, 44.2% in global insulin and 55.7% in the hot selling Glucagon-like peptide-1 receptor agonists (GLP-1 RAs), a group of drugs used to treat type 2 diabetes. This represents an astounding market share when one considers that basic insulin is now a generic formulation, one produced by many dozens of companies around the globe, and that diabetes care encompasses both medical device manufacturers as well as pharmaceutical companies.
The global marketplace is quickly moving towards widespread acceptance of GLP-1 products for type 2 diabetes treatment as the class of drugs works to reduce feelings of hunger while simultaneously reducing glucose levels. Despite the rapid revenue growth of glucagon-like peptides, GLP-1 products account for less than 5% of the total global market in terms of prescriptions.
The key to the success of Novo Nordisk has been incredible efficiency of production, determined evolution of the science supporting the business and a degree of fiscal restraint seldom noted in the pharmaceutical industry.
1. Efficiency of Production: Novo Nordisk operates massive facilities in developed nations to produce the API (active pharmaceutical ingredients). These facilities are designed to be scaled up quickly to meet market demands. As a result of maintaining almost total control over production and supply of the pharmaceutical ingredients required to produce their products, gross margins in the most recent fiscal quarter, topped 84%.
2. Evolution of the Science: Novo Nordisk has been operating as a pharmaceutical developer of diabetes products for closing in on 100 years. They hold a body of research unmatched on the planet and have warehoused more papers on the subject than are presently fielded by all other companies on the planet in combination.
Many pharmaceutical developers, in the past, optimistically declared to the markets that their diabetes developments represent “the next big thing” and grab headlines for a time by the media. To confirm or deny the validity of any specific premise put forth by potential competitors, one typically only has to pour over older scientific papers produced by Novo Nordisk. In most cases, what is marketed, by capital fundraisers, as that next breakthrough, is an avenue Novo had already explored as fully as science permitted and had shelved for a variety of reasons, but most typically either due to a lack of promise or due to side effects. Nobody in the pharmaceutical industry ever faults Novo-Nordisk for missing something, competitor research in areas already explored by Novo scientists are typically redundant, wasteful, duplication. By and large, what Novo-Nordisk deems to be a dead end, is truly a dead end.
3. Fiscal restraint. For the past 20 years, the majority of of the giant pharmaceutical players de-emphasized R&D, preferring to pay massive premiums in a quest to scoop up drug developers via merger or acquisition, few of which ever pan out and are quietly scuttled years after the purchase. Now, many are playing catch-up, having to dramatically increase inhouse R&D as well as buy or license promising compounds on a serial basis. Novo Nordisk never went down that route, preferring to spend roughly 12-15% of sales annually on R&D of its core diabetes franchise. Novo does make purchases from time to time; they tend to be smaller bolt-on R&D shops complementary to an area of research underway and are designed to primarily confirm or to deny a specific thesis already being explored, with a goal of boosting operating margins on the existing business franchise.
In contrast to the serial acquirers among the top ten pharmaceutical companies worldwide, Novo Nordisk is seldom noted as a buyer. Such focus is scorned among major Wall Street investment firms; they desire regular merger and acquisition activity to provide high fees and potentially result in a takeover payout premium on any companies that they bring to the attention of a major for review. As Wall Street has nothing to sell to Novo-Nordisk, Wall Street pays little attention to Novo-Nordisk; when a company holds a $300 billion market cap, trades on the NYSE and has just 4 Wall Street firms providing coverage, I call that “indifference“. Novo Nordisk sticks to their knitting, building on their core competency and growing out that knowledge base internally. Arguably, it may be the most focused large pharma on the planet today.
As a result of this disciplined operational focus, Novo, with a $311 billion enterprise value, generated gross margins of 84.3%, EBITDA margins of 45.1% and boasts net profit margins of 32.5% (last fiscal quarter).
The driver of double digit sales growth at Novo Nordisk during 2022 was rapid take-up of new generation GLP-1 compounds.
Novo Nordisk has largely carved out the weight loss market as an entirely new category, one completely separate from diabetes, via rebranding an existing GLP-1 diabetes compound called Ozempic, under the name Wegovy, to be sold exclusively as an obesity treatment. The drug affects how the pathways between the brain and the gut regulate energy and helps patients to feel more full. The FDA cleared Wegovy and sales began in 2022 but the sales rollout was rather slow due to an inability to ramp up supply of the medication in the formulated strength.
Undeterred by the lack of Wegovy supply, prescribing physicians utilized a work-around and prescribed double dosages of Ozempic as an off-label prescription, essentially diagnosing any adult wishing Ozempic for weight loss to be some variation of a prediabetic and in need of the product. Subsequently, Ozempic sales shot up by almost 100% in the first 9 months of 2022 and will almost certainly report annualized sales in the $10 billionish mark by the end of fiscal 2022. In the meantime, Wegovy sales might touch $1 billion for the entire fiscal 2022. On a consolidated basis, the Ozempic/Wegovy diabetes (weight loss) franchise went from quarterly revenues of roughly $1 billion in 2021 to potentially $3 billion quarterly by the end of Q4, 2022.
To this we can now look to include revenues from patients between the ages of 12-18 in the coming year.
The new US medical guidelines recommend that children as young as age 12 battling obesity be prescribed appropriate obesity drugs. This follows approval in late December for the use of Wegovy in children aged 12 or older.
The potential market size of the pre-adult market could be easily be in the billions of dollars annually, in the US alone. While about 40% of U.S. adult population is considered to be obese, up to 20% of children and teens in the United States also fall into the category of obese. And, unlike adults, obesity in children is primarily considered by the US medical regulators to be a biological problem whereas a high percentage of obese adults are deemed to be overweight due to lifestyle. We may privately disagree on some points in that regard, but this is how the medical profession has opted to assess obesity in the current environment.
Wegovy has performed far better in clinical testing on children and teens than it has on adults.
In adults, Wegovy trials resulted in an average weight loss of about 7.9% of all adults enrolled in the trials. Trials conducted for children age 12-18 indicate that Wegovy use resulted in a 16% reduction in body mass index. The significant difference in weight loss, between adults and children, could be as a result of the body’s ability to metabolize calories more quickly and burn them faster at younger ages. If so, this would suggest that not only children, but younger obese adults as well, might shed more weight than the average test subject in the Wegovy trials. If correct, such findings would have implications for dosing recommendations over time based upon age, but this has yet to be confirmed. The childrens’ trials were far smaller, so real world results over a larger patient pool could also move away from those high weight loss figures.
Novo Nordisk is aware of a potential competitive threat to its monopoly in 2023.
Eli Lilly (LLY-NYSE, $359.12) is considered by Wall Street to be the major competitor to Novo Nordisk in GLP-1 drugs. Their scientists, lacking “first to market status” presently conferred to Novo-Nordisk, have opted to compete against Novo Nordisk on the diabetic and weight loss front with a “more is better” approach. Their flagship drug will feature dramatically stronger formulations vs Novo-Nordisk, more active ingredients per injection, brute strength vs finesse, extra strength above all else.
Being more than a year behind on the GLP-1 weight loss front, Lilly has placed its bet on a formulation that would mimic multiple hormones with the goal of stimulating insulin production while suppressing appetite with a view towards driving even greater potential weight loss. Their diabetic product (turzepatide) was approved in 2022 for diabetes use under the name Mounjaro. Now, a rolling submission is underway specifically geared to obesity indications, with phase 3 data anticipated by April 2023. After that point, assuming the data remains satisfactory, a full approval for a weight loss specific application could come by summer of 2023. The rolling application only covers adults and a separate application would be required for children.
There are headline media differences between the Novo Nordisk and the Eli Lilly products, and then there are science differences.
Novo Nordisk’s Wegovy product contains, in an injectable form, 2.4 mg of active pharmaceutical ingredient. The use of this amount has been demonstrated, over a 68 week period of testing in adults, to result in weight loss per patient in the range of 7.9% of body weight. A 230 pound average patient loses about 18 pounds over a year. Patients prescribed Wegovy start off on a half strength dosage for a period of one month and then move up to the full strength prescription assuming that the product is well tolerated.
Eli Lilly’s Mounjouro requires a total of 3 step ups in dosage and testing was done over a 72 month period. While Wegovy ends at 2.4 mg of API, Mounjouro starts off at 5 mg of API. This is used for a month. Next, the dosage is doubled, to 10 mg of API for an additional month. Finally, assuming that the patient tolerates the dosage, a full 15 mg of API is the end result with a Mounjoro prescription.
All in all, and taking into account the differentials between a two hormone version vs a 3 hormone version, the Eli Lilly product is between 3x-6x stronger than what is being offered by Novo Nordisk.
Eli Lilly reports an end result of potentially a 20% reduction in body mass at the highest strength formulation. That much is true, assuming that the typical patient can tolerate up to a 6x increase in the active pharmaceutical ingredients. Novo Nordisk relied upon a testing phase trial with over 4500 participants, whereas Lilly used fewer than 1/2 that many test subjects. The average BMI in the Lilly trial subject pool was 37.5 vs a BMI average of 30 for the Novo subjects. Finally, the trials conducted at Novo took place over a 68 week period whereas the Lilly trials were conducted over 72 weeks; the difference represented the additional month to step up from 10 mg to 15 mg of active ingredient.
6% of the weight loss differential reported between Eli Lilly’s Mounjaro and Novo Nordisk’s Wegovy is entirely attributed to the duration of the trials, which benefits Eli Lilly.
To that, we must then harmonize the weights of the subject pools in both trials. According to the trials, the BMI of the Eli Lilly was potentially a full 24% higher than in the Novo-Nordisk trials. This could suggests that some good old fashioned goosing up of the trials was done, cherry-picking subjects, so as to ensure that the trials were filled with participants capable of losing much higher percentages of weight for their height. I believe that at least a percentage of the reported weight loss differential was due to this factor. This is, to some extent, a testing model based upon the now cancelled TV series “The Biggest Loser”. Total weight losses on teams in those shows typically favored the heaviest participants, because they had the most weight to potentially shed.
Finally, the Eli Lilly test pools were smaller. Statistically, the smaller the sample, the less likely that the results will be replicated equally over a larger population.
All of this must be considered when looking towards an approval of Mounjaro for weight loss indications at some point in 2023. Will it mean that the Eli Lilly injectable represents a category killer or will it be just another competing product in the weight loss pharmaceutical toolbox?
There are always those that favor brute force over finesse in pharmaceutical compounds, but every increase in active pharmaceutical ingredients comes with tradeoffs, those tradeoffs being the short and long term side effects. Both the Novo and the Lilly GLP compounds have a fairly dizzying array of side effects. In many cases, even the mildest effects impact as much as 20% of the test subject pool and while some are less serious and short term, some are potentially more serious over the longer term. Novo Nordisk determined that the optimal active ingredient was a 2.4 mg dosage, because to increase their active ingredient dosage beyond that point resulted in too many short term side effects and deterred those trying the product from continuing on for a longer duration.
Lilly, took a different view, that those who were morbidly obese would gladly want a 3X higher dosage even if it were less than tolerable, because the end result of saving ones’ life and preventing gastric bypass surgery would be worth it. It is a tactical approach, one designed to appeal to the highly obese, but will it be accepted by a more “lifestyle” type patient, those wanting to lose 30-40 pounds and not wanting to continually wear adult diapers during a three month break-in period?
Wall Street analysts are all over the map on the companies and the category in general.
In order for a drug to be covered under private health insurance, it must first be accepted into the HMO’s pharmaceutical benefit managers (PBM)’ “formulary”, a list of covered drugs. Some formularies have excluded one drug vs another when there are multiple products available. Inclusion into a formulary is negotiated between the pharmaceutical producer and the PBM. If a drug will represent such a wildly prescribed product that it could negatively impact the profits of the insurer providing coverage, either a significant break on price is required for acceptance, or alternatively, a competing product might be chosen. There is a lot of behind the scenes horse-trading that goes on between drug companies and health insurance firms. Having two companies offering somewhat similar products can muddy the waters.
On the other hand, having two companies produce somewhat similar products, to the eyes of the public, need not be a bad thing. The class of diabetes drugs for purely weight loss is quite novel, the potential untapped market is vast and both Novo-Nordisk and Eli Lilly will be marketing their respective products very hard through media advertising, lobbying and public service announcements, in the coming years. A duplication of advertising, creating awareness of the category, may actually drive collective revenues for the sector above what would normally be possible with a single company being forced to do all of the heavy lifting, marketing wise. As well, increased awareness of the class of drugs will pressure all health insurers to offer coverage for weight loss GLP-1 drugs in their PBM formulary, or potentially, lose a bunch of insured customers to competing firms. There are many that attribute at least a portion of the business success of Coca-Cola and Pepsi to a healthy rivalry during the formative years of soft drink sales. Their combined marketing initiatives created a global awareness of soft drinks, and now here we are. Would carbonated sugar water be as widely accepted as the beverage of choice, were there just one producer?
Analytical firms such as Cowan & Co, employing teams that do nothing but look into such matters, project that the Eli Lilly product could eventually peak out at revenue of $25 billion and have gone so far as to declare it to have potential to become the world’s most widely prescribed drug, an outright category killer capable of obliterating any other competing product in the marketplace. Others are more nuanced and I fall into the that category. Adjusted for the dosing differentials, the Novo Nordisk product appears to provide less top line weight loss than Lilly’s mounjaro, but conceivably with a much lower incidence of side effects.
It will be physicians, health insurers and patients that will determine the investment outcomes for both firms, based upon their real life experiences with both products. Thus far, Novo’s Ozempic is declared to work very well and is well tolerated on the whole by patients.
The question, is, to my way of thinking, how many, if any, existing patients of Novo, who took the time to go through the one month phased-in ramp-up to the 2.4 mg formulation and that are steadily losing weight will want to switch; will they be easily persuaded to jump ship for a different drug that will require months of step-up dosage increases and that may be far less tolerable for the patient? I’m not so sure about that proposition. Nor is Novo Nordisk. They feel that the market for weight loss drugs is sufficiently large that plenty of room exists for both products without cannibalization on either side. Of course, any pharmaceutical producer of a product facing potential competitive pressures would say such a thing, but in the case of Novo Nordisk, we want to look at the history of their statements and actions. Have they overstated potential sales or efficacy of any of their products in the past, despite external competitive pressures? The history of Novo Nordisk typically does not involve bluster; maybe there is a first time for everything, but I’m not sure this will be that time.
In the meantime, while Lilly works to complete the rolling phase 3 trial data before requesting formal approval, Novo Nordisk sells more Wegovy and Ozempic daily and continues to capture, potentially solidifying, a greater and greater market share of the lifestyle weight loss patients. They are doing so via the physician workarounds using the off label script on Ozempic. Anecdotes abound of patients taking the 1 mg dosage that is designed to be administered weekly and decreasing the interval between jabs; the anecdotes suggest that for those persons, the weight loss is far greater than the 7.9% reductions achieved during the trials. If such stories prove to be accurate, then there may not be much, or any, slippage away from Ozempic sales if/as/when the Eli Lilly product reaches full approval.
It could be that Ozempic/Wegovy captures the low hanging fruit and maintains that base while Mounjaro works to obtain new patients or nabs those who were intolerant of the Novo product. The potential market is vast and the surface has just been scratched on the weight loss front. It should go without saying that that if a patient proves to be incapable of taking of Ozempic/Wegovy due to the side effects, they could likely have a far tougher time with an extra strength dosage from Lilly, dosage strength being expressed, not in percentages, but in multiples. it could also prove that a new patient, initially prescribed Mounjaro by a physician and finding it too difficult to stay the course, they could opt for the potentially kinder Wegovy and under such an outlook, the entire weight loss market continues to grow for all parties concerned.
As to children, until such time as Eli Lilly seeks approval for teens and children over 12, and it must first obtain approval as a weight loss drug for adults; Novo-Nordisk appears to have that market largely to itself.
On a valuation basis, NVO represents the purest play on the weight loss pharma market at this time.
Every dollar of revenue generated by Novo produces almost 60% more net EBITDA margin than is reported by Eli Lilly. Each dollar of revenue generated by Novo produces 55% more net profit than does that same dollar of revenue generated by Eli Lilly. Yet, the enterprise values for both companies are practically the same. For 2023, Novo Nordisk might surpass Eli Lilly in terms of total revenues and the recent approval for treatment of children over 12 is a wildcard that will only show up in fiscal 2023.
All this would suggest that Novo is the better buy on a valuation basis; the company is considerably more profitable, dollar for dollar of revenue. However, Novo’s valuation gap may never close to that of Eli Lilly, for no other reason that one is a US company with a major US active and passive investor following as well as exhaustive coverage by 20 separate Wall Street firms, while another company is headquartered in Copenhagen and is largely ignored by Wall Street.
To those that believe in the outlook for weight loss GLP drugs; any debate regarding Novo Nordisk vs Eli Lilly need not be a win/lose scenario; it could as easily be the battle of Coke vs Pepsi. Those who held KO & PEP over many years did quite well. Each marketed so hard that they grew the recognition and acceptance of the entire soft drink industry. It might be also similar to the competitive battle between Visa and Mastercard, where Visa controls the lion’s share of the US market while Mastercard dominates the majority of the non-US global market. Perhaps Eli Lilly will capture the super obese patient, while Wegovy best serves the lifestyle weight loss patient, children or younger adults. It is too soon to declare either a winner or loser, as the competition has not officially started. Time will tell; but Novo Nordisk feels that the market is so large that multiple products, from multiple players, might easily co-exist.
I think that the weight loss market is vast, completely underserved and that to pick out just one winner, when in fact the market represents a potential duopoly, is to minimize the investment premise of both companies. Neither will need to directly compete on price; they will only need to negotiate the inclusion into PBM formularies. Furthermore, the development of one drug and the rebranding it for multiple applications, (diabetes or weight loss) is pure marketing genius, in my view; it enables physicians to reduce the likelihood of coverage rejection by a health insurer. This is one of those situations where multiple diagnosis of a condition (diabetic, prediabetic, obesity, etc.) can still result in a prescription for the same product, perhaps just with a different brand name (Ozempic or Wegovy) to be prescribed. My personal primary reservation regarding Eli Lilly and Mounjaro is based on the science; Mounjaro produces greater weight losses in the tightly controlled test groups. But, is the product really as good as the testing reported, or were the tests somewhat massaged to predetermine an outcome? How many patients can and will tolerate a greatly extra-strength product for an indeterminate period of time, because we are not talking about a moderately stronger formulation, we are essentially comparing a regular strength product to a triple strength product.
Both Eli Lilly and Novo Nordisk are presently priced for an extremely high volume of prescriptions to be written on Mounjouro and Ozempic/Wegovy.
Any disappointment on the prescription front, regulatory, or from negative side effects, will likely hit one or both stocks hard, very hard. As a result, this isn’t the sort of investment that one even contemplates as a sure thing, despite the likelihood that the drug class will be of great appeal by those seeking to lose weight. The formulations offered by Novo and Eli Lilly are good, for the right person, potentially even great, but a variety of factors, likely including age, don’t ensure that a prescription from either company represents a universal slam dunk, and that is what is missing from some incredibly bullish themes percolating on Wall Street.