Novo Nordisk: Time to Sell?

Novo Nordisk shareholders have grown fat even as the obesity drug company’s customers have been losing weight. From relative obscurity just five years ago, Novo Nordisk has become the most valuable company in Europe.

The promise of future returns is built into the stock price. In this post, we look at the risk, which seems to also have risen sharply with the stock price.

The stock was trading in the low 20s just five years ago, when Novo Nordisk’s diabetes and weight-loss drug Ozempic was approved for sale in the US and Europe. Now the stock trades at over $100 per share, and about 43 times earnings. Novo Nordisk’s price has been driven up by investors excited by the addition of Wegovy. Wegovy is a higher-dose version of the drug Ozempic, and is explicitly marketed for weight loss.[1]

We wonder about that risk of Wegovy, and what that means for Novo Nordisk’s stock price, for two main reasons. These reasons are: 1) the sad history of weight-loss drugs, and 2) the historic frequency with which drug companies have had big runups on exciting drugs, followed by breathtaking drops.

A history of drug company run-ups leading to crashes

In 2021, large-cap pharmaceutical companies Pfizer and Moderna experienced huge run-ups on the excitement surrounding their covid vaccines. Everything was great — until it wasn’t. Huge share price declines followed the big run-ups. In just two years, from December 2021 to December 2023, Pfizer’s value fell in half – from $59 per share to about $27 per share. Moderna did even worse.

Here’s a graph of Pfizer’s stock price. You can see the peak in 2022. The value of the stock then declined.

Similarly, Moderna’s stock climbed sharply and steadily from the $130s in May 2021 until it peaked around $449 in September 2021. Following that peak, the stock cratered, losing over 70% of its peak value, and by March of 2022 was back to the $130s. Moderna has still not recovered.

Pfizer’s and Moderna’s stock price histories are similar to the peaks and declines that weight-loss drug companies experienced in the 1990s.

Wyeth’s weight-loss drug debacle

In the 1990s, a company called American Home Products, which later became Wyeth, marketed weight-loss drugs called Pondium and Redux, also known as “fen-phen” (named after the active ingredients in the drugs). These drugs were enormously popular; millions of Americans began using them. Then, in 1997, evidence emerged that fen-phen drugs were causing extremely serious side effects including leaky heart valves. In mid-1999, Wyeth stock fell from about $70 per share to $40 per share.[2] The company eventually had to pay over $14 billion to cover the cost of law-suits.[3]

The prudent investor, with one eye on history, might want to ask whether something similar could be in Novo Nordisk’s future.

That’s partly because doctors and scientists have begun to find negative effects associated with Wegovy.

Risks regarding Wegovy

Novo Nordisk’s recent valuation increase is largely due to sales of and excitement about Wegovy. However, risks to Novo Nordisk’s valuation include 1) Wegovy (or semaglutide or GLP-inhibitors in general) becoming less popular, and 2) competitor drugs taking market share, even if such drugs remain popular.

As more science emerges regarding the problems associated with taking Wegovy, there may be reason to suspect that the drugs will become less popular. The problems include the fact that some patients who lose weight with Wegovy show patterns associated with starvation, that some patients experience extreme side-effects, and that patients who stop taking Wegovy gain weight back at a high rate.

Wegovy – starvation and other side effects?

A study published in the New England Journal of Medicine[4] reported that while consumers of Wegovy did lose significant amounts of weight, they also experienced a many more side effects, including nausea, vomiting, diarrhea, and constipation at rates 3 to 6 times higher than the control group. More alarmingly, almost half the weight that people lost was muscle, not fat.

That pattern of weight loss is characteristic of starvation, according to retired professor of medicine Robert Lustig. He is alarmed by Wegovy. Lustig says, “If you’re 60 [or older] and losing muscle, your risk of dying just went up exponentially.”[5]

A growing number of doctors, many who had initially been excited about Wegovy, are now voicing concerns. For example, Dr. Peter Attia, a Stanford, Johns Hopkins, and NIH-trained doctor in private practice, was initially very excited about Wegovy and other drugs based on semaglutide. But more recently, Attia has said that “almost every patient we put on this drug [semaglutide] has lost muscle mass at a rate that alarms me.” [6]

Extreme side-effects

Most drugs have some side-effects, but the side-effects of Wegovy include severe effects like paralysis.

Although weight-loss drugs have increased in popularity over the past few years, it’s unclear whether they will continue to do so. As new research emerges on the side effects of GLP-1 inhibitor drugs such as Wegovy, patients may become wary about using the drugs and doctors may become hesitant about prescribing them. Research published in late 2023 suggests that GLP-1 inhibitor drugs lead to side-effects such as increased stomach paralysis. The FDA has added a warning to Ozempic’s labeling.[7] (The side effect of stomach paralysis may be caused because GLP-1 inhibitor drugs slow movement of food through the stomach, indicating that reversal of the side-effects might be difficult without reversing some of the benefits of the treatment.)

Patients re-gain weight

Attia says that many of his patients on the drug have lost body mass in “alarming proportions,” and become fatter even though they’ve lost weight – in other words, they’re losing more lean body mass than body-fat.[8] That could mean they’re losing bone, organs, and muscle, even heart muscle.

A study published in April 2022, which studied the effects of semaglutide versus a placebo pill on 190 patients, found that patients on the semaglutide pill regained two-thirds of the weight they had lost within one year of stopping treatment.[9] This effect is not inconsistent with statements by Novo Nordisk’s head of global drug discovery, who noted that patients can gain back about 50% of their bodyweight within two to three years if they stop treatment.[10] If anything, the science suggests that the Novo Nordisk official may have under-stated the problematic effects of going off the drug.

It’s impossible to know what this means for Novo Nordisk. Even if FDA or EU regulations surrounding semaglutide don’t change, consumers and or their doctors may become afraid to try the drug lest they get “hooked” on it. Or, consumers may try the drug and then refuse to stop taking it. Of course, these two different scenarios have very different outcomes for Novo Nordisk’s revenue, but it is impossible to say which one is more probable.

Competition

Pharmaceutical company Eli Lilly recently received approval for Mounajro, or Zepbound, a drug that, like Wegovy and Ozempic, is a GLP-1 inhibitor. Zepbound, however, targets two hormonal pathways instead of just one, and it has received mixed reviews. On the one hand, some studies suggest that Zepbound can lead patients to lose three times as much weight as can Novo Nordisk’s drugs. On the other hand, studies recently emerged suggesting that patients regain weight after they stop taking Zepbound.[11] Even if this study is correct, it’s unclear what the implications are. Perhaps people will be afraid to be “addicted” to Zepbound. Or, perhaps they will see Zepbound as a necessary new addition to their lifestyle, and will continue to use it regularly.

Conflicts of Interest?

Reuters reports[12] that many doctors who are outspoken advocates of Wegovy may have serious conflicts of interest. For example, Reuters reports that Novo Nordisk paid Dartmouth medical school’s chief of obesity medicine, Lee Kaplan, $1.4 million over a number of years. Kaplan received much of that money while he was teaching at Harvard Medical School. There may be a risk that a scandal erupts in which Novo Nordisk gets in trouble for “buying out” the certain influential doctors.

Risks in Novo Nordisk Valuation

The current price-to-earnings ratio (PE ratio) for the American pharmaceutical industry is about 48.[13] Novo Nordisk’s PE ratio is about 43, which is slightly below the industry average.

But Novo Nordisk has grown so quickly in the past two years that its growth rate may be unsustainable.

Novo Nordisk now has a market cap of about $361 billion, according to Google Finance.

Assuming the company is worth the present value of the future earnings, how much would those have to grow to be worth 361 today? If the company’s market cap is $361 billion and the PE ratio is 43, earnings are about $8.39 per share (ie $361B / 43).

Assuming that the market is efficient, the fundamental value of a company is the present value of its future cash flows. What level of future cash flows would Novo Nordisk need to justify today’s market cap of $361 billion?

Given earnings per share of $8.39, and a required rate of return of 5% (i.e. roughly the return implied by a market p/e of 20), Novo Nordisk would need to grow its earnings at a compound annual rate of 38% per year for the next ten years, and then revert to a market multiple, to justify its current market cap of $361 billion. Thirty-eight percent compound growth would mean that the company would earn about 19 times as much in 2033 as it did in 2023.

If you don’t think that’s a risk worth taking, and you own a significant chunk of Novo Nordisk, you may consider selling some or all of your Novo stock.

Don’t let the tax stop you from selling

You’re doubtless aware of the heavy tax burden that can be associated with selling stock. A Stock Diversification Trust can help you (or your clients) avoid paying capital gains tax when selling.

Please call us to see whether a Stock Diversification Trust might be a good solution. You can also ask us for a free copy of our Advisor Guide on stock diversification. Click here for a free copy of our Advisor’s Guide to Stock Diversification. You can also call 703 437 9720 and ask for Connor or Katherine, or email us at [email protected].

[1] https://www.goodrx.com/classes/glp-1-agonists/wegovy-vs-ozempic#:~:text=Ozempic%20and%20Wegovy%20are%20both,They%20aren’t%20interchangeable.

[2] https://www.forbes.com/forbes/2006/0410/086.html?sh=1f2499c748d4

[3] https://www.forbes.com/2003/05/16/cx_mh_0516wyeth.html?sh=71f1d281c5af

[4] https://www.nejm.org/doi/full/10.1056/NEJMoa2032183

[5] https://www.statnews.com/2023/05/08/weight-loss-drugs-wegovy-novo/

[6] https://www.advisory.com/daily-briefing/2023/03/22/wegovy-muscle-mass

[7] https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwimrM3huMyDAxU3kmoFHYoTANMQFnoFCNQBEAE&url=https%3A%2F%2Fwww.webmd.com%2Fobesity%2Fnews%2F20230928%2Frisk-of-intestinal-blockage-added-to-ozempic-label&usg=AOvVaw26Tz2J_B1FW1O-DgPlqzP3&opi=89978449, https://www.today.com/health/news/tirzepatide-mounjaro-weight-loss-drug-rcna82400

[8] https://www.youtube.com/watch?v=T6fhFLv2ERs

[9] https://dom-pubs.onlinelibrary.wiley.com/doi/10.1111/dom.14725

[10] https://www.reuters.com/business/healthcare-pharmaceuticals/novo-nordisk-says-stopping-obesity-drug-may-cause-full-weight-regain-5-years-2023-03-30/

[11] https://www.cnbc.com/2023/12/11/zepbound-patients-on-eli-lilly-drug-regain-weight-after-stopping-it.html

[12] https://www.reuters.com/investigates/special-report/health-obesity-novonordisk-doctors/#:~:text=Another%20concern%20stems%20from%20clinical,significant%20amount%20of%20muscle%20mass.