Novo Nordisk focuses on investment and new factories for anti-obesity treatment

In the publication of financial statements there are always some graphs that are more emblematic than others. This is also the case with the presentation of Novo Nordisk's first quarterly report of the current year. Among the many charts, the one describing the division of revenues by therapeutic area must be highlighted. Well: as of 31/3/2024, 76% of turnover is attributable to diabetes treatments; 17%, on the other hand, concerns anti-obesity medicines. The remaining 7%, finally, is attributable to rare diseases (mainly blood or endocrine). In other words: weight-loss treatments have taken on no small importance alongside the world of diabetes (in which Novo Nordisk is a leader). Importance, it turns out, has risen over time, as the trend in the division of turnover over the last five years shows. In 2019, revenues of DKK 122 billion were 80 per cent and 5 per cent generated by diabetes and obesity treatments, respectively. The remainder was accounted for by rare diseases. Over the years, total sales have risen (17% weighted average annual increase) and the same breakdown has gradually seen the incidence of obesity care rise. In 2021 it was worth 6%. Then, subsequently, its weight rose to 9% (2022) to reach 18% last year. In short: the growing relevance of anti-obesity care is in the numbers. So much so that, in another chart in the latest quarterly report, it is described how the current 'wave' of company expansion is linked above all and precisely to the diabetes issue (where the company aims to strengthen its leadership). Subsequently, the baton will have to be passed on to the world of obesity, and finally, beyond 2027, to the 'wave of growth' expected (above all) in the cardiovascular sector. A sector, the latter, where the aim is to build a competitive position.

Within such an environment, the Danish giant reported - albeit with some ups and downs - increasing margins. According to the Bloomberg terminal, the adjusted Ebitda to revenue ratio was 47.7% in 2019. Thereafter (2020) it rose to 47.2 per cent and then dropped to 45.2 per cent.From there on, however, the indicator rose again, reaching 48.2% in 2023. In the first quarter of 2024, the positive trend in the income statement was confirmed. Revenues, in constant currency, rose by 24% and the operating margin was 48.7% (46.9% a year earlier). Finally: diluted earnings per share were DKK 5.68 compared to DKK 4.39 in the same period of 2023.

All as easy as swallowing a pill, then? The reality is more complicated. Starting with the world of weight-loss treatments. True! The market for anti-obesity pills is expanding. Last year, it was worth around six billion dollars, according to Goldman Sachs. By 2030, it is expected to generate a turnover of around 100 billion. Not only that. According to Novo Nordisk, the European company's market share is over 80 per cent. A percentage that plastically describes the company's importance in this sector, particularly thanks to its flagship drug Wegovy, which was recently also approved in China. However, competitors are advancing. Which threatens to impact Novo Nordisk's growth. At the forefront is certainly Eli Lilly. Last November, the US group received the OK - from both the Food and drug administration (Fda) and the British Mrha - for Zepbound. That is: its anti-obesity treatment. A drug whose success (together with the treatment - based on a similar principle - against diabetes) has led the company to revise upwards its estimates for 2024. More. Novo Nordisk will - in a more futuristic time - have to reckon with Amgen itself. The latter does not yet have an approved medicine in 'obesity care'. The group is, however, developing two molecules. In particular, the focus is on the injectable treatment called MariTide, for which updates on the phase II clinical trial are expected in 2024. In the face of this, there are questions about the impact on Novo Nordisk's business of new participants in the anti-obesity gold rush.

Novo Nordisk for its part - at least this is what one can deduce from analysing quarterly reports and transcripts of conference calls - emphasises its ability to cope with the situation. First of all, it should be pointed out, the company is developing new drugs for slimming treatment. One example? CagriSema. This is a treatment, currently in Phase 3, aimed at weight loss as well as other benefits for patients with obesity and related comorbidities. Also in Phase 3 is Oasis. That is, the oral dose of semaglutide, which - it should be remembered - is the active ingredient of drugs against obesity (and diabetes). Moreover, the group - as shown by the performance in the first quarter of 2024 where revenues were also and above all driven by weight loss drugs (+41%)- the demand for such drugs is very high. So much so that the group is expanding its production base.

The expansion project is aimed (also) at coping with the demand for precisely those anti-obesity drugs. In this sense, one may recall Catalent's purchase of three fill-finish sites (Anagni in Italy, Bloomington in the United States and Brussels in Belgium). An operation (final closing is expected towards the end of 2024) that should allow flexibility and future options for expansion on a larger scale. More generally, the commitment on production - initiated not as of today - contributes to the increase in capitalised investments. Capex in 2021 was around 4% of turnover. In 2022, the percentage rose to 7%, and in the past year to around 11%. With regard to the current financial year, the estimate is for a commitment that should be worth around 45 billion kroner. The increase is so significant that it is not surprising that, in the latest update of the 2024 forecast, free cash flow is lower than the previous estimate. At the end of January, the expectation was for DKK 64-74 billion of free cash flow. With the publication of the quarterly data, however, the range was increased to DKK 57-67 billion. This was a reduction that made several analysts turn up their noses. Perhaps this is also why the share price on the stock exchange - immediately after the announcement of the quarterly numbers - remained weak. In general, however, it should be mentioned that Novo Nordisk improved its guidance for 2024. On the one hand, turnover is expected to rise between 19-27% (18-26% previously). On the other hand, operating profit is expected to increase between 22-30% (21-29% according to the guidance offered on 31/1/2024).