Novo Nordisk has disclosed details of early-stage clinical trial results for its novel oral treatment, amycretin. This not only increases the body’s production of the GLP-1 hormone, like some of Novo’s existing treatments, but also another hormone, Amylin. The data from the Phase 1 trial suggested an average weight loss of 13.1% after 12 weeks and a safety profile in line with existing treatments.
The company expects to close the $11bn acquisition of three medicine bottling sites from contract development and manufacturing firm Catalent this year, with a view to expanding manufacturing capacity.
The shares closed up 9.0% on the day.
Our view
Novo Nordisk is a leading provider of diabetes-care products such as insulin. Currently, the key growth driver is its range of GLP-1 products for the treatment of type 2 diabetes and, more controversially, as a weight-loss aid.
Sales of the group's headline weight-loss drug, Wegovy, saw a more than fourfold increase in over 2023.
The market opportunity for this new generation of obesity treatment has the potential to support strong growth for many years. Positive data from recent clinical trials is demonstrating benefits for cardiovascular health. This represents another significant target market to go for and one where the company has a strong development pipeline of new products.
These sit alongside its more experimental obesity candidates, which could see the emergence of more palatable oral formulations as opposed to the current range of injectables. Early trial data indicates that these are potentially more effective treatments, but there are no guarantees that these will ever make it to market.
But concerns are emerging about the long-term safety of GLP-1 and Novo has attracted criticism for its marketing practices for one of its other obesity treatments. Potential restrictions on usage and marketing, as well as emerging competition, are risks to watch out for further down the line.
The rare disease market is another area of focus and one which has met with recent clinical success. This is something we'll be monitoring with interest, but it's currently only a small part of the business.
A dominant market share and attractive end markets would be enough to attract investors' attention on their own, but Novo also runs a pretty tight ship operationally. That's allowed the group to boast operating profit margins consistently over 40%. There are some headwinds to margins as Novo seeks to internalise more of its supply chain and drive the research agenda, but overall management is confident of further expansion.
Manufacturing bottlenecks still seem to be the main constraint on growth across the business. Despite these challenges, the group expects operating profit to grow between 21-29% this year - hardly a snail's pace. Cash conversion of these profits is impressive, allowing Novo to indulge in acquisition opportunities which can provide further drug development programs as well as operational scale. This is one option open to management for increasing production capacity but it won’t be an instant fix.
The valuation's sitting some way above the long-term average. Recent clinical data has driven the valuation even higher, implying confidence about the company’s ability to deliver. We’re also impressed by the track record but caution that any associated revenue from the early-stage pipeline could still be years away, even if the high regulatory hurdles are cleared.
Environmental, social and governance (ESG) risk
The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk.
According to Sustainalytics, Novo Nordisk's management of ESG risks is strong. Executive pay is linked to both financial and non-financial targets, including sustainability targets, though it's unclear exactly how the two are linked. Novo Nordisk's product quality and safety programmes are adequate. The company also addresses pricing and access to medicine in emerging markets and the US. In general, Novo Nordisk has strong policies and programmes to address business ethics issues, but fails to address anti-competitive practices and has been implicated in alleged price fixing and questionable promotional activity controversies.
Novo Nordisk key facts
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