Novo Nordisk (NOVO B) DKK0.1 B

No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Novo Nordisk has published late-stage data from a trial of its anti-obesity drug CagriSema in 3,417 patients.

The results showed better efficacy than the company’s existing anti-obesity treatment Wegovy and a similar weight-loss profile to Eli Lilly’s Zepound. But the outcome was significantly worse than the company had previously guided for.

The shares were down 18.1% following the announcement.

Our view

Markets have reacted very negatively to disappointing data from Novo Nordisk’s late-stage obesity trial for its experimental drug CagriSema. There’s still potential for this to become a commercially viable product, but regulatory approval can’t be guaranteed. And it now seems unlikely that this will be a significantly superior product to others already on the market

Novo Nordisk’s fastest-growing products are its range of GLP-1 injections for the treatment of type 2 diabetes (Ozempic) and, more controversially, as a weight-loss aid (Wegovy).

The market opportunity for this new generation of obesity treatment has the potential to support strong growth for many years, particularly as more use cases emerge for the treatment of associated medical conditions such as osteoarthritis and liver and kidney diseases. Recent late-stage clinical data has given management the confidence to target an application for approval in certain liver conditions in the first half of 2025.

And while CagriSema isn’t living up to expectations, there are other next-generation products in this class to keep an eye on in the pipeline. The prospect of an oral formulation of semaglutide (the active ingredient in Ozempic and Wegovy) is one we’re excited about. Oral medicines may result in both a more scalable route to market and one with more customer appeal. And in the earlier-stage pipeline, Amycretin is one to keep an eye on. But remember, all clinical trials carry a high risk of failure.

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 they remain very robust.

Downwards pressure on pricing, particularly in the United States, where the private cost of Wegovy is over $1,300 per month, could impact profitability further down the line.

But for now, manufacturing bottlenecks seem to be the main constraint on growth across the business. Despite these challenges, the group expects operating profit to grow between 21-27% this year - hardly a snail's pace.

Novo’s strong financial position means it can afford the recent $11bn acquisition of three manufacturing sites from Catalent this year.

There’s plenty to be excited about. Novo’s valuation doesn’t look as demanding as it has done in recent times, and the negative market reaction to the CagriSema data looks overdone to us. However, it comes as a reminder that sentiment towards the stock can be volatile, which means the shares are sensitive to disappointments in both financial performance and clinical data.

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Previous Novo Nordisk updates