Should you buy shares in Novo Nordisk? Today’s options explained

Novo Nordisk, the Danish pharmaceutical company, is a hot topic in both Hollywood and Wall Street thanks to the success of its weight-loss drugs, Wegovy and Ozempic. Its market capitalisation of 3.8 trillion Danish krone, around $570 billion, makes it one of the biggest companies listed in Europe.
But now as Novo faces tougher competition, regulatory pressure and supply chain issues, the question for investors is: how long can it keep its crown?
Novo Nordisk’s success has been driven by its glucagon-like peptide-1 (GLP-1) drugs, which suppress appetite: Ozempic, an injection that treats diabetes and weight loss, and Wegovy, which is a weight-loss drug.
When Novo launched Wegovy in 2021, it became the first mover in a market estimated to be worth more than $130 billion a year — in the space of just five years its sales and operating profits more than doubled. Ozempic alone made up 27 per cent of its net sales in its 2023 financial year.
The Copenhagen-listed group has developed all the markers of a quality outfit: an operating profit margin of 44 per cent, return on invested capital (which measures how effectively it uses its capital to make a profit) of 89 per cent, and strong cash flow. High profitability and a dominant position in a growing market is a winning combination, a view which is certainly reflected in Novo Nordisk’s shares, which have more than quadrupled in value in the past year alone.
Demand has been so strong that there have been some supply chain issues, with the company forced to cap the supply of starter doses to help safeguard supply for its existing patients. But it has also committed to invest $6.8 billion in expanding its manufacturing capacity, as well as paying $11 billion for three sites that were previously owned by Catalent, a pharma company, in a deal that is expected to close by the end of the year.
The real threat to Novo Nordisk’s long-term success is competition from Eli Lilly, the world’s biggest healthcare company by market cap, which launched its own weight-loss medicine Zepbound in the United States last December.
The two giant pharma groups have been engaged in a price war: indeed Novo Nordisk missed expectations for its last quarterly results, partly because of discounts on its list prices. Bears fear that this race to the bottom will accelerate as more weight loss drugs arrive on the market over the next few years. A weight loss pill, rather than injection, will be key. Eli Lilly has one in the works, and analysts predict it could be around 25 per cent cheaper than drugs such as Zepbound if it does reach the shelves.
There are some regulatory concerns hovering around Novo Nordisk, too. Next week the company will face Bernie Sanders, who chairs the US Senate committee on health, education, labour and pensions, in a meeting over the pricing of diabetes and weight-loss drugs. It will be the latest effort by the US to control the pharmaceutical industry, with the Biden administration having recently capped costs of insulin and asthma inhalers.
Last week a Novo Nordisk executive told an investor conference it was “very likely” that Ozempic would be targeted by the second round of price negotiations from next year. Analysts have speculated this could mean that Wegovy will be subject to price controls — and if Eli Lilly’s developing drug is approved later, it is unlikely to come under the same controls for several more years.
Shares in Novo Nordisk do not come cheap, at 37 times forward earnings. This is at a significant discount to Eli Lilly which trades at a multiple of 57 — but this also reflects the latter’s other avenues for growth, including its breast cancer treatments. Novo Nordisk’s valuation leaves very little room for error, even though the regulatory ground is far from firm. For new investors, the entry point for this Danish star looks too risky.
Advice Hold
Why Valuation leaves little room for error even as competition and regulation gets tougher
For investors looking for broader access to developments in the global healthcare industry, Bellevue Healthcare Trust could be a good pick.
The £687 million fund invests across all facets of healthcare, from biotechnology to healthcare insurers and drug retailers. Its single biggest holding is CareDx, an organ transplant specialist that provides pharmaceutical, administrative and lab product support.
The company made up 9 per cent of the fund’s total assets as of the end of August. That was followed by the medical device manufacturer Tandem Diabetes Care at 7.8 per cent, and Evolent Health, a software provider, at 7.3 per cent.
Investing in young healthcare companies can be risky, but the potential for reward is considerable, as proven by the makers of weight-loss drugs. But investors entering this space for the first time are likely to benefit from a more experienced hand — the fund is managed by Bellevue Asset Management, a Swiss-listed investment manager that specialises in healthcare. The trust’s managers, Paul Major and Brett Darke, also have scientific academic backgrounds.
This trust is not for the faint-hearted: it is highly concentrated at a maximum of 35 different holdings and just over half its assets are invested in small to mid-sized businesses. The growth style of the fund is balanced slightly by its income policy, with a targeted 3.5 per cent dividend yield.
Nevertheless, Bellevue’s focus on smaller companies has hindered its performance, especially against its preferred benchmark, the MSCI World Healthcare index, which has benefited from the rise of the likes of Novo Nordisk and Eli Lilly.
In the five years to the end of August, the fund delivered a net asset value return of 60 per cent, compared with 65 per cent by the index. Still, shares in the trust have bounced 10 per cent in the past year, partly thanks to expectations of lower rates in the United States, which have now come to fruition. This should work in favour of the smaller companies in Bellevue’s portfolio, who now have more flexibility on their balance sheet to invest in new growth projects.
Advice Buy
Why High-risk, high-reward strategy for ambitious investors