Stock in Focus: How Novo Nordisk revolutionised weight loss (and profited massively)

Investors who use their moral compass to avoid certain sectors tend to shirk the sin stocks, or the big, bad miners or the defence companies (although these are less horrifying now that parts of Eastern Europe need arming). ESG investing has fallen out of vogue a little in the wake of the liquidity crunch following the pandemic, but there are still private investors and funds who like to steer clear of companies whose revenue generating ability is morally ambiguous.

For me, these companies lie in the pharmaceutical sector.

Just to be clear, pharma and biotech is my favourite sector to write about. It was the first sector I covered when I became a financial journalist and I find the development and manufacturer of drugs fascinating. But it was in those early days as a journalist that the distrust began. That was the year Martin Shkreli was busy gouging the price of a drug that had been on the market for many years and Elizabeth Holmes was being investigated for making claims about her blood testing company which turned out to be completely false.

It was also the year that my uncle was recruited for a drugs trial which saw him and his fellow participants endure two rounds of brain surgery. The trial generated extraordinary results for its participants (all Parkinson’s Disease patients), but the sponsor company (US giant, Pfizer) ended up dropping the drug because the placebo effect was too strong to generate statistically significant results. Pfizer has since sold its entire neurology business. There isn’t enough money in diseases of the brain.

More recently I lived in Vancouver where the effects of opioid addiction are terrifyingly present. The crisis which is sweeping North America and threatening these shores is almost entirely born out of pharmaceutical greed. In 2019, Purdue Pharma - which aggressively marketed its opioid-based pain medicine in US states most prone to workplace injuries and is widely considered the company at ‘ground zero’ of the epidemic - admitted to “knowingly and intentionally” conspiring to aid doctors dispensing medication “without a legitimate medical purpose.”

And then there is Wegovy - the brand name for the drug semaglutide, which mimics the GLP-1 hormone that the gut releases in response to eating, meaning people who take it feel full. It’s being used as a drug for weight loss and generated £3.6bn of sales for its owner, Novo Nordisk, in 2023.

Now, there is a lot to be said for helping deal with obesity - another western epidemic, which is putting huge pressure on our healthcare systems. But should a company really be profiting to such an extent from a medicine which is being used for condition which, for many people, can be treated without medical intervention at all?

It’s a complex debate. Many medical practitioners sing the praises of Wegovy, which is the first of its kind to help treat obesity without compromising metabolic function (many weight loss treatments impact the way we digest food, Wegovy simply works by suppressing our appetite). What’s more, the profits from the Wegovy windfall can be used to invest in other complex medical needs.

But for me, something leaves a bad taste. It might be that it is an uncomfortable reality of living in a world where a company can profit so significantly from a drug which helps control obesity, while poverty and famine are still rife. Or perhaps it is the fact that, in the pharmaceutical industry, the big money makers are not drugs that can cure disease, but those that need to be taken forever.

The rise and rise of Novo Nordisk

In December last year, Novo Nordisk dethroned luxury goods giant LVMH to become the biggest company in Europe. Its current market capitalisation of £430bn is larger than the entire GDP of Denmark (its home market). It’s quite an achievement for a company which recently celebrated 100 years since its inception.

Novo’s roots lie firmly in the treatment of diabetes. It was the first company to commercialise the production of insulin and its two founding divisions both grew out of diabetes hospitals in Denmark. But it’s the expansion into weight loss which has really lit a fire under the share price.

In 2017, Novo completed clinical trials into the effects of appetite suppressing molecule semaglutide in type 2 diabetes patients. The trial found that a smaller dose of semaglutide lead to a greater reduction in both blood glucose and body weight compared to a larger dose of the previous gold standard treatment. That year the company also completed the recruitment for a further ten trials into the same molecule in patients with a range of clinical conditions, including obesity. In December, semaglutide was approved in the US for the treatment of Type 2 diabetes, under the brand name Ozempic.

By 2020, Ozempic sales had risen to DKK21bn (£2.41bn) - making it the largest single contributor to the company’s top line. Sales have since risen to DKK95bn (in 2023) and the molecule has been expanded to more clinical areas, including obesity (under the Wegovy brand). Since semaglutide’s original stateside approval in 2017, Novo Nordisk’s share price has risen over 4000%.

It’s an interesting lesson for anyone seeking profits in the pharmaceutical industry, where many investors are looking to identify companies prior to success in major clinical trials. For Novo Nordisk, the major returns have been made since the company’s clinical success. It wasn’t the drug development which has helped the company’s sales, profits and share price rise so spectacularly, but its ability to squeeze growth opportunities from its existing intellectual property.

And with these profits come further opportunities for reinvestment. Novo Nordisk’s largest shareholder is lifesciences investor Novo Holdings, which has profited handsomely from the returns generated by Wegovy and Ozempic and recently reinvested some of its windfall into a company which specialises in pharmaceutical manufacturing. In a rather convoluted deal-making series, Novo Holdings has since sold three manufacturing sites to Novo Nordisk, which should help the pharma group streamline its supply chain.

A further boost to profits could be on the way - tempting for any investor brave enough to leap in after following a 66% one-year share price rise.