Where our aspirations meet your bank accountNordisk is potentially one of the best AUD$262.5 billion companies you’ve never heard of. Founded in 1923 and based in Denmark Novo Nordisk is a world leader in diabetes care, insulin, and weight loss. Novo Nordisk has been a diabetes care company that has focused on insulin-based treatments for diabetes. Now we will get into the pathophysiology of the most common forms of diabetes in a moment but for now it’s sufficient to know that insulin is a key ingredient to staying alive once you have diabetes. The other key ingredient that you should really know about diabetes is this; once people are diagnosed with type 2 diabetes, they are seldom able to reverse this condition and hence become lifelong customers of Novo Nordisk. Type 1 diabetics, as you will soon learn, have no chance of reversing the condition however, thankfully, they make up a smaller number of total cases. For the remainder of this piece, I will write using the local currency of Novo Nordisk, the Danish Krone. To get a rough understanding of how this translates to Australian dollars just divide the number by 5.
Thematic
Ultimately Novo Nordisk is a company built to take advantage of our modern society. 100 years ago, it probably made some sense to be making insulin but they have, through 3 parts of sheer good luck mixed with one part excellent research. As the world gradually gets richer, we also gradually get heavier. With this expansion in our waistlines, we are seeing an explosion in both type 2 diabetes and obesity as measured using the BMI. This could be a point where we debate the underpinnings of the BMI and that it is a measure of weight within a cohort of army conscripts and perhaps then it is not a great overall measure to use but alas, this would be taking us off course. The real take home is this; first world nations (and China) are getting richer, heavier, and are being saturated with the ‘skinny is best’ message from marketers that are simply smarter than most other people. After all, that’s how they get us to buy things.
Where does this leave Novo Nordisk? Well, they now see themselves as a market leader selling insulin into a world with a huge (and growing) demand along with weight loss treatments that could herald a new age in obesity treatment, but more on that later.
What is diabetes?Given that insulin and diabetes management makes up a large part of Novo Nordisk’s revenues, now is probably a good time to take you through the basics of diabetes. At the end of this section, which you can easily skip should you wish, we will have covered the main three types of diabetes. It is not necessary for you to undertake a medical degree to get your head around this stuff, and to be honest, I’ve always found those who do just a little bit odd.
Before we step through the types of diabetes, we should look at what is happening within the body and why having blood sugar is a good thing and why having insulin do its job is also kind of ideal for a healthy life. Very basically when we eat food it is broken down into smaller parts. Some of these parts end up as sugars in the blood. Now the blood hurtles around the body taking all of the garbage away from the cells (where all the real work happens) and delivering oxygen and sugar to those very same cells. Insulin is how our body gets those sugars out of the blood and into the cells where they are needed. Insulin is produced in the pancreas and for extra credit you can tell your professor that it is derived from the beta cells in the islets of Langerhans.
Now that we know what insulin is doing to the sugars in your blood, we can graduate to the second year of medical school and see what is going wrong. In type 1 diabetes mellitus (T1DM) we see the beta cells in the Islets of Langerhans destroyed by antibodies we produce. This is clearly a design flaw with our bodies and these patients will eventually have all of their insulin producing cells destroyed. When this happens, they have no way of getting the sugars into the cells. As a result, the cells start breaking down anything they can in order to get something close to sugar in order to keep working. The end product of that chain reaction is ketones. If this goes on unchecked the person in question eventually goes into diabetic ketoacidosis which is life threatening. Fortunately, in Australia this rarely results in death if caught in time and swift hospital care results in a full recovery. From this moment forward however, these patients will need to actively inject artificial insulin and measure their blood sugar levels, keeping them within a set range, so as not to go into DKA again and, in a worst case scenario, die.
Next, we will look at the most common type of diabetes, type 2 diabetes mellitus (T2DM). This is the ‘lifestyle’ diabetes, and it has been growing as a percentage of the population for decades. What happens here is relatively simple; loads of food is eaten that leads to high blood sugar levels. The pancreas does its job and secretes insulin to take that sugar out of the blood and into the cells of the body. Unfortunately, we have managed to put so much sugar into our blood that over time (often decades) the beta cells in the islets of Langerhans get exhausted from the effort. When this happens the outcome is similar, but not exactly the same, as in T1DM. The pancreas is often producing a small amount of insulin (which you can tell your professor helps avoid ketoacidosis) but not enough to get enough sugar into the cells. If left untreated the patient will collapse as the body (especially the energy hungry brain) does not have enough sugar to do its job. Often though T2DM is picked up by a good GP who is doing routine checks. Once the discovery is made the patient is put on a diet and exercise regime. If this is done well enough often the T2DM can go into remission with the patient needing no further intervention. What often happens in practice however is that diets are poorly controlled, exercise regimes are poorly adhered to, and the patient eventually develops full insulin cell burn out and requires artificial insulin injections.
The last type of diabetes we will speak about is gestational diabetes mellitus (GDM). This is where a pregnant lady develops diabetes while carrying a child. This is treated with injections of insulin and monitoring blood sugar levels throughout. Once the baby is born this problem very often solves itself and everything goes back to normal. The mothers do however have an increased risk of developing T2DM.In all three of these cases, it sure is great to be the company that has a large market share of the artificial insulin market. Novo Nordisk already has a huge and growing share of the market and has the financial clout to expand into new markets, like China. Lastly, we should note that there are some downstream effects of having high blood sugars you should know about. People with high blood sugar levels have blood that is, for lack of a better phrase, rough. At a microvascular level this leads to what's called non-enzymatic glycosylation and the destruction of small blood vessels. Once there is enough blood sugar and the non-enzymatic glycosylation is taking place you end up with advanced end glycosylation products. These are the products that help lead to macrovascular damage. When I say macrovascular damage, you should be thinking of the fat deposition in the arteries known as atherosclerosis. This will speed up the process that leads towards coronary artery disease, aneurysm, thrombosis, and total vessel occlusion to name a few. In addition, and here is the real kicker for how amazing the human body is, if you have atherosclerosis occurring in the proximal third of the renal arteries you will reduce the blood flow to the kidneys. So what you might ask? Well, a reduced blood flow to the kidneys means your tubules are able to reabsorb sodium much better. This lowers the sodium level in the tubules and the juxtaglomerular cells pick this low sodium level up as a marker of low blood pressure. They then release renin which, after a bunch of steps, increases your blood pressure. Want to know the real kick in the pants though? Your blood pressure was probably fine the whole time and it was the mass of fat in your arteries that was blocking the flow to the kidneys. The really bad thing is it still is. So now you have high blood pressure, and your kidneys still think it is low so they are constantly trying to boost it back up again. What does this matter in the context of high blood sugars? Well now you have ‘rough’ blood that is also under a huge amount of pressure and that is making it even easier to inject your arteries with fat and so the problem gets worse. Now you can probably see why your GP is trying to keep your blood sugar level under control.
How Novo Nordisk Helps Treat DM
Novo Nordisk is making money by supplying the artificial insulin that many diabetics need in order to maintain a healthy blood sugar level. Although this is a very stretched analogy, I will use it anyway because Australia is the land of a two bit mining company. In relation to diabetes Novo Nordisk is looking to supply the shovels and not dig for the precious dirt. Yes, they say they are dedicated to the cure of diabetes, but they also know that most patients will end up on insulin and they are the ones dealing it out. It’s a pretty smart business move, and it locks in a portion of their business income year to year.
What Is Obesity?
Obesity is often crudely measured as an BMI that is greater than 30. Now as we mentioned earlier there are plenty of problems with BMI as a measure of obesity but no matter what measure you are using the outcomes of being overweight are often not good. The excessive weight can place huge forces on your joints and lead to osteoarthritis. Here are a few more complications that fat accumulation can lead to; T2DM, cancer, cardiovascular disease, asthma, gallbladder disease, and chronic back pain. On top of this, your excellent general practitioner is also aware that 80% of those diagnosed with NASH (Non-alcoholic steatohepatitis) are obese. All of this is on top of the psychological damage wrought by a consumer society that has been raised on a steady diet of thin is beautiful and skinny is best marketing. After all, just like Scott Morrison, aren’t the smartest people in any university hanging out in the marketing department?So, this brings us to the multibillion dollar weight loss industry which dovetails nicely with the increased risks your GP is keeping in mind when she is taking your medical history and formulating a life health plan. So, let's take a look at what options we have available.
Treatments For Obesity?
A well-known treatment for obesity is Duromine. Basically, it’s an amphetamine and, of course, if you take it you’ll probably lose weight. I mean hey, your doctor is cool with you taking uppers to lose weight and you are grinding your jaw and cleaning your house flat out so yeah, you’ll probably lose weight also. The amphetamines work by not only boosting your drive but by reducing your hunger too. Longer term however this treatment hasn’t proven to be efficacious as many people put the weight back on when they stop taking it as they find the side-effects a little much to handle. Not to mention that it is falling more and more out of favour within the medical community as it is a ‘dirty’ drug with many cross side-effects and actions that are unintended.
Surgery is also an often-used method of weight loss. In broad terms, and there are many different versions, a section of your stomach is removed, a balloon is inserted, or a reconfiguration of the path of food is conducted and the end result is you can physically fit less food into your stomach at any one time. This is often highly effective as a weight loss method in the short term. In the longer term however, and these are the statistics your bariatric surgeon is unlikely to tell you while you hand over $10,000 for the procedure, they just don’t work. Patients find ways to cheat by blending food, reorienting towards high calorie drinks or liquid foods. They exercise less than they should and ultimately, they expand the remaining stomach tissue to roughly the size it was before and continue on their way only now they have even less physiological reserve should something like a gastric cancer show up and need removing.
The most effective and natural way, as you can imagine, is to diet and exercise. Eat less than you should, exercise more than you normally do. The theory goes that eventually that calorie deficit will show up as weight loss as your body liberates fat to convert into energy through lipolysis. This fat, or triglycerides, will enter the cytosol and undergo lipolysis where they are broken down into glycerol and free fatty acids. The free fatty acids then undergo a process of beta oxidation where they eventually yield acetyl-CoA. This acetyl-CoA then enters the TCA cycle and you get paid out loads of ATP units which your cells ‘spend’ keeping the machinery going. The only catch here is that your body, having become overweight or obese, now has a new ‘set point’ and will constantly trying and fight the starvation rations you are putting yourself on by making you even more hungry. Ultimately your body will win, and you will put on the weight again. It is this theory of obesity that puts it in the category of a pathology rather than a personal failing. Thankfully we, as a society, are becoming far more nuanced in the way we look at obesity.
This finally brings me on to the new treatment modality that Novo Nordisk have brought to market. But before we get to that we need a brief primer in the history of the product.
Why Is Novo Nordisk In The News?
As part of Novo Nordisk’s research team into dealing with diabetes the boffins started trialling liraglutide. Liraglutide, in case you wanted to know, is a glucagon-like peptide 1 receptor agonist (GLP-1). What this basically means is that the drug acts on the GLP-1 receptors in the same way as incretins do. This works to increase insulin production in the pancreas, but a strange thing happened during the clinical trials; patients started to lose weight. Eventually the company decided to apply to the drug administrations of countries around the world to use liraglutide, sold in Australia as Saxenda, as a weight loss drug. This was an injection you put into the subcutaneous layer under the skin once a day. This is the fatty part just below the dermis and epidermis. The drug has the effect of making you ‘feel’ full. Every time you eat you feel fuller even sooner and with less food. Gradually the dose is increased, and the weight starts to fall off. The dose has to be increased slowly as the side-effects, mostly nausea, are said to be rather unpleasant and needing a lot of getting used to.This product was released to the market in 2009 and 2010. This will become important later. Anyway, ten years goes by and the drug doesn’t really take off. It is highly effective but it is also very expensive, costing in the realm of $500 a month and still requiring daily injections. Well, as you should know by now, the boffins in the lab love to tinker with things and so they eventually made the breakthrough of developing a slow release formulation of the GLP-1 formulation. This drug, semaglutide, marketed as Ozempic in Australia and Wegovy in the States is a once-a-week injectable formulation with a slow-release. And the kicker? The price per unit sold remained the same. What this effectively meant was that a $500 a month product becomes a $150 a month product. To kick this off even further Novo Nordisk published their results in the prestigious journal Lancet and found that “...the average loss was 16% of body weight… a weight loss of greater than or equal to 10%, 15% and 20% was achieved by 75%, 56% and 36%...” of the cohort in the study.
Between this study being published, which I told to anyone that would listen along with a recommendation to purchase Novo Nordisk stock, along with the price reduction, along with medical practitioner education campaigns have led to a massive increase in the number of scripts written. This has also led to many news and current affairs pieces touting the impact that Ozempic can have on those looking to lose weight. Ultimately Novo Nordisk didn’t even think they would be that much of a winner because they have been recently caught flat footed on the supply side. Many pharmacies in both the United States and Australia are reporting that they are struggling to get hold of sufficient stock to meet the demand.
Is this a good investment?
Now, the multi-billion dollar question is this; is Novo Nordisk a good buy? There are a number of different ways to answer this, but I’ll have a crack at a few. Diabetes is said to impact roughly 463 million people and only 6% of that total have good diabetic control. Those with poor control will, sadly, eventually need more insulin which Novo Nordisk handily sells. Of the roughly 650 million people living with obesity only 2% are being medically treated. Both of these statistics offer a snapshot at the possible market that lays ahead of Novo Nordisk. Yes, the company is currently at or near an all time high in it’s stock price but I would contend that they are also at or near the first step in treating a mountain of people with either insulin or Semaglutide.
For those who prefer to look at the financials of a business instead of hearing a great sales pitch for a pharmaceutical solution to a problem from a pharmaceutical company, let me show you what a well-run company looks like. Novo Nordisk is looking to pay out $22 billion in dividends this year along with buying back $18 billion in their own shares. This is an upgrade on the $21 billion in dividends paid out last year and $17 billion in share buy backs. In fact, they are doing so well that they expect this financial return to still be $6 billion short of their expected free cash flow.
Still not sold? You might be pleased to know that they have a gross margin of 83.5% on every dollar they earn. After they’ve paid for all of those boffins and keep the lights on, Novo Nordisk has a real, net of all costs, margin of 33.2%. That means that for every $1 of product they sell they get to keep 33.2 cents as pure profit and the best part is that these figures are growing both in profit margins and in total sales. For the record, Novo Nordisk sold $126.9 billion worth of products last year and they got to keep $42.1 billion of it as profit.Still need some more convincing? How about this; patients going on Semaglutide will likely be using it for the rest of their lives. Yes, they will lose a lot of weight and yes, that’s exactly what the Lancet article says but guess what? When they try to go off the drug their appetite will increase, the weight will come back on and they will head back to their GP clinic and ask for another script. This is almost the most predictable routine of dieting and weight loss ever. Locking in lifetime customers in first world countries that can afford to pay your massive margins; sign me up.
The last thing that needs to be looked at is the possibility that the federal government sees the benefit of a proactive approach to weight loss and the downstream cost reductions that this could bring by putting products like liraglutide and semaglutide on the pharmaceutical benefits scheme (PBS). Although this is clearly a long shot and Novo Nordisk stands to make a great deal of money even with private script only patients, the opportunity this would provide for increased patient access would be enormous. It would however be a progressive step for a government not known for their progressive health policy so I will, for now, not hold my breath.
What are the risks?
That’s not to say that this investment isn’t without risks. From what I can see there are 5 main risks to be contended with. The first is that these all time low interest rates will rise along with global inflation and the high asset prices we have all come to enjoy will come crashing down to a more ‘normal’ level as the returns are repriced with suddenly more expensive ‘risk free’ rates.
The second risk is that we cure obesity. Yes, it sounds insane probably because it is but we can’t deny the risk that some really smart scientist comes out with a one off pill that cures obesity as an issue forever. Is this likely? Well, the more you know about the problem the less likely you are to believe in a quick fix. In fact, the fix to obesity being hard work isn’t lost on most in the field and this is almost exactly what puts patients off and sends them to the likes of bariatric surgeons and Novo Nordisk selling pharmacies.
The third risk is that diabetes is cured. Now although it is unlikely we will ever see a cure to T1DM, it is possible however these patients make up a small part of the overall pie. What may happen is that lifestyles get better and type 2 diabetes, by far the biggest market, starts to shrink. Is this likely? Well, I’d ask the McDonalds, KFC, Dominos, Wendy’s, in fact just about every processed food seller how likely they are to pivot out of highly profitable junk foods and into healthy ones, but I think I already know the answer.
The fourth and fifth risks bring about the most likely risks to Novo Nordisk. The first of these is the risk of a competitor coming into the market. This is not only likely but highly probable. There is only so long a major competitor can sit by watching Novo Nordisk scoop up cash before they pitch into battle for those same customers. This good news? Novo Nordisk has a long track record and so far has modest promising research material relating to their products. This puts them in the box seat as it were for those valuable and cashed up patients. The second of the more realistic risks is that the products are pulled by the regulators as more negative information is discovered about them. Although this is possible it is less likely by the day. As we spoke about earlier Novo Nordisk now has 12 years of actual data about patients using liraglutide and they are using this information to develop even more sub markets by putting out research papers on the efficacy of using semaglutide and liraglutide on heart patients amongst many other previously unresearched patient groups.
The Big Question
So here is the big question; should you invest in Novo Nordisk? Ultimately, I see a lot of upside in the company. Ideally you would have scooped up shares in the company at the dramatically lower price when I first suggested it in May however that is all water under the bridge now. This company is standing at the nexus of a society that has gotten larger and larger while still holding up ideals of beauty relating to the thin and trim physique, who see physicians steeped in the need to have patients live at a healthy weight and understand intimately the medical side-effects of not doing so. We are likely to see an explosion of weight loss based prescriptions written for Ozempic that are highly supported by physicians, patients, and governments. What we might be about to see here is a truly effective treatment for those who are obese or overweight that sees better lifestyle attainment to the patients and outsized profits to Novo Nordisk.
