Novo Nordisk (NVO.US) Q2 Earnings Preview: Can 'Weight-Loss Wonder Drug' Wegovy Keep Fueling Record-Breaking Growth?

Intelligent Finance APP learned that Danish pharmaceutical company Novo Nordisk (NVO.US) will announce its second-quarter financial results before the U.S. stock market opens on August 10. Novo Nordisk's second-quarter revenue is expected to increase by 33.6% year-over-year to 55.109 billion Danish kroner; net profit is expected to grow by 52.1% to 20.25 billion Danish kroner. Diluted earnings per share are expected to rise accordingly, surging 53.7% to 9.01 Danish kroner. The surge in share price on Tuesday pushed Novo Nordisk’s market value above 2.87 trillion kroner ($423 billion), surpassing Denmark's GDP for 2022.

Weight-loss drug business to soar, rare disease drugs lack momentum

In the latest trial, Novo Nordisk announced that its weight-loss drug Wegovy reduced the risk of major cardiovascular diseases in overweight and obese adults by 20%. The company's stock price surged 17% on Tuesday, hitting a record high. This has excited investors as it represents a new breakthrough area, with other pharmaceutical companies also competing in this field.

In response, Martin Holst Lange, Executive Vice President of Development at Novo Nordisk, said: "People with obesity have an increased risk of cardiovascular disease, but so far no approved weight-management drug has been able to demonstrate both effective weight control and a reduction in the risk of heart attack, stroke or cardiovascular death. So we are very excited about these results."

Novo Nordisk is seeking regulatory approval in the US and Europe this year to expand the indications for Wegovy, a major milestone that investors will closely watch. However, the drug is already being sold as an off-label treatment in the US and has been launched in other countries such as Denmark, Norway, and Germany.

Wegovy is one of the three drugs driving revenue growth this year, with analysts forecasting its second-quarter sales at 6.976 billion Danish kroner. This would be more than four times last year's figure and marks a significant increase compared to the 4.563 billion Danish kroner in sales seen in the first quarter, as the company’s performance gains momentum. This should be sufficient to offset the ongoing decline in insulin sales.

Two other key drugs will determine Novo Nordisk's performance this year: the diabetes medications — the injectable Ozempic and the oral tablet Rybelsus. Sales of Ozempic are expected to increase by 48% this quarter compared to the same period last year, reaching USD 21.336 billion, while sales of Rybelsus are projected to grow by 99%, reaching DKK 4.334 billion.

Overall, regarding GLP-1 weight-loss drugs, Soren Lontoft Hansen, a senior analyst at Sydbank (Southern Bank of Denmark), stated in a report that he expects Novo Nordisk's GLP-1 drugs for treating type 2 diabetes and obesity to continue their strong growth this quarter. The total sales of GLP-1 diabetes treatment drugs are expected to increase by 43% year-on-year, reaching 27.45 billion Danish kroner.

But Hansen pointed out that due to strong demand, some markets are temporarily experiencing production difficulties, which may somewhat restrain growth prospects. Ozempic, a diabetes drug from the Danish pharmaceutical company Novo Nordisk, is also being used "off-label" for obesity. He added that prescription data from the U.S. shows extremely high and ongoing demand for the weight-loss drug Wegovy, but Novo Nordisk's previous decision to reduce the supply of lower-dose versions in the U.S. will impact the company’s quarterly growth. Both Ozempic and Wegovy are based on the same active ingredient — semaglutide.

Denmark's Southern Bank Predicts Gross Margin ImpactSouthern Bank of Denmark expects that the gross margin will be affected by significant growth in sales and product mix, while lower net prices in the U.S. and currency effects will have the opposite impact. The bank forecasts the gross margin to increase from last year’s 85.3% to 84.0%. Hansen stated: "We are seeing a rise in capacity costs, reflected in this quarter’s increase in R&D expenses as well as sales and distribution costs, which indicates higher activity levels. However, we estimate that the increase in capacity costs will be lower than the revenue growth."

The company expects a 24% to 30% year-on-year increase in sales for 2023. Sydbank believes that production challenges with the GLP-1 combination for diabetes and obesity treatment may hinder upward adjustments to the guidance.

The company's soft spot will continue to be its rare disease business, as its manufacturing operations were temporarily reduced, and sales may drop by 69.7% to 4.654 billion Danish kroner. Due to the temporary reduction in manufacturing output, the net sales of the rare disease division declined in the last reporting quarter. This trend is likely to continue into the second quarter. In the rare disease sector, only drugs for hemophilia A and B achieved year-over-year growth in the previous quarter.

Novo Nordisk's performance will largely depend on how quickly it can expand production. Demand for Ozempic has been so strong that it has caused periodic supply constraints, leading to shortages in several countries. Meanwhile, the adoption rate of Wegovy is another key factor to watch this year, especially amid increasing competition. The company’s U.S. rival, Eli Lilly (LLY.US), also hit a record high stock price after reporting impressive sales of its weight-loss drug Mounjaro earlier this week, adding further sales pressure on Wegovy.

Last quarter, Novo Nordisk raised its guidance. The current target is sales growth of 24% to 30% and operating profit growth of 28% to 34% at constant exchange rates this year.

What will be the next move for Novo Nordisk's stock price?

This week, the company's shares soared following news that the weight-loss drug Wegovy had cardiovascular benefits. This increase pushed Novo Nordisk's market value to surpass 2.87 trillion kroner ($423 billion), exceeding Denmark's 2022 GDP. The Danish company’s market capitalization has now outpaced the size of Denmark's economy, positioning Novo Nordisk to contend for the title of Europe's most valuable company.

Josephine Cetti, Chief Strategist of Asset and Wealth Management at Nordea, said: "Novo Nordisk already occupies a very significant share in Denmark and has a major impact on the Danish business community. In the eyes of investors, Novo Nordisk's success also influences other companies, giving Danish stocks a mark of quality. Having a successful company like Novo Nordisk may also help other Danish pharmaceutical companies secure better financing."

In 2008, Novo Nordisk surpassed the container shipping giant A.P. Moller-Maersk A/S to become the most valuable company in Denmark by market capitalization. Since then, the gap between the two companies has continued to widen. Driven by soaring sales of its drugs for treating obesity and diabetes, Novo Nordisk's market value now exceeds the combined market value of all other companies in Denmark's benchmark index OMXC25.

This indicates that following the widely watched trial update for Wegovy, Novo Nordisk's rapid growth means its stock price commands a significant premium relative to competitors in the U.S. market, trading over 60% above its five-year historical average. Expectations were particularly high ahead of the earnings release, which carried downside risks before the announcement, and it wouldn't take much pressure to trigger a pullback—thus requiring a major upside surprise to sustain the rally.

With this in mind, we can see that the RSI was pushed into overbought territory yesterday amid a surge in trading volume, as traders rushed in following the latest data release this week. If there is indeed a pullback in share price, investors will hope it remains above the previous high of $173. Considering that Novo Nordisk's current share price is nearly 7% higher than the average target price of $176, the sharp rise in stock value has also made the stock expensive.