When it comes to the best-performing pharmaceutical stocks on the US stock market in recent years, Novo Nordisk may be among the top. Even in the face of the significant market corrections in 2022, the company has seen its stock price by more than 20% with the introduction of its weight-loss drug Wegovy, with gains since early 2019 nearing an impressive sixfold increase.

Novo Nordisk's standout performance in the capital markets is closely linked to its robust financial results. So, how should one evaluate its financial reports? There are four key points to focus on: earnings growth, changes in market share, shifts in profitability, and shareholder returns.

1. Earnings growth

Pharmaceutical companies typically see growth based on their drug sales. While some have diversified portfolios that lead to steady performance, others may see only modest results until a single drug's success triggers a surge in growth.

Novo Nordisk stood out as a bastion of consistency. Since 2000, except for a stable 2017, the company has reported revenue growth annually for over twenty years. Moreover, Novo Nordisk's net profit has shown consistent growth year after year since the start of the new millennium.

Over the last two years, Novo Nordisk has experienced a remarkable surge in growth, propelled by strong sales of GLP-1 class drugs such as Wegovy, used for diabetes and obesity management. In 2022, the company's revenue increased by over 25% from the previous year, with a further growth rate exceeding 30% for 2023 and net profits rising by more than 50%.

The question arises whether Novo Nordisk can maintain this high level of growth in its future earnings. This may largely depend on two key factors. On the one hand, it hinges on whether the hot demand for GLP-1 class products like Wegovy can continue, which has been an important driver of high growth in recent quarters.

On the other hand, the advancement of its R&D pipeline matters. With the potential for the demand for a single product to plateau, sustaining such robust growth may prove challenging. Hence, it's important to watch for breakthroughs in Novo Nordisk's other new products, especially those that show promise of strong market potential.

2. Market share changes

Novo Nordisk has traditionally concentrated its efforts on diabetes and obesity care, as well as rare disease management, with the former accounting for over 90% of its revenue and remaining the focus of our analysis.

The company's roots are in the diabetes market, where it has consistently held a dominant position and has steadily increased its market share to one-third of the global market in 2023.

In the field of obesity management, Novo Nordisk has risen rapidly in recent years, becoming a focal point of market attention. Prior to November 2023, Novo Nordisk's weight-loss drugs, Wegovy and Saxenda, were the only two that had FDA approval, giving the company a significant market presence. As of 2023, Novo Nordisk held a commanding 54.8% share of the GLP-1 drug market.

However, after November 2023, Eli Lilly's blockbuster weight-loss drug, Zepbound, also received FDA approval and began to encroach on Novo Nordisk's share. The competition between these two pharmaceutical giants for market share in the weight-loss drug sector has become a point of interest.

Compared to Eli Lilly's Zepbound, Novo Nordisk's Wegovy is at a disadvantage in terms of pricing. According to the data disclosed on their official websites, Wegovy costs approximately $1,349 per month, nearly 30% more expensive than Zepbound's $1,060. While Eli Lilly claims that Zepbound shows better results in phase three trials, there has been no conclusive direct head-to-head study to determine the more effective product.

Wegovy's advantage may lie in its earlier market entry, which has allowed Novo Nordisk to establish a strong brand and distribution network. As weight-loss medication serves both health management and aesthetic consumption, Wegovy's earlier commercialization and potentially wider distribution channels may have cemented its brand influence more deeply among consumers.

Moreover, Novo Nordisk has had a head start in Wegovy's production capacity. With both Wegovy and Zepbound currently in high demand and short supply, Wegovy's longer preparation time for production may be beneficial for increasing shipment volumes and market share.

Thus, in the weight-loss drug sector, it is important to monitor the competition between Novo Nordisk and Eli Lilly, as well as the shifts in market share. In the diabetes sector, we may need to observe whether Novo Nordisk can continue to solidify its leadership position moving forward.

3. Profitability

Novo Nordisk's robust management and leading position in the diabetes and obesity management markets are reflected in its profitability.

Historically, Novo Nordisk has displayed a remarkably stable and high profitability, which can be measured by three key indicators.

The first is the gross margin, which, from 2014 to 2023, has consistently hovered around 84%, with minimal annual fluctuations of no more than two percentage points, suggesting rock-solid stability. This impressive gross margin level may be attributed to Novo Nordisk's strong competitive position and its relatively high bargaining power.

The second indicator is the net margin. Since 2015, Novo Nordisk's net margin has remained around 33%, with very little variation. This, too, has been quite stable. By 2023, as revenue growth accelerated, the scale effect allowed Novo Nordisk to dilute its sales expenses and R&D costs, thus boosting the net margin by several percentage points to approximately 36%.

The third indicator is the return on equity (ROE). Charlie Munger once mentioned that in the long term, a stock's return rate tends to align with the company's ROE, making it one of the most important metrics for shareholders. Since 2015, Novo Nordisk's ROE has consistently been above 70%, reaching an exceptionally high level of around 88% in 2023.

Moving forward, we should continue to monitor the changes in Novo Nordisk's profitability indicators to assess shifts in its competitive environment and overall profit-generating capabilities.

4. Shareholder's returns

For many established pharmaceutical stocks, research and development (R&D) expenses have stabilized, and capacity building is progressing in a methodical manner. As a result, these companies often find themselves with substantial cash flow that exceeds their operational spending needs, allowing them to return value to their shareholders.

Public companies typically employ two main methods to reward shareholders: dividends and buybacks. Dividends involve distributing cash directly to shareholders, representing the most straightforward way to return value.

On the other hand, buybacks can enhance the company's return on equity (ROE) and earnings per share (EPS), while also injecting additional liquidity into the market. This approach delivers multiple benefits and is quite popular among shareholders.

Novo Nordisk, a traditional giant in the pharmaceutical industry, is no exception when it comes to rewarding its shareholders. The company has consistently utilized a balanced approach between dividends and buybacks. For instance, from 2011 to 2023, Novo Nordisk's cumulative amount spent on buybacks was 221.4 billion Danish kroner, while the total dividends paid amounted to approximately 227.8 billion Danish kroner. During this period, Novo Nordisk's total net profit was 507.8 billion Danish kroner, with dividends and buybacks together accounting for 88.5% of the net profit. This demonstrates that a substantial portion of the net profit has been generously distributed to shareholders.

In 2023, this ratio dropped to 74%, partly due to significant capital investments in increasing production for drugs like Wegovy. Future observations will determine if the firm can restore the nearly 90% level once capacity expansion stabilizes.

Summary

When analyzing Novo Nordisk's financial reports, four key aspects should be considered: revenue growth, market share changes, profitability, and shareholder returns.

For revenue growth, it's important to track both the sustained growth trajectory of existing blockbuster products and the progress of key R&D pipelines.

Market share dynamics may be assessed by examining the competitive landscape of the weight-loss medication market and Novo Nordisk's enduring leadership in the diabetes sector.

Profitability may be evaluated through key indicators such as gross margin, net margin, and return on equity, and whether the company can maintain its currently high levels.

Finally, regarding shareholder returns, attention should be paid to the proportion of dividends and buybacks to net profit, and whether this ratio can return to approximately 90% after the company ramps up production.