Novo Nordisk ($NVO) Investment Thesis
Newest addition to the portfolio
Welcome to the first Investment Thesis on this publication.
There are a few changes from the old Deep Dives. First, these theses will be partly behind a paywall. Second, they’re designed to be more actionable for you. And third, they’ll be be published once a month. That gives me more time to go deeper into each business, and gives you fewer—but higher-quality—ideas. I believe less but better is the way to go.
That said, the structure will still feel familiar: we’ll cover the company’s history to understand where it’s headed, break down how it makes money, examine how it protects its returns, find out where it can reinvest, and assess how management allocates capital. In the end, we’ll tie it all together with a detailed yet simple valuation model.
The first thesis is on Novo Nordisk, a business I recently wrote a shorter post about and wish to expand on.
What You’ll Read Today
Investment Case
History
Business Model
Moat
Key Financials
Capital Allocation & Management
Valuation
Investment Case
Novo Nordisk is by far the largest company in Denmark. At its 2024 highs, it was actually worth more than Denmark’s GDP, excluding Novo itself.
Now, the stock has fallen spectacularly—down more than 60% from its all-time high. That’s despite revenue growing at around 20%, ROIC nearing 50% (excluding capitalized R&D), and heavy reinvestment into the business. So, what happened?
Novo develops GLP-1 drugs, which are treatments for diabetes, obesity, and rare diseases. It’s a highly lucrative space, currently dominated by just two players: Novo and Eli Lilly. The stock’s decline is largely due to two things: increased competition and a previously stretched valuation. Indeed, at over 1,000 DKK (~$155), the stock was priced for perfection and more.
Novo is interesting today because the valuation has reset, but the long-term opportunity holds. The GLP-1 market is expected to grow from $36 billion in 2023 to $217 billion by 2031. Obviously, that’s going to attract competitors. You’d be crazy to think Novo and Lilly will remain the only major players in a $200+ billion industry.
Still, Novo is expected to remain a leader. It has scale, manufacturing capabilities, a track record of innovation, and it’s reinvesting for the future. Yes, Novo will lose market share—and so will Lilly—but that’s not the point. it’s about the bigger picture: losing market share while the industry has become six times bigger is both inevitable and acceptable.
History
Novo Nordisk was formed in 1989 through the merger of two Danish companies: Nordisk and Novo. Although the merger was relatively recent, both companies’ roots date back to the 1920s, and both initially focused on insulin production.
The Nordisk Founding Story
In 1922, Nobel Prize-winning physiologist August Krogh and his wife, Marie Krogh—the fourth Danish woman to earn a medical doctorate—traveled to the United States. Marie had type 2 diabetes, and during their trip, the couple learned of a literal life-saving breakthrough: the first successful insulin extraction in Toronto.
Canadian scientists Charles Best and Frederick Banting had discovered the molecule insulin, capable of treating diabetes, a condition that had previously been a death sentence.
Soon after, August Krogh contacted Professor John Macleod, head of the institute in Toronto where the discovery had been made, and received permission to produce and sell insulin in Scandinavia.
Back in Denmark, Krogh partnered with Dr Hans Christian Hagedorn, a colleague of Marie, and with financial backing from pharmacist August Kongsted, they founded Nordisk Insulinlaboratorium in 1923. That March, the first patients were treated with insulin manufactured by Korgh and Hagedorn.
The Novo Founding Story
The other half of today’s company, Novo Terapeutisk Laboratorium, was founded in 1925. At Nordisk, Krogh and Hagedorn had hired brothers Harald and Thorvald Pedersen to help with the necessary equipment for insulin production and chemical analysis. But Thorvald and Hagedorn did not get along, which led to Thorvald’s dismissal in 1924. Harald soon followed his brother.
Together, the Pedersen brothers began manufacturing their own insulin, founding Novo in 1925. Nordisk, because of its earlier establishment, dominated the Scandinavian markets, while Novo sought growth internationally—by 1936, 90% of Novo’s production was exported.
Innovation Through Competition
In the decades that followed, both companies constantly pushed each other to innovate in the insulin market. In 1936, Nordisk introduced a longer-lasting insulin by adding protamine, reducing the number of daily injections needed by patients. In response, Novo marketed zinc-protamine insulin in 1938, which only needed to be shaken before use rather than mixed with a neutralizing liquid.
In 1946, Nordisk produced crystalline protamine insulin, which proved to be more reliable and effective, leading to its widespread use in the Western world. Again, Novo responded, this time by introducing its Lente products in 1953. These insulin variants had different durations of action and didn’t use protamine, which was beneficial for patients who were allergic to it.
In the 1970s, both companies focused on purifying insulin to address the issue of antibodies forming against insulin products, which made them less effective over time. Novo introduced Monocomponent insulin, consisting of just the insulin itself, while Nordisk developed a purified porcine insulin.
The next step in insulin purification was the production of human insulin—insulin identical to what the human body naturally produces. Before this, insulin was derived from animal sources, like porcine insulin from pigs. Human insulin is ethically more appropriate and, being identical to our own insulin, offers better tolerance and minimizes antibody formation.
In 1982, Novo successfully converted porcine insulin into human insulin. Nordisk followed two years later. In 1987, Novo began production of human insulin using genetically modified yeast cells. This allowed for the production of human insulin without relying on animals, enabling the company to produce insulin in nearly unlimited quantities.
The Merger and Modern Era
In 1989, Novo and Nordisk merged to form Novo Nordisk A/S. By that time, Nordisk was the world’s third-largest insulin manufacturer, and Novo was the second-largest.
In the following decades, Novo Nordisk continued to grow and innovate. In the 2000s, the company expanded its focus beyond insulin to include glucagon-like peptide-1 (GLP-1) receptor agonists. GLP-1 is a hormone that helps regulate blood sugar by supporting insulin production, slowing gastric emptying, and reducing glucagon release.
While insulin helps the body use sugar to give you energy, GLP-1 works to support insulin production, regulate the timing of insulin release, and slow the movement of food through the stomach—plus the added benefit of weight loss.
After extensive trials, Novo introduced Victoza in 2009, a GLP-1 receptor agonist aimed at diabetes patients.
In 2014, Victoza was followed by Saxenda, a GLP-1 variant designed to treat obesity.
Both Victoza and Saxenda used liraglutide, a GLP-1 receptor agonist, which required daily injections. In 2015, Novo Nordisk introduced a different type of GLP-1 called semaglutide, which allowed for weekly injections. This version led to the approval of Ozempic in 2017 for the treatment of type 2 diabetes. In 2021, Novo Nordisk released Wegovy, a higher-dose semaglutide designed specifically for weight loss.
Today, Novo Nordisk is a pharmaceutical company with a unique focus on chronic diseases like diabetes and obesity. With various insulin products, along with Ozempic, Wegovy, and even Rybelsus—an oral GLP-1 for diabetes—the company continues to lead its industry.
Business Model
Product Overview
Novo Nordisk operates through two main segments: Diabetes & Obesity Care and Rare Disease. The Diabetes & Obesity Care segment can be broken down further into three categories: GLP-1 therapies for diabetes, insulin products, and GLP-1 therapies for obesity.
The company’s most important products today (as underlined in the image below) are:
Ozempic: a weekly GLP-1 injection for diabetes
Rybelsus: the first oral GLP-1 therapy for diabetes
Wegovy: a GLP-1 injection specifically approved for obesity
Insulin products: still a major part of the business, consisting of many different types of insulin
Notice how earlier-generation drugs like Victoza and Saxenda have declined in importance due to patent expirations and the shift from liraglutide to semaglutide. Novo is constantly evolving its portfolio, extending product lifecycles, and introducing new treatments. We’ll discuss this in greater detail shortly.
Novo’s treatments serve chronic diseases, meaning patients require long-term, often lifelong, medication. This leads to recurring, predictable demand and high retention, especially when patients respond well to treatment.
Rare Disease Segment
The Rare Disease segment generates a small portion of total revenue. Moreover, its 2024 operating margin was just 3.3%, though partly due to increased R&D investment. By comparison, however, the Diabetes & Obesity Care segment had a 47% margin—even while ramping up R&D as well.
While less meaningful today, Rare Disease offers optionality for future growth. For instance, GLP-1 therapies have potential beyond metabolic conditions, like cardiovascular disease, addictions, sleep apnea, and Alzheimer’s.
Geography and Secular Tailwinds
North America is Novo Nordisk’s largest and fastest-growing market, driven by the region’s high and rising obesity rates. The U.S. has long led global obesity trends, while much of the world is following the same path. Obesity is a global megatrend, and Novo is positioned in the center.
In 2024, U.S. revenue reached DKK 167.4 billion, accounting for 58% of the company’s total. This is both an opportunity (due to scale) but also a risk (due to pricing and regulatory exposure).
Globally, over 800 million people live with obesity, and the number of diabetes patients is expected to rise from 589 million today to 853 million by 2050, fueled by urbanization, aging populations, and declining physical activity.
Pricing Dynamics
Novo Nordisk’s sells its products through wholesalers, pharmacies, hospitals, and government healthcare programs. Pricing is influenced by both competition and middlemen, especially in the U.S., where pharmacy benefit managers (PBMs) and insurers negotiate significant rebates.
For example, in 2024:
Gross sales totaled DKK 680.1 billion
While net sales (after discounts and rebates) were DKK 290.4 billion
This kind of discounting is common in the U.S. pharmaceutical market and highlights the gap between demand and realized revenue. Novo effectively returns a major portion of gross sales to PBMs and managed care plans in exchange for formulary access and volume.
Looking ahead, pricing will also come under pressure as a result of competition. As mentioned earlier, the GLP-1 industry is expected to surpass $200 billion by 2031, which will inevitably attract competition. This will put downward pressure on pricing.
Here’s how Morningstar sees the U.S. pricing landscape evolving:
“Over the next two years, we expect Novo and Lilly to concede price declines to expand insurance coverage over larger patient groups. By 2027 and beyond, we expect new entrants to cause the annual pricing declines to accelerate toward 10%-15% as competitors work to gain insurance coverage.”
In other words, both Novo and Eli Lilly are expected to trade price for volume. With the overall market growing rapidly, volume gains should more than offset pricing headwinds.
That said, Novo’s wide moat and heavy reinvestment put it in a strong position to maintain leadership, even in a more competitive environment.
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