Novo Nordisk ADR (NYSE: NVO) currently trades at $89 per share, nearly 40% below its peak level of over $145 seen in June of this year. In contrast, its closest peer, Eli Lilly stock is down 15% over this period. NVO stock was trading around $55 in early June 2022, just before the U.S. Fed started increasing rates, and is now 60% above that level, compared to 45% gains for the S&P 500 during this period. This outperformance of NVO stock can be attributed to a ramp up in sales of its obesity drugs. Novo Nordisk is based out of Denmark. Notably, Denmark’s interest rates are lower than those in the U.S.
NVO stock has struggled in the past few months. In fact, Novo was down over 20% on Friday, December 20, after the company reported underwhelming results from a late-stage clinical study for its obesity treatment – CagriSema. The trial showed that CagriSema helped patients reduce their weight by 22.7%, below the 25% Novo Nordisk was targeting. But, even before this fall, the stock was underperforming, with slower than anticipated sales growth for its obesity drugs. In fact, the company missed Q3 revenue and earnings estimates, weighing on its stock. While NVO stock has had a tough ride lately, if you want upside with a smoother ride than an individual stock, consider the High-Quality portfolio, which has outperformed the S&P, and clocked >91% returns since inception.
In this note, we capture trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
- August 2023 – August 2024: Fed has kept interest rates unchanged to quell fears of a recession and keep inflation in check
- Since September 2023: Fed cut rates by 100 bps, but turned hawkish for its 2025 outlook
In contrast, here’s how NVO stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
Novo Nordisk and S&P 500 Performance During 2007-08 Crisis
NVO stock declined from nearly $5.40 in April 2008 (pre-crisis peak for the stock) to $3.20 in early March 2009 (as the markets bottomed out), implying it lost 40% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $5 in early 2010, rising about 56% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
Novo Nordisk’s Fundamentals Over Recent Years
Novo Nordisk’s revenue rose over 2x from 127 billion DKK in 2020 to 271 billion DKK for the last twelve-month period. This can primarily be attributed to the success of its diabetes and obesity drugs – Wegovy and Ozempic. While Ozempic’s sales have risen 4.5x from $21.2 billion DKK in 2020 to 95.7 billion DKK in 2023, Wegovy’s sales have surged to $31.3 billion in 2023, since its launch in 2021.
The company’s operating margin has also expanded from 42.6% to 43.7% over the same period. Higher revenues and margin expansion resulted in the bottom line of 21.20 DKK per share for the last twelve month period, versus 9.01 DKK per share in 2020.
Does Novo Nordisk Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing, Uncertain Rate Cut Cycle?
Novo Nordisk’s total debt increased from 10 billion DKK in 2020 to 57 billion DKK now, while its cash increased from around 13 billion DKK to 75 billion DKK over the same period. The company also garnered 118 billion DKK in cash flows from operations in the last twelve months. Novo Nordisk is a net debt positive company, and it has a sufficient cash cushion to meet its near-term obligations.
Conclusion
While the Fed’s efforts to tame runaway inflation rates has helped market sentiments in the past, its recent hawkish outlook for 2025 is now worrying investors. We believe Novo Nordisk stock has the potential for some gains once markets finds a footing, digesting the news of fewer than anticipated rate cuts next year. Although the development around CagriSema doesn’t bode well for NVO stock, we think after a meaningful 40% correction from its recent highs, the headwinds appear to be priced in. Notably, the $123 average of analysts price estimates reflects a solid 45% upside potential from here.
Admirably, NVO stock has generated better returns than the broader market in each of the last three years. Returns for the stock were 63% in 2021, 23% in 2022, and 55% in 2023. Similarly, the Trefis High Quality Portfolio, with a collection of 30 stocks, is less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
While NVO stock looks like it has some room for growth, it is helpful to see how some of its peers, such as Eli Lilly, fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
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