Why Novo Nordisk's Pricing Shift Could Unlock a Much Larger Obesity Market

Over the past two years, Novo Nordisk (NVO +1.23%) has lost its lead in the anti-obesity space to its biggest competitor, Eli Lilly (LLY 1.96%). The Denmark-based pharmaceutical leader has tried several things to bounce back, including new drug launches and label expansions for its famous weight management medicine, Wegovy. Novo Nordisk has also worked on making the drug more accessible, and a recent move it announced along those lines could help it expand the market. Here’s what investors should know.

Image source: Getty Images.

A subscription plan for Wegovy

First, it’s essential to note that, despite the popularity of GLP-1 drugs, many patients who could benefit from them are not currently taking them. Here’s how we know that. As of a few years ago, about 40.3% of adults in the U.S. were obese, using the standard definition of having a body mass index (BMI) equal to or above 30. This definition has some drawbacks. Insofar as excess weight is dangerous, the risk comes mostly from visceral fat, which is stored in the abdomen region.

BMI, however, doesn’t distinguish between visceral and subcutaneous fat (the latter of which is far less dangerous), nor can it tell the difference between muscle and fat. Using a different definition that accounts for these (and other) limitations, some researchers recently found that the prevalence of obesity in the U.S. could be more like 70%. And of course, it is linked to everything from diabetes to hypertension. Yet, as of last year, only 12% of people in the U.S. were on GLP-1s, with about 18% having ever taken these drugs.

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NYSE: NVO

Novo Nordisk

Today’s Change

(1.23%) $0.45

Current Price

$36.93

Key Data Points

Market Cap

$125B

Day’s Range

$35.64 - $36.95

52wk Range

$35.12 - $81.44

Volume

584K

Avg Vol

24M

Gross Margin

80.90%

Dividend Yield

4.87%

Here’s the bottom line: The market arguably remains underpenetrated, even going by the standard BMI-centric definition. Meanwhile, price remains a challenge for cash-paying patients. Enter Novo Nordisk, which recently announced Wegovy prescriptions for three, six, or 12 months. Patients who take Novo Nordisk up on the offer – which they can do so through various telehealth platforms – will save on their prescriptions, and the longer their subscriptions, the more money they save.

This initiative could help Novo Nordisk reach significantly more people. Is this how the pharmaceutical leader grabs the lead back from Eli Lilly? Probably not, as Eli Lilly is likely to adjust its prices accordingly. That said, Novo Nordisk should succeed in launching newer medicines, including some targeted at patients at even higher risk, which will have stronger pricing power. Novo Nordisk’s pipeline progress could help it bounce back in the next few years. And in the meantime, investors can purchase its shares at a discount, as Novo Nordisk is trading at 11x forward earnings, compared to the average of 17.3x for healthcare stocks. Novo Nordisk looks like a buy at current levels.