3rd November 2023
Danish drug dream
Thankfully, since the age of the Vikings, Danes have turned their talents to other more peaceful and useful endeavours. That the home of Carlsberg, Danish Bacon, and Danish Pastry is also the home to the anti-obesity drug: Ozempic, suggests that irony is alive and well in Denmark.
The drug behind the success story is Semaglutide, marketed as Wegovy for obesity and Ozempic for diabetes, is made by the Pharmaceutical company Novo Nordisk. The drug works by reducing appetite (addressing obesity) and increasing the release of insulin (helpful to control diabetes). The success of the drug has meant that demand has far outstripped supply. Only launched 6 years ago, the drug is the top selling drug in the US with $8.5 billion in sales over the past year. Results published this week show revenue growth of 29% compared to the same time last year for the company, with obesity growing by 182%. These growth rates are likely to fall in coming years, but even in the insulin sector, which is seen as mature, growth continues in the mid-teens pace, which is impressive compared to many others in the Pharmaceutical sector.
Novo Nordisk, now the largest company listed in Europe, is in clients’ portfolios (depending on the platform and investment wrapper either directly via Artorius’ European Capital Discipline Process or via a fund). This is not an investment comment to sing the company's praises but to illustrate a remarkable situation for Denmark (and economists), as well as the potential ramifications for other companies in other sectors from the success of this one company.
The success of a single drug in a single country (Denmark) is having a remarkable impact on that country’s economic data. Danish Industrial Production data shows an overall annual growth of 18% to the end of June 2023. Excluding drug production, industrial production fell by 6.8% over the same period. The 74% year-on-year growth of drug production is staggering.
Danish economic data is being driven by drugs. Industrial production (excluding drugs) is falling whilst industrial production of drugs has grown by 74% over the past year
Source: Artorius, Bloomberg
Danish Current Account Surplus has risen to over 13% of Gross Domestic Product GDP)
Source: Artorius, Bloomberg
As a result of the drug boom, the Danish Current Account (Trade Balance) surplus has risen to over 13%. This is higher than even Switzerland’s and unlike Switzerland, the Danish Krona is locked in a tight range against the Euro. Theoretically, the Danish Krona should be allowed to rise as the Danish economy is much more productive (due to the success of its drug’s sector), but the policymakers seem intent on maintaining a long-held value versus the Euro. Currency manipulation in plain sight?
Whilst the good news of successful drug treatment is driving the share price of Novo Nordisk (up 53% year to date in Danish Krona terms) there are widespread losses elsewhere. Food companies such as Nestle and Dunkin’ Donuts are reporting drops in sales due to the curtailing of consumers’ appetites.
The drug, originally designed to combat obesity and diabetes has recently had success in trials for heart, live and kidney disease. As recently as October 10th, Novo Nordisk announced early success in a trial for kidney disease. The impact of that announcement saw the share price of kidney dialysis machine makers Fresenius Medical Care AG & Co. plunge 24% whilst DaVita fell 18%, merely of the risk that at some stage Novo Nordisk’s medication could reduce future demand.
In August 2023, Novo Nordisk announced that trials suggested that their drug may reduce heart attacks and strokes by 20%. The US spends $250 billion a year on combating heart disease therefore the market opportunity is sizeable for the drug if it proves successful in gaining regulatory approval. Furthermore, Semaglutide (the generic name for Ozempic) is undergoing exploration in various fields, including liver disease and Alzheimer's. This presents additional potential opportunities for the company.
We would highlight that it is not unusual for drugs to have benefits beyond their original target illness. For example, Viagra was originally developed by Pfizer for high blood pressure and chest pain (angina). By accident, the trial conducted at Morrison Hospital in Swansea found that it addressed erectile dysfunction. It went on to break records for the fastest initial sales growth for a prescription drug.
Just before you think that too much is made of drugs and that Novo Nordisk will rule the world forever, history provides warnings of betting too much on a single company. Back in 2000, Nokia was worth twice the GDP of the Finish economy. It accounted for 25% of the corporate tax revenue and 4% of the GDP at its peak. Following the arrival of the iPhone and other smartphones, Nokia lost its dominance and the overall Finish economy struggled in the following decade.
Back to Britain
Away from the drug fuelled economic story of Denmark, a more prosaic backdrop exists in the UK. The Bank of England presented its Monetary Report on Thursday 2nd November. Whilst holding interest rates at 5.25%, the Bank acknowledged that the UK economy was likely to stagnate until 2025. Despite this downbeat economic forecast, the Bank indicated that they do not expect to be reducing interest rates soon as inflation is likely to remain above 3% through to the end of 2024, with risks of higher rather than lower inflation.
News like this tempts me to reach for a Carlsberg or comfort food such as a Danish Pastry or Bacon roll. To be followed by Danish drugs to cure the resultant obesity.
Gerard Lane Chief Investment Officer
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