Last week, $NVO
announced its investing
$6 billion to expand production of the Ozempic-Wegovy duo of diabetes and obesity meds. This investment will lead to the creation of a new 170,000-square-meter (1.83 million-square-foot) API (active pharmaceutical ingredient) facility that will be able to make multiple products and accommodate future processes. Management notes that construction of this new facility will be finalized gradually from the end of 2025 through 2029.
While the demand for diabetes and obesity medications are projected to grow, what once looked like easy big profits is now turning into a fierce competition, $LLY
made a competing drug called Zepbound, which recently got FDA approval. The CEO of Eli Lily has discussed plans of aggressively expanding
production capacity as surging demand keeps outstripping supply for their weight loss drugs. At the same time, $AZN
paid $185 million to a Chinese biotech company to license their GLP-1 agonist and enter the obesity drug race.
A Novo Nordisk manufacturing plant. Li Ran/Xinhua via Getty Images
As you can see, the big pharmaceutical companies are rushing to secure their first mover advantage with weight loss drugs. While Novo Nordisk's $6 billion investment will start generating revenue by 2029 conservatively, let's assume the following:
- Ozempic and Wegovy will give $NVO $15.7M in revenue for the entire 2023
- Ozempic and Wegovy both projected to grow revenue at 32% CAGR for the next seven years
- Profit margin of 30%
And here are the assumed results:
- In 7 years, estimated Ozempic revenue of $18 billion
- Estimated Wegovy revenue of $7.5 billion
- Total revenue of $25.5 billion
- At 30% margin, total profit is $7.65 billion
- On $6 billion investment, the ROI of this investment is 127.5%.
Because the profits on this investment will only be experienced in 7 years, applying present value calculations, the present value of the profits are projected to be $5.6 billion. The ROI of this factory investment, accounting for present value, will be 93%.
Here is my present value calculation below:
- future value: $7.6 billion
- number of periods: 7
- rate: 4.47%
- compounding: 1
It's great to see Big Pharma investing big on expanding production capacity for high demand drugs while demand for them remains hot. Even if a few years goes by, it's assumed that demand for those drugs will continue to grow as more supply enters the market. This investment can be seen as a "no brainer" to management and in the end, as long as the insurance companies are willing and are able to cover for the cost of Ozempic and Wegovy and other drugs that Novo Nordisk makes in the future, this investment will create immense value for shareholders for a very long time.