Novo’s plight offers a lesson on managing market expectations

The Danish drug giant’s purpose may be to improve people’s lives, but investors’ shrinking gains from its opening of the anti-obesity market matter too. Novo’s blind spot has been failing to see its share price as an asset to manage—and exploit.

For years, Novo had a relatively quiet life as one member of an insulin oligopoly alongside US peer Eli Lilly & Company and France’s Sanofi. While it wasn’t a completely smooth ride—2016 was dire—Novo has never seen operational and strategic challenges on the scale it’s now facing.

In developing Ozempic for diabetes and its sibling Wegovy for weight loss, the company suddenly found itself riding a tiger.

As is well known, the sudden surge in demand for appetite suppressants was too great for Novo to satisfy. Eli Lilly had a second-mover advantage in launching challenger drug Zepbound, learning from Novo’s experience. Trial data suggesting Zepbound is the more effective treatment has also helped.

Both firms face competition from ‘compounding’ copycat drugs based on similar chemistry. Shares in the more diversified Eli Lilly have held up better.

On a five-year view, Novo is still the world’s third-best performing big pharma stock after Eli Lilly and Abbvie.

Perhaps if it had made a steadier journey to this point, instead of more than trebling in just over two years before its subsequent slide, there’d have been no drama. Try telling that to Lars Fruergaard Jorgensen. He has been replaced as CEO.

The giddy trajectory raises two questions related to what might grubbily be called share-price management.

First, Novo should not have let market expectations run away. At issue here was the confidence it expressed that a successor to Wegovy, CagriSema, would achieve 25% weight reduction. This long-held view within the company was expressed even a few weeks before trial data came in at 22.7% in December.

That was still impressive, but the stock market was disappointed. Its shares tumbled amid concern that the shortfall would further weaken Novo’s competitive position. Company leadership is often overly preoccupied with how to get a share price up.

But boards should worry about the stock price in both directions. As the cliché goes: under-promise and over-deliver. Some may say a company can’t and shouldn’t try to control its share price. But that doesn’t let Novo off the hook.

Should it not have taken advantage of the strength of its shares by using them as a currency to make an acquisition? That was an opportunity even before the price went into overdrive.

Novo could have diversified, say, by buying a biotech firm focused on related areas such heart disease. Instead, Novo’s fortunes have yoked largely to Wegovy.

It’s hard to separate this from Novo’s governance. It has a controlling shareholder in the form of the Novo Nordisk Foundation. This has a majority of the votes but a minority economic interest. Such foundation ownership is common in Scandinavia.

The stated objectives for the Novo investment include “contributing positively to the lives of people” and “generating competitive long-term financial results.” That doesn’t mean Novo the foundation or Novo the drugmaker ignores ordinary shareholders.

The foundation says it has an “arm’s length relationship” with Novo Nordisk, which in turn is governed by an independent board. It also says it’s “particularly mindful of observing and respecting the rights of other shareholders.”

Nor has the foundation been passive. It sought the CEO change. And last year it struck a major deal to expand capacity. But the general idea that a long-term anchor shareholder is a good thing needs some qualification.

Novo’s ownership structure and sheer size protect it from a takeover or shareholder activism: These are the twin threats that otherwise focus boards’ attention on their stock price.

For a controlling shareholder with an indefinite investment horizon, the short-term share price—whether a bubble is inflating or deflating— is unlikely to be of much concern.

In turn, such governance is more likely a brake than a spur to doing anything opportunistic, especially if it involves issuing stock that might change the power dynamics.

Small wonder that Novo has historically avoided transformational dealmaking in favour of commercial partnerships and small bolt-ons.

Long-term business value determines the share price over time. In the meantime, though, markets need to be managed as much as the business. A firm’s stock is a resource. New CEO Maziar Mike Doustdar says he doesn’t like what happened to the share price. Maybe he gets it. ©Bloomberg