European fund manager, Niall Gallagher, is trimming his position in Novo Nordisk, citing the hype surrounding weight-loss drugs that has driven the Danish drugmaker's stock price up by more than 50% this year. Gallagher, who runs an equity fund for GAM Investments, has reduced his position in Novo Nordisk by about half in recent months, partly due to the surge in stock valuations as sales of its appetite-suppressing medications, known as GLP-1s, soared.
Gallagher expressed concerns about the overwhelming hype surrounding Novo Nordisk's drugs. He noted that the buzz has extended beyond the stock market, with weight-loss medications frequently making headlines in Sunday newspapers as "wonder drugs." Although Gallagher believes there are currently no competitors emerging for Novo Nordisk and Eli Lilly & Co., he cautioned that pharmaceutical drugs do not have perpetual patents, and eventually, the patents will expire.
The frenzy surrounding Novo Nordisk's weight-loss drugs, Wegovy and Ozempic, has propelled the company to become Europe's most valuable firm. Celebrity endorsements and positive remarks from influential entrepreneurs like Elon Musk have further fueled the drugs' popularity. Novo Nordisk has raised its full-year revenue outlook three times in light of the drugs' success. Currently, Novo Nordisk shares trade at almost 33 times 12-month forward earnings, significantly higher than their long-term average of 19. The broader Stoxx 600 Health Care Index has a much lower price-to-earnings ratio of about 17. Novo Nordisk's stock price is also just shy of the average target price set by 31 analysts, suggesting limited upside potential over the next year.
Although the majority of analysts still maintain a buy rating for Novo Nordisk, some are becoming skeptical after the company's substantial rally. UBS Group analyst Michael Leuchten stated in September that the revenue opportunity from obesity drugs might not be as significant as Novo Nordisk's current valuation suggests. Novo Nordisk declined to comment on these concerns.
Gallagher's GAM Star European Equity Fund, valued at €473 million ($518 million), has outperformed 88% of its peers this year. The fund's top holdings, according to the latest filing at the end of October, include Nestle SA, London Stock Exchange Group Plc, and Linde Plc. Novo Nordisk, previously the fund's largest holding, has now fallen to the fifth position. The fund initially invested in Novo Nordisk shares in April 2020.
While Gallagher remains optimistic about Novo Nordisk's medium-to-long-term prospects, he believes the risk-reward balance has shifted and the valuation multiple is no longer as favorable. He acknowledges that the company still has good growth potential due to strong demand and supply constraints. However, Gallagher feels that the current valuation is at its limit and does not warrant further investment.