Novo Nordisk

On 16 July 2026 we published our first X-Ray of Novo Nordisk at $51.48 an ADR. We called it "a wonderful franchise, on sale, with a clock ticking on the patent", scored it 7.3, and told readers to accumulate and to add with conviction below about $45, where the dividend yield would cross 4%. Three months later the ADR stands at $38.83, down 24.6% (23.4% including the August dividend). In the same three months Eli Lilly rose 7.5% and the S&P 500 1.7%.

The strange thing is that most of Novo's own numbers improved. In August it reported second-quarter sales up 7% at constant exchange rates on an adjusted basis, adjusted operating profit up 11%, and raised its 2026 guidance for the second time — from a fall of 5–13% in February to a fall of 0–6%. It raised its free-cash-flow forecast to DKK 45–55bn. The Wegovy pill, launched in January, became the fastest GLP-1 launch in US history, with seven million prescriptions by September.

What fell was the market's belief in the next decade. A heart trial failed on 31 July; the pill sold slightly less than hoped; US injectable Wegovy sales fell 22% because of price; and on 21 September a capital-markets day offered growth "in line with industry peers" to 2030 and said little about the US patent expiry in 2032. Underneath it all sits the change we under-weighted in July: from 1 January 2027 Novo will cut the US list price of Wegovy by about half and of Ozempic by about a third, the same year Medicare's negotiated price takes effect.

What we got wrong, plainly. In July we wrote that the automated discounted-cash-flow value of $89 was "in its natural habitat — a durable, high-margin cash compounder". It was not. A DCF that projects past cash flows assumes the past pricing environment, and Novo's pricing environment was ending in front of us: a most-favoured-nation agreement with the US administration in November 2025, a negotiated Medicare price from 2027, falling cash prices in the self-pay channel, and — announced with the August results — a voluntary cut of roughly half in Wegovy's US list price from 1 January 2027. Buffett's 1991 definition of an economic franchise has three legs, and the third is that the product is "not subject to price regulation". In the United States, which is 56% of Novo's sales, that leg has broken. We knew it; we did not price it.

What we got right. The business is not a value trap in the sense of shrinking cash: volumes are growing, guidance has been raised twice, the balance sheet is rated AA, and the dividend has not been cut. A reader who followed our July advice is down about 12–23% depending on where they bought, holds a business still earning a 42% operating margin, and is being paid ~4.5% a year. The lesson we take is the one Part XI applies: when a government starts to set the price, value the company on the prices it will set, not the prices it used to charge — and demand a wider margin before calling it cheap.

Volume up, price down — every quarter. Novo's own description of its US business in 2026 is the same each time: higher volumes, lower realised prices. In the first half US sales fell 4% at constant currency while international sales rose 8%. The price pressure has four sources at once: the most-favoured-nation agreement signed with the US administration in November 2025, which Novo said would cut 2026 growth by a low single-digit percentage; the cash channel, where the Wegovy pill sells for $149–299 a month and now makes up about half of the Wegovy franchise and 90% of pill demand; commercial rebates, with CVS Caremark adding rival drugs to its main formularies from 1 October 2026; and Medicaid cutting obesity coverage. From 2027 two more arrive: the Medicare price negotiated under the Inflation Reduction Act, and Novo's own cut of the US list price of Wegovy and Ozempic to $675 a month — about half and about a third below today.

Why it still earns a 42% margin. The cost of making a month of semaglutide is a small fraction of even the new prices; the heavy costs are fixed — factories (DKK 162bn of capital spending in 2024–26), research and a large sales force, now cut by ~13,000 people. So volume growth still drops through to profit, which is why adjusted operating profit rose 11% in the second quarter even as US prices fell. The question for 2027 is arithmetic: how much more volume a 35–50% list-price cut buys.

A warning in the guidance. Novo has made DKK 66bn of adjusted operating profit in the first half of 2026. Its full-year guidance of 0% to −6% at constant currency implies only about DKK 52–56bn in the second half — roughly DKK 26–28bn a quarter, against DKK 33bn in the second quarter. Either the guidance is conservative, or the second half carries much heavier launch spending and price erosion. The third-quarter report on 4 November will show which.

Buffett's 1993 letter describes the brands of Coca-Cola and Gillette as "setting up a protective moat around their economic castles". Novo's castle has always been different: not a brand customers choose, but a molecule patients need, made in factories few can build, paid for by insurers who had little choice. In 2026 all three walls were tested. The factories still keep newcomers out. The molecule now has a better rival in Lilly's tirzepatide and is losing patent protection country by country. And the payers — above all the US government — have shown they can and will set the price. We score the moat 6, down from the high marks we implied in July: wide around manufacturing, contested in the pill, breached on price.

The race in one number. In the second quarter of 2026 Eli Lilly sold $9.94bn of Mounjaro against about $4.9bn of Ozempic, and $4.93bn of Zepbound against about $3.5bn of Wegovy, injection and pill together. Lilly's worldwide prices fell 13% in the quarter and its volumes rose 60%; Novo's adjusted sales rose 7%. Both companies are cutting prices to reach more patients. The difference is that Lilly's volume is growing fast enough to swamp the price cuts, and Novo's, so far, only barely.

Why 2027 matters more than 2026. Three things change on 1 January 2027. Novo's US list price for Wegovy falls about 50% and for Ozempic about 35%, to $675 a month, which Novo says will hit its 2027 cash flow. Medicare's negotiated price for semaglutide takes effect. And Medicare coverage of obesity drugs, piloted from July 2026, widens. List-price cuts do not translate one-for-one into lower revenue — most US patients already pay far less than list after rebates — but the direction is unambiguous, and the market is paying for 2027, not 2026.

Our reading: volume outran price in 2026 by a small margin, and the 2027 handicap is bigger. The bull case is not foolish. A cheaper, simpler, oral obesity drug in the hands of a company with Novo's manufacturing could reach tens of millions of patients, and at a 42% margin even lower prices make a great deal of money. But Novo's own ambitions for 2030 — revenue growth "in line with industry peers", an operating margin "broadly stable" — are the language of a mature pharmaceutical company, not a compounder, and it gave no plan for 2032 in the United States. We now think of Novo as a very profitable cash generator facing a long, managed decline in price per patient, whose value depends on how many more patients it can reach. That is worth owning at the right price. It is not worth $89.

The pattern. In July we described the market as expanding rather than zero-sum, with room for a profitable number two. That remains true, and it is now plainly what Novo is: number two in the United States to a rival with better efficacy, more products coming and a share price that has risen while Novo's fell. Behind Lilly, the generics that arrived in 2026 outside the US are a preview of 2032 inside it, and the next wave — monthly injections from Pfizer and Amgen — arrives from 2028. The comparison on our board is Eli Lilly itself.

Integrity: no veto. Novo's reporting is detailed and its adjustments — the 340B reversal, the impairments — are clearly disclosed. Governance: unusual. The Foundation's control lets management think in decades, and also let it fire a board in 2025; outside shareholders have no say. Capital allocation: adequate, not inspired. Capacity bought at the peak, a next-generation drug lost to Pfizer, and buybacks this year at prices above today's are offset by a sensible acquisition, a conservative dividend and an AA balance sheet. We score management and capital 5.

The 340B reversal. Novo's reported first-quarter 2026 sales of DKK 96.8bn (+32% at constant currency) and EPS of DKK 10.91 are not what they look like. Since 2021 Novo had restricted discounts under the US 340B programme for contract pharmacies and, because of litigation, held back the related revenue as a USD 4.2bn provision. When a federal dispute panel's decision in its favour became final on 20 January 2026, Novo released the provision as revenue — DKK 26.8bn, with no cash effect. On an adjusted basis first-quarter sales fell 4%. Any trailing ratio that includes the first quarter of 2026 — our feed's P/E of 9.9, for example — is flattered by it.

Which earnings to use. We use "core" earnings: the 2026 guidance midpoint translates into roughly DKK 20.7 of EPS excluding the 340B reversal and the impairments — about $3.10 per ADR — against DKK 26.17 adjusted in 2025. Owner earnings, normalised for capital spending that management says will fall from DKK 55bn, are about DKK 20 ($3.00) per ADR.

The verdict on the dividend: safe this year, not protected by a cushion, and no longer growing. At DKK 11.70 the dividend yields about 4.5% gross to an ADR holder and takes about half of 2025's earnings — but, with capital spending at record levels and US prices falling, it takes roughly all of 2026's free cash flow. The balance sheet can carry that for years, and the Foundation, which lives on the dividend, will not want to cut it. Our central expectation is a flat or slightly lower dividend for 2026–27 rather than a cut, with cover improving as capex falls. A note for US holders: Denmark withholds 27% on ADR dividends; the US treaty rate is 15%, but the 20-F warns that a late-2025 Danish tax tribunal ruling has made the refund for ADR holders uncertain — so the net yield may be closer to 3.3% than 3.8%. The comparison on our board is Pfizer, a higher yield whose cover was tested by its own post-pandemic price fall.

What is it worth? We discounted owner earnings of about $3.00 per ADR at 10% for ten years. If volume growth roughly matches price erosion — owner earnings growing ~4% a year for five years and 2% thereafter as the US patent ends, ending at 13 times — Novo is worth about $42. If US prices fall faster than volumes grow and Lilly keeps taking share — $2.60 shrinking 2–3% a year, 9 times at the end — about $21. If the pill and CagriSema reach tens of millions of patients and the 2030 ambitions prove conservative — $3.30 growing 7% then 4%, 15 times — about $60, roughly where the ADR traded in January.

At $38.83 the price sits about 8% below our central value — fair, not cheap, for a business we now score 6 on its moat and 4 on growth. That is a very different conclusion from July's, and deliberately so: the change is in the price per patient Novo will be paid, not in the quality of its science. Our advice: hold if you own it — the dividend is safe for now, the balance sheet strong and the business still highly profitable — and buy below about $33, ~20% under our central value, where the gross yield would be ~5.3%. We would revisit that view if the 4 November results show second-half profit holding up well above what the guidance implies, or if CagriSema is approved with a strong label.