At first glance, it may be difficult to understand why Novo Nordisk is set to lay off 9,000 people. Firstly, the company continues to earn a fortune, and everything indicates that its revenue will only grow in the coming years.
Secondly, we are talking about a company whose biggest problem until recently was simply not being able to produce all the medicine that consumers demanded. For this reason, it seems illogical to announce a farewell to 11 percent of the workforce.
Nevertheless, investors have reacted positively to the layoffs – share prices rose on Wednesday after the announcement. There is a clear explanation for this. It is about the future and starts about a year ago.
Until the summer of last year, the narrative about the Danish pharmaceutical giant was almost entirely positive. The weight loss medicine Wegovy was making significant strides, particularly in the U.S., and future expectations were that Novo Nordisk could walk on water.
But then the ice started to crack beneath the giant. The problem of keeping up with high demand suddenly was no longer just a luxury issue. The shortage of the drug led to legal permission in the U.S. to sell copies of Novo Nordisk’s products, which has taken a significant share of the market.
At the same time, competition with the American company Eli Lilly has been tougher than expected. And preliminary results for Novo’s next generation of weight loss medication, Cagrisema, have disappointed investors. Sure, it leads to greater weight loss than Wegovy, but not quite as much as promised.
Growth was not a problem until now
Novo Nordisk lowered its expectations for future earnings, which are no longer projected to be quite so astronomical. This caused shareholders to flee, resulting in massive drops in stock prices.
And this is where an explanation for the impending layoffs comes into play. Novo has hired thousands of people in recent years, and as long as investors believed that revenue would grow at rocket speed in the future, it was no problem that costs were also increasing.
But now that faith in astronomical growth is gone, Novo has suddenly appeared heavy – and also heavier than competitor Eli Lilly. It is now necessary to show the world that the giant can put itself on a strict diet after gaining weight recently.
As the new Novo CEO Mike Doustdar put it on Wednesday, in hindsight, they shouldn’t have hired so many in recent years – and management will now look at where there are »duplicate positions« where some can be spared because multiple people are essentially hired for the same task. Ouch.
In many shareholders’ eyes, Novo is thus demonstrating that when earnings are not as high as expected, costs must also follow suit. This must happen even though layoffs of this magnitude are really painful. Right now, it will cost 8 billion kroner in severance pay to those laid off and impact this year’s financial results. But the savings from the layoffs in the coming years are more important to investors.
And thus arises Wednesday’s peculiar situation, where a company in massive growth announces layoffs of 11 percent of its employees – and is rewarded with rising stock prices.
Pills can change the picture
What Novo Nordisk does from here is, however, far more crucial for the future. Now that they have shown they can cut costs, shareholders want to see that they can also increase earnings.
Or as Saxo Bank’s investment strategist Oskar Bernhardtsen puts it: »You can’t save your way to success«.
Several, like him, point out that multiple things need to succeed simultaneously for Novo Nordisk if the money is to roll in even more than now.
This can happen by reversing the current trend where American doctors prescribe more of Eli Lilly’s drug, Zepbound, than Novo’s Wegovy. And by ensuring that copycat drugs are pushed out of the American market.
But perhaps the biggest factor for future success is tiny in physical form: Wegovy in pill form. Until now, treatment has required weekly injections, but next year, the weight loss medicine is expected to come in pill form. Granted, the pill needs to be taken daily, but many users may very well prefer that over injections, and possibly the pills will be cheaper than the injections. Eli Lilly also has Zepbound in pill form on the way, but Novo could gain an advantage by being first.
Equally crucial could be whether Novo Nordisk can market its products more directly to users in the future, according to several assessments. For decades, diabetes medications, among others, have been marketed to authorities, doctors, and other healthcare professionals worldwide, but the market for weight loss medicine works differently.
Users do not necessarily see themselves as patients. The obesity market has become more »consumer-driven«, as Mike Doustdar himself expressed it on Wednesday.
Novo Nordisk has already tried to adapt. Former CEO Lars Fruergaard Jørgensen used to say »oral semaglutide« when referring to Wegovy in pill form, but then switched to what most people would call it: Wegovy in pill form. The future demands much more of this, assesses Oskar Bernhardtsen.
In the longer term, the real gold of the future could lie in Novo’s next generation of weight loss medication, Cagrisema. When new results come from ongoing studies, there is still a chance that it will turn investors’ disappointment into excitement.
If successful, today’s painful layoffs could be the basis for new successes for the pharmaceutical giant.
