Ozempic’s most important side effect: turning Denmark into a “pharmaceutical state”?

What if the country’s entire economy was based on a single product? TV commercials joke that America runs on Dunkin’, but in reality, Denmark literally runs on Ozempic, a diabetes drug that is now widely used by consumers to lose weight.

Ozempic is proving to be a powerful growth driver. Its global sales have increased by more than 60% in the past year alone. In the United States, which is one of its largest markets, prescriptions for Ozempic and similar drugs quadrupled between 2020 and 2022. And despite these record sales, demand is so high that there has been a persistent shortage of Ozempic in the United States for much of the past few years.

Ozempic’s maker, Denmark’s Novo Nordisk, is reaping the benefits of this hype. Its net profit more than doubled between 2019 and 2023, and its stock has hit new highs. By the end of 2023, Novo had become Europe’s largest company. And its rise has eclipsed the Danish economy, creating a lot of value on one side, but an unbalanced economy on the other.

You may have heard of “petroleum states,” countries where fossil fuel extraction dominates the economy. In this respect, Denmark could be called a pharmaceutical state, as Novo now dominates the Danish economy.

Nearly one in five Danish jobs created last year were created at Novo. And that’s just direct. If you also include the jobs created indirectly by Novo (for example at its suppliers or through all the newly rich Novo employees spending their money in shops and restaurants), nearly half of all non-agricultural private sector jobs created in Denmark can be attributed to Novo.

Moreover, Denmark’s gross domestic product would have declined last year without the contribution of the pharmaceutical sector. In other words, the company almost single-handedly saved the country from recession.

Novo Nordisk’s meteoric rise raises a question about economic growth that goes far beyond Denmark: What are the risks of having a single giant company running the entire economy? And, more importantly, what would happen if that company went south?

Danish disease

In economics, sometimes too much of a good thing can be bad. This is the case with the phenomenon known as “Dutch disease,” named after the Netherlands’ experience in the 1960s. Some economists worry that the rise of Novo Nordisk could hurt Denmark as well (for more on Dutch disease, listen to this episode of Planet Money’s The Indicator).

In 1959, when the Dutch discovered large deposits of natural gas in Groningen, they began extracting and exporting the gas as fast as possible. These large exports increased the demand for the Dutch currency, the guilder, which caused its value to skyrocket against other currencies. This made other Dutch exports, other than gas, too expensive to compete on international markets. This eventually decimated the manufacturing sector and increased unemployment in the country. Ironically, this huge windfall ended up hurting the economy.

Dutch disease is usually associated with the discovery of natural resources such as oil or gas, but it can occur as a result of any development that causes an increase in global demand for a currency. For example: the discovery of a miracle weight loss drug that everyone wants to buy.

Indeed, Novo’s strong growth in drug sales has boosted Danish exports and brought a lot of foreign currency into Denmark. For example, most of Novo’s sales come from North America. Novo then has to exchange a large part of the foreign currency earned abroad for Danish kroner to pay its employees’ salaries and taxes in Denmark, expand its factories there, and so on. This puts pressure on the kroner to appreciate against other currencies, such as the dollar.

The Danish krone is unlikely to rise much, however, as the country’s exchange rate remains pegged to the euro. To offset the strengthening currency effect, the Danish central bank has had to respond by keeping interest rates low. “It may seem strange that weight loss drugs have an effect on interest rates in Denmark, but it does,” Jens Nærvig Pedersen, head of foreign exchange and rate strategy at Danske Bank, told Bloomberg.

Novo’s activities have had a noticeable effect on the krona, but the central bank’s interventions have been enough to keep its value stable. While a fixed exchange rate can’t always save you from Dutch disease, Denmark has managed to avoid it so far and continues to export a wide variety of products today. And the central bank continues to monitor Novo’s effect on the currency.

The new Nokia

Novo Nordisk’s dominance of the Danish economy has prompted many to warn Denmark of falling into the same trap that its Nordic neighbor Finland fell into years ago: the Nokia trap.

In the early 2000s, Nokia, a telecommunications company, was the hottest thing around. The appeal of its iconic brick-shaped phone has long since been forgotten in the shadow of a new generation of smartphones, but by the early 2000s, Nokia was the world’s largest mobile phone maker. And like Novo Nordisk, it was a commercial behemoth in its home country: at its peak, Nokia was responsible for almost a quarter of Finland’s growth and generated more than 20% of Finnish exports.

But disaster struck: In the mid- and late 2000s, Nokia began rapidly losing market share to Apple and other smartphone makers. The global financial crisis hit at the same time, and the Finnish economy collapsed. Compared to its Nordic neighbors, Finland’s economic decline was more pronounced, and its recovery from the crisis was much slower.

The widespread belief was that Nokia’s collapse had led to the collapse of the Finnish economy. “Steve Jobs took our jobs,” the then prime minister said in an interview. The geographical proximity and economic similarity of the situation raise the question: is Denmark also in danger of falling into Nokia’s trap?

As is often the case in economics, the answer is complex. For starters, Nokia was in a pretty extreme situation. It may be unusual to see a company of Nokia’s size in a small open economy like Finland, but it is even more unusual to see a company go from being the world market leader to laying off tens of thousands of jobs and being acquired by another company in the space of a few years.

The fact that the global financial crisis occurred at the same time also means that many of the factors behind Finland’s economic woes were not related to Nokia. The Finnish Economic Research Institute estimated that Nokia’s direct contribution was responsible for more than 30% of the decline in GDP and 20% of the decline in employment between 2008 and 2014. This is a staggering amount for a single company, but it is far from the majority.

Novo is unlikely to experience a Nokia-style collapse anytime soon, but there are some hurdles on the horizon that could hamper its growth in the future. Countries are already considering stricter price controls on Novo’s drugs, and Novo’s patents on Ozempic expire in a decade, at which point the company will likely have to fight off a wave of competition from generic drugmakers. And as we can see from the data, if Novo stops growing, Denmark will likely stop growing too. This is the Nokia trap for Denmark.

The best way to avoid this situation would be for other Danish companies to grow faster and generate more value, so that the country’s economic growth is driven by many companies rather than just one. But this is easier said than done, especially given the stagnant European economic environment.

The other side of the Nokia trap is that Denmark could become complacent and equate Novo’s success with that of its economy as a whole. But partly because they can draw on the Finnish experience, Danish leaders are watching the economy closely for signs of underlying weaknesses that could be masked by the “Novo effect.” The country’s national statistics agency recently released GDP figures with and without the pharmaceutical industry’s contribution, and the economy ministry referred to the company 31 times in its recent economic report.

If handled carefully, Denmark’s problem can be a positive one. Novo Nordisk’s runaway success is certainly good for the Danish economy, but only if policymakers understand the risks of too much of a good thing. For now, that seems to be the case.