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Novo Nordisk (NYSE:NVO) is a Denmark based pharmaceutical company whose primary focus is the development of diabetes care products. NVO's diabetes care division covers a vast spectrum of diabetes care including insulin and non-insulin treatment medicine, and its insulin pens and needles. NVO boasts that an estimated 6 million people use its FlexPen to treat their diabetes daily. The company also manages a biopharmaceuticals division and manufactures products for three other medical divisions: haemostasis management, growth hormone therapy, and hormone replacement therapy.

The company's diabetes care division's sales grew 21% in 2012. This growth was highlighted by the company's continued success in the North American, and China regions, where total sales grew 28% and 29% respectively. North America accounted for 66% of NVO's total sales growth and the company expects this trend to continue due to the fact that roughly 35% of the insulin delivered to Americans is from the pen system, whereas in Europe, this percentage is nearly 100%. In China, the country with the largest population of people affected by diabetes, NVO has worked hard to establish itself and currently holds a 37% value stake in the diabetes market.

Total sales by the company's international business segment also showed robust growth, improving by 18% driven by success in Brazil and the Middle East. The company expects continued growth in its international division as many developing countries and regions become more urbanized, westernized, and therefore, more prone to develop the diabetes.

Growth Strategy:

In his annual letter to shareholders, CEO Lars Sorensen spoke of the company's growth saying, "Despite the difficult economic climate, we were able to grow sales in 2012 by 12% measure in local currencies due to continued strong demand for some of our key products." Sorensen went on to say that NVO, "will invest in both current products and our new-generation insulins," spending, "14-15% of our sales on research and development of new, innovative products, which will address unmet medical needs and help secure Novo Nordisk's long-term development."

Part of what has made NVO so successful over the long term and gives me confidence of its continued success into the future is the company's clearly laid out strategy encompassing its 5 key focus areas. Expanding the company's leadership in the treatment of diabetes is the largest of these 5 key focuses. Because of NVO's past focus on the treatment of diabetes, the company has been able to position itself strongly within the industry. In 2012 there were more than 371 million people living with diabetes worldwide. The company estimates that by 2030, there will be more than 550 million people affected by the disease. NVO's current market share within the diabetes treatment industry is roughly 26%.

NVO also hopes to establish a presence in obesity, pursue leadership in haemophilia, expand leadership in growth disorders, and establish presence in inflammation.

There are clear connections between diabetes and obesity, as the latter is known as a risk factor in developing type 2 diabetes and certain cardiovascular diseases. The World Health Organization says that obesity has reached pandemic proportions; yet, there are few medical treatment options for patients suffering from the condition. NVO is investigating an anti-obesity medicine that is currently in phase 3 testing trials. The company feels optimistic because the U.S. Food and Drug Administration approved new obesity medications in 2012.

NVO first entered the haemophilia market in 1996 with NovoSeven. The company hopes to strengthen its position within the haemophilia market with an estimated 400,000 people suffering from the condition across the planet. In October 2012, the company filed for approval of its turoctocog alfa, a recombinant factor VIII therapy, with the Europe and the U.S.

NVO is already a world leader in the human growth hormone industry with a 28% market share. The company's products within the market are revolutionary. Norditropin is the only room temperature stable liquid growth hormone available to the consumer in a pre-filled pen device, the Norditropin FlexPro. NVO also has a long acting growth hormone formulation that is in phase 1 of trials.

Novo Nordisk hopes to use its already successful design process of therapeutic proteins to enter the inflammation market by developing new treatments for patients who suffer from autoimmune inflammatory diseases and are unresponsive to current treatment methods. The company currently has several products meant to address this focus, most of which are in early clinical development stages.

Fundamentals:

  • NVO trades with a P/E multiple of 25.9x. This is higher than its peers whose average multiple is 17.8x; however, NVO's P/E is drastically lower than the Biotech and Drug industry average of 46.8x.
  • NVO's gross margin is an impressive 82.74%. The company was able to grow this margin in 2012, up 1.7% from 81.0% in 2011. 82.74% beats its peers' average by 11 percentage points and outpaces the industry average of 76.38%.
  • NVO's management effectiveness numbers caught my eye; the company's return on assets is 32.88%, return on equity is 54.90%, and return on investments is 48.74%. These numbers are astonishing relative to the industry averages of 7.30%, 11.69%, and 7.10%.
  • The company's 1 year and 5 year EPS growth rates also greatly outpace the industry and healthcare sector averages. NVO's 1 year EPS growth was 29.55%. The industry and sector averages are -17.57% and -6.45% . NVO's 5 year EPS growth was 23.74% compared to the industry and sector averages of 10.56% and 7.75%

Here are several graphs comparing NVO to its closest rivals, Eli Lilly (NYSE:LLY) and Sanofi (NYSE:SNY).

NVO Chart
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NVO data by YCharts

NVO Gross Profit Margin Quarterly Chart
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NVO Gross Profit Margin Quarterly data by YCharts

NVO Return on Equity Chart
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NVO Return on Equity data by YCharts

Valuation:

On February 11th, NVO's stock fell drastically after the FDA unexpectedly announced a rejection of the company's Tresiba and Ryzodeg insulin related products. The stock fell $26.89 from its Friday, February 8th close at $192.29 to $165.40, where it closed on Monday, the 11th. Since what appears to have been a market overreaction, the stock has steadily risen to its current level of $181.36. Yesterday alone, the stock rose 3.28% after a company shareholder/analyst call discussing China, NVO's 37% market share within the country, and its future sales force growth guidance within its Chinese division.

NVO's stock is still 5.7% off its February 11th numbers, and 6.7% off its 52 week high, achieved on February 6th. I see the stock quickly recapturing these prior price levels in this forgiving market. I also like the company's future growth looking at its current fundamentals, especially when compared to its direct peers in diabetes treatment and the pharmaceutical industry as a whole. I like the direction that NVO is headed, capitalizing on the treatment of diabetes, whose growth worldwide will fuel the company's earnings for years to come.

Here is a link to NVO's 2012 annual report.

Source: Buy Novo Nordisk And Ride This Upward Trend