Novo Nordisk (NVO) is a Danish pharmaceutical company focused on the treatment of diabetes. Diabetes' growing prevalence is one of the main reasons that I began following NVO's stock performance. The International Diabetes Federation (IDF) says that the number of people affected by type 2 diabetes is increasing in every country. The IDF predicts that by 2030, the number of humans who have diabetes will more than double. In 2011, at least $465 billion was spent on diabetes healthcare according to the IDF's figures. This expenditure represents 11% of total healthcare costs for adults worldwide. This disease is not only a growing problem for adults; the IDF says that 78,000 children develop type 1 diabetes each year. With these numbers in mind, it becomes clear why NVO has been such a successful company. NVO has established itself as an industry leader is diabetes care and treatment and, barring an unforeseen cure for this growing problem, Novo Nordisk is poised to continue to benefit from the increasing impact that diabetes has on this world.
In this article written three weeks ago, I proposed that investors jump onto NVO's upward trend thinking that, in this incredibly forgiving and rewarding market, the stock would quickly bounce back from a recent 14% pullback. The stock price fell drastically after the FDA unexpectedly rejected NVO's Tresiba and Ryzodeg insulin products, which were expected to be big hits for the company, potentially producing billions of dollars of revenues. The FDA requested more information on certain cardiovascular concerns it had with the drugs and NVO stated that it is unlikely that this data could be produced in the near future. The fear for investors is that because of this setback, NVO's market dominance will erode and the company will lose market share to its major competitors, Eli Lilly (LLY) and Sanofi (SNY).
It should be noted that these two drugs, Tresiba and Ryzodeg, have been approved for use in Europe and in Japan, two major markets for NVO. But, this article isn't meant to focus on the company's current fundamentals and growth catalysts. Please refer to my older article for more detailed account of the company's financials. I wrote this article because I was surprised to see that, since my previous article, the stock has once again plummeted.
The initial Tresiba/Ryzodeg pullback bottomed out at $163.52 on February 11th. The stock quickly began what seemed to be a steady rise back to its previous pricing in the $190 range. On March 5th (the date the previous article was published) the stock hit a high of $183.17. This represents a 12% gain in roughly 3 weeks.
I know, I know; I jinxed it. Since March 5th, the stock has embarked on a steady stream downward, closing Thursday at $161.50. This represents an 11.8% pullback. As of Thursday, the stock is trading 16.94% off its 52 week high achieved on February 6th, just days before the Tresiba/Ryzodeg announcement that served as a roadblock to the stock's strong upward trend. Going ex-dividend on March 21st did not help to slow NVO's slide.
It is unclear to me what will stop this current negative trend. What I will say is that, for the long term investor, this short term mishap should be of little significance. Obviously it is wonderful to start a position at a valuable price point. There will be temptation to wait and watch, making speculations concerning the bottom of this dip. I hope to comfort a potential buyer of NVO's stock by saying that for a company with such wonderful long term growth and stock price appreciation numbers, I believe a 17% pullback serves as such.
It's always nice to get good news last isn't it? Frankly, when studying NVO's performance metrics over the past 10 years, I was amazed.
Below is a graph of the company's stock price since becoming publicly traded on the NYSE in 1981:
NVO data by YCharts
As you can see, this stock has been on a perpetual upswing. On January 1, 2003 the stock opened at $14.62. On January 1, 2013, NVO opened at $165.64 meaning that during the last decade this stock is more than a 10 bagger; at its current $161.50 valuation the stock is up 1105% in 10 years time. There have been dips in share price, most notably in 2008 and 2011; however, in the past 20 years this stock has had only 5 negative annual postings. In the last 10 years, the stock price has shown annual depreciation only once, in 2008. The company's 10 year CAGR is 27.47%, and this figure does not include its dividends collected.
Below is a graph showing NVO's 10 year annual shareholder return:
It is not simply NVO's stock price that is appreciating, the aforementioned dividend's performance is worth mentioning. NVO's most recent dividend increase was 27.7%. The company boasts a 31.95% 5 year dividend growth rate and has increased its dividend payment for 16 consecutive years. NVO's current payment is $3.18/share annually, scheduled to the paid on April 2 to those on record of March, 25th. This payment represents a 1.97% yield.
Below is a chart demonstrating the stock's total shareholder return over the past 10 years:
The company currently carries a $180.56 average analyst target price. The stock is largely seen as being overweight which accounts for much of this recent sell off. However, I see these estimates as overly conservative. As stated before, NVO is the world's foremost company in terms of Diabetes treatment. I love best in breed companies and the security that comes with this sentiment. I also think the statistics from the International Diabetes Federation speak for themselves. This disease and the market for its treatments are only growing. I know you can't base the future predictions off of history. There are entirely too many variables for this policy to hold true with absolute consistency; but, looking at the historical returns of NVO's stock and the statistical information regarding Diabetes, I feel comfortable taking my chances chasing this company's 25+ percent CAGR into the great unknown.