Novo Nordisk: Right Product, Right Time, Fair Price

Mar.28.11 | About: Novo Nordisk (NVO)
Novo Nordisk A/S (NYSE:NVO) is a Danish pharmaceutical company. The company is one of the largest producers of insulin and related diabetes-care products, along with a variety of other pharmaceutical products. The company is also the largest producer of industrial enzyme products in the world.
[Click to enlarge]
Click to enlarge
In 1985, Novo Nordisk launched the NovoPen, which today accounts for 45% of the company’s insulin sales in the United States. This fountain pen-like product appeals to many diabetic patients who do not want to be bothered with using a vial and syringe. This allows diabetic patients to live more active lifestyles than they otherwise would be able to.
On January 25, 2010, Novo Nordisk received FDA approval to market a new drug that offers further benefits towards the treatment of type 2 diabetes. Victoza is a long-lasting GLP-1 analog that improves control of blood glucose. Victoza is used once a day by the diabetic patient. As the drug needs to be taken only once per day, this makes it easier than ever before for the patient to control his diabetes and live a more active lifestyle.
Victoza competes against Eli Lilly’s (NYSE:LLY) Byetta. Byetta, however, must be taken twice a day versus Victoza’s once a day. That makes Byetta somewhat less convenient for the diabetic patient, but both are superior to older medicines. This gives Victoza and Novo Nordisk the competitive advantage in this market. In addition to the FDA, Victoza was approved by the European Medicines Agency on July 3, 2009 and is currently being marketed in the U.S., Germany, Denmark, the Netherlands, the United Kingdom, Ireland, France, and Japan.
The market for Novo Nordisk’s diabetes-care products is enormous. The CDC estimates that 26 million Americans have diabetes. Another 79 million have prediabetes – higher blood glucose than normal and an increased chance of developing diabetes, according to the Center for Disease Control). Type 2 diabetes, the most common form, is closely linked to obesity and inactivity. The CDC estimates that 17% of children aged 2-19 years are obese. Due to the link between obesity and diabetes, this indicates that a large and growing number of people could be at risk for developing the disease.
Novo Nordisk is clearly at the right place, with the right product, at the right time. Investors, however, need to be concerned about the price as well. Novo Nordisk’s largest competitors in the diabetes pharmaceutical market are LLY and Sanofi-Aventis (NYSE:SNY). This table gives the financial ratios for those three companies:
Novo Nordisk earned net profits of 14,403 million Danish kroner in 2010. The company earned 10,768 DKK in 2009. This equates to a net profit of $2.727 billion profit in 2010 and $2.039 billion profit in 2009, when measured in U.S. dollars at a March 23, 2011 exchange rate of 5.2805 DKK to $1. That gives a growth rate of 33.75%. The company expects to show 15% growth in 2011. The Danish krone is pegged to the euro via the European Union’s exchange rate mechanism, and so should boost the nominal profits of Novo Nordisk if the euro continues to rise against the dollar going forward.
There was an average of 585.5 million shares outstanding in 2010 (including options in the money). That gives the stock a trailing EPS of 24.60 DKK ($4.66). At the March 25 closing price of $120.18 per share, NVO has a trailing P/E ratio of 25.79. Using the forward guidance of 15% growth, NVO has a PEG ratio of 1.71. At this price, the stock is certainly not a bargain. However, it may be the best investment out of any of these three players in the diabetes-care industry -- and it certainly does not appear to be overpriced, given the significant tailwinds that the company has.
Novo Nordisk has the highest growth rate of its immediate peers by a rather substantial margin, as can be seen by comparing the trailing EPS to the forward EPS of the companies in the chart above. This does not tell the whole story, however. Since NVO reports its earnings in Danish kroner, it is certainly possible that the forward P/E will be less on a nominal basis than what is indicated. If the euro increases in value against the U.S. dollar over the next year, which seems likely, then that will raise the EPS when converted into U.S. dollars. Thus the dollar-denominated forward EPS may be higher than it appears to be – which would lower the forward P/E and make the stock even more attractive than it looks now.
All financial information for Eli Lilly and Sanofi-Aventis was obtained from Zack's Investment Research. All other data was obtained directly from Novo Nordisk’s annual report or from the sources cited in the article. It is believed to be accurate as of March 27, 2011. Investors are advised to conduct further due diligence before making any financial decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.