Novo Nordisk Likely to Profit From Worldwide Growth in Diabetic Treatments

Jun.28.11 | About: Novo Nordisk (NVO)
Reuters recently ran an article on the persistent growth in the number of type-2 diabetes patients all over the world. There are 347 million patients worldwide, a 126.8% increase from the 153 million patients worldwide in 1980. Population growth alone cannot account for all of this increase.

Diabetes looks to become even more prevalent in the coming years. I made the case for future growth in diabetes cases in an article published here on Seeking Alpha a few months ago. The reasons for a continued increase in diabetes patients worldwide going forward include the following:

  • The global population continues to grow. The number of people with diabetes will inevitably increase as the population increases in size.
  • Child obesity is becoming more and more common. There is a strong link between obesity and type-2 diabetes. These obese children have a stronger predisposition towards the condition at a young age than non-obese children.
  • The citizens of developing countries are slowly adapting more westernized diets. This is likely to continue as these economies continue to grow and the population becomes wealthier. Diabetes will likely become more common in these countries going forward due to these dietary shifts. Some of these countries have very large populations. That is a lot of potential diabetic patients!
  • The population of the developed world is aging. Older people have a higher chance of developing diabetes than younger people. These countries have well developed healthcare systems and diabetic patients in these countries are likely to receive treatment for their condition.
Diabetic pharmaceutical treatments are currently a $35 billion global industry. Drug research firm, IMS Health predicts that this market could top $48 billion by 2015. This represents a 37% growth rate in only five years. There is an opportunity here for investors to profit off of this trend.

The Danish firm Novo Nordisk A/S (NYSE:NVO) may be the biggest beneficiary of the worldwide growth in diabetic treatments. As I discussed in my previous article on Novo Nordisk, Novo Nordisk holds a more than 50% market share in every major global market for diabetes care products except for North America.

The company still holds a respectable 43% market share in North America and this market is a growth area for the company. Novo Nordisk is very focused on the diabetes care market and currently earns 64% of its operating profits from this one division (the remaining 36% of operating profits comes from biopharmaceuticals).

The company also has a long history of innovation in the diabetes-care industry. Novo Nordisk is currently the only company with a completed phase 3a development program for two next generation insulins. These insulins are designed to treat both type-1 and type-2 diabetes. Type-2 diabetes is by far the more common condition.

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The stock has fallen in recent weeks along with the broader market. The stock has still outperformed the S&P 500 index over the past 3-month, 6-month, and one-year periods.
Novo Nordisk 3 Month Chart vs. S&P 500
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Novo Nordisk 6 Month Chart vs. S&P 500
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Novo Nordisk 1 Year Chart vs. S&P 500
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All charts are sourced from Fidelity Investments.

Novo Nordisk has a twelve-month trailing EPS of DKK 26.05 ($4.957). This gives the company a trailing P/E ratio of 24.07 at the June 27, 2011 closing price of $119.30. Management-provided guidance predicts that earnings will increase 15% in 2011.

Zack's predicts 2011 EPS of 5.65 and 2012 EPS of 6.50. That gives the company forward P/E ratios of 21.12 for 2011 and 18.35 for 2012. Novo Nordisk has a PEG ratio of 1.60 according to management guidance and 1.48 according to the Zack’s estimate. The ADS has a yearly dividend of $1.90 and is subject to Danish withholding tax. This is a yield of 1.59% at current prices. Novo Nordisk has a history of increasing their dividend and will likely continue this streak.

All currency conversions from Danish Krone (DKK) were calculated on June 27, 2011. The company reports earnings and dividends in Danish krone and these values may change subject to currency valuations.

Disclosure: I am long NVO.