It's Not The Right Time To Buy Novo Nordisk

| About: Novo Nordisk (NVO)

Summary

DCF analysis with inputs below analyst estimates shows Novo Nordisk isn’t trading at an attractive valuation.

These inputs reveal downside potential of around 1% based on a perpetuity growth method or upside of 10% based on an EBITDA exit multiple method.

Under a worst-case scenario, Novo Nordisk is overvalued by approximately 19% (Perpetuity Growth Method) and 9% (EBITDA Multiple Method).

Thus, despite trading at discount to historical valuation, the risk/reward for Novo Nordisk stock doesn't look compelling enough.

I've recently discussed the key reasons I don’t think Novo Nordisk (NYSE:NVO) is poised to outperform in 2017. In this article I will focus on a quantitative valuation of the company, to show why I think Novo Nordisk's valuation is not compelling.

Base Case

DCF analysis with inputs below analyst estimates shows Novo Nordisk is not trading at an attractive valuation. I used the Excel template offered by Bloomberg, but I adjusted consensus estimates to reflect a more conservative view on Novo Nordisk's Insulin and Haemophilia franchises.

As a reminder, NovoSeven will face competition by Roche's (OTCQX:RHHBY, OTCQX:RHHBF) ACE910 in 2017, which has recently reported positive headlines from a Phase III trial in Haemophilia A for patients with inhibitors (HAVEN 1). In addition to a very strong efficacy profile, ACE910 is also administered as a weekly subcutaneous injection, which is much more convenient for the patients compared to an intravenous administration, as for NovoSeven.

In addition to that, as I discussed in my previous articles on NVO, regarding the diabetes division, I believe:

The worst is not behind the diabetes insulin franchise. Despite the market has clearly understood the reasons behind the disappointing downgrade of Novo Nordisk's long term guidance at Q3/2016 results, I think there are few key sources of downside for the insulin market expectations over the period 2018-2020, which the investors have overlooked.

Thus, I reflect conservative assumption in my sales estimates for these two franchises, especially in 2020 and 2021.

Here are my key assumptions for the estimates of Sales, EBITDA Margin and FCF:

Sources: Bloomberg & My Own Valuation Model

As you can see, these estimates are below consensus in terms of sales and EBIT, especially for 2020 and 2021.

Sources: Consensus Comparison vs. My Own Valuation Model

To generate a DCF Analysis, I used 2 different methodologies:

  • PERPETUITY GROWTH METHOD: I used fair assumptions for the perpetual growth rate and the WACC. In details, I used a perpetual growth rate of 1%, which is in line with the Bloomberg estimate and I assumed a WACC of 8%, that is in line with the peers one.

Source: Bloomberg

As can be seen in the table above, Novo Nordisk is fairly valued based on the Perpetuity Growth Model. In addition to that, the sensitivity analysis shows significant upside (i.e. 20%), only assuming unreasonable estimates for WACC and perpetual growth rate.

  • EBITDA MULTIPLE METHOD: this analysis reveals a slightly better result for Novo Nordisk. The company looks undervalued by about 10%. I assumed an EBITDA exit multiple of 11.5X, which is a reasonable assumption because it's in line with the peers' multiple (i.e. 11.7x EV/EVITDA NTM) but below the Novo Nordisk's historical multiple, as shown by the following tables. I believe that NVO doesn’t deserve anymore a premium valuation compared to its peers, given that they will face a lot of pressure in the Diabetes and Haemophilia franchises over the coming years.

Source: Bloomberg

Novo Nordisk' Current vs. 5 years average P/E (absolute analysis). Source: Bloomberg.