Company description: Novo Nordisk is a global healthcare company with more than 90 years of innovation and leadership in diabetes care. The Company is engaged in discovery, development, manufacturing and marketing of pharmaceutical products. The Company’s business segments include diabetes, obesity care, and biopharmaceuticals.

Competitive Advantage:

With almost 50% market share by volume of the global insulin market, Novo Nordisk is the leading provider of diabetes-care products in the world. The company’s global scale combined with significant barriers to new competition; provide a strong level of business protection for what we believe is a persistent business.

Persistent Products:

Demographic trends with a growing prevalence of diabetes in an aging and overweight global population provide confidence about the resilience of Novo’s product lines and business going forward.

Why we like Novo Nordisk:

  • An Attractive Outlook
  • Quality of Earnings
  • A Strong Balance Sheet
  • Superior Management

An Attractive Outlook

. We believe that the companies revised five year growth rates are conservative estimates based on historical trends and global demand for their products. Plans to reduce the workforce will lead to efficiencies within the business costs structure with average sales growth expected to be between 5-7% per annum going forward.

Quality of Earnings

Qualities of earnings over the past 10 years have demonstrated the company’s ability to outperform its peer group and provide a consistent track record for shareholders looking for a durable business at a competitive price.

The P/E gap between Novo and sector has narrowed in recent months despite the company’s superior growth profile providing a discrepancy between valuation and what we believe will be Novo Nordisk’s future earnings potential.   While the USA is the main contributor with 44% of share of revenue growth this is followed by China contributing 27% and International Operations at 16% respectively. Despite softer figures for the last period Net profit increased by 10% to DKK 29.2 billion and diluted earnings per share increased by 12%.

A Strong Financial Position   

Novo has a strong balance sheet ending 2015 with DKK 20 Billion in cash and marketable securities and virtually no debt. Free cash flow has exceeded DKK 31 billion and has increased by 16% compared to 2015 reported figures. We expect the firm to continue to use this cash for a mixture of share repurchase and a growing dividend returning shareholder value.

Superior Management

While CEO Lars Rebien Sorensen is due to retire at the end of 2016 his replacement Lars Fruergaard Jorgensen has 25 years experience in the firm and has served in various leadership positions. The management team has shown vigilant leadership with the stock outperforming its peer group average by a very large margin over the last decade. The board has continually demonstrated a commitment to shareholder value via share buy backs and rising dividends with compensation packages for top executives not being excessive.

 

The Risks

  • Changes in regulation and delays on trials with the US Food and Drug Administration could prove costly.
  • Conversion of patients to next generation insulin offerings could reduce margins and profitability.
  • Demographic trends may not match expectations for growth in the diabetes market.

 

 

 

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