By any metric, Novo Nordisk (NYSE: NVO) , the world leader in diabetes medication, is an outstanding company. It commands a 28% global market share in diabetes drugs, one of the largest buckets within specialty pharma. Returns on shareholder’s equity last year was a whopping 45%.
The company is also growing fast. Over the last decade, annual growth rates for revenue and operating income were 15% and 23%, respectively.
Novo is very focused on just four disease areas: diabetes (79%), obesity (<1%), hemophilia (10%) and growth disorders (11%).
Diabetes is clearly its major focus. Diabetes is a medical condition that has affected mankind for millennia. It is currently experiencing rapid growth due to the lifestyle factors associated with modern urban life: western diet and lack of exercise. Type 2 diabetes, also known as adult onset diabetes, makes up 90% of the diabetes market. There is no cure for this condition except purchasing expensive insulin products from Novo, Sanofi and other drug companies.
As India and China urbanize and develop a middle class, there could be a large pool of new customers. Even the United States is a great growth opportunity; according to the American Diabetes Association and the CDC, if current trends continue, 1 in 3 American will have diabetes by 2050.
Novo is highly profitable. Last year, gross margins were 85%. Operating margins were 45%; that is an incredible number and beats almost anything I’ve seen (Coca-Cola’s is 20%, Starbucks’ is 19%, Walmart’s is 5%).
Due to pricing pressures in the US and European markets, management has reduced long-term revenue and operating income targets to 5% from 10%. This is a very sharp reduction and has led to a steep drop off in the share price. Shares reached a two year low today at close to $34.
At this price, the trailing 5-year P/E is 22x (a little pricey) and the forward 2016 P/E is 15x (quite reasonable). The shares sport a 2.79% dividend yield.
Based on my analysis, long term total returns on common shares (share price appreciation plus dividends) are expected to be 10-11% going forward. However, if shares are purchased below today’s prices or growth exceeds the new 5% target (quite possible), your results could be even better.
Value Beacon 