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Novo Nordisk: A global leader in obesity and diabetes therapies

Opdateret: 1. maj


Novo Nordisk is a global leader in obesity and diabetes therapies. As the unmet needs in type 2 diabetes and obesity are growing daily, the increasing prevalence of these closely related threats to global health has led to a surge in demand for Novo Nordisk's therapies. And these needs for Novo Nordisk's products are not expected to disappear anytime soon, as a report by the World Obesity Federation found that half of the world's population will be overweight or obese by 2035.


This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.


Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.


I should probably start by telling you that I do own shares in Novo Nordisk outside of eToro. It was actually the first stock I ever bought, which is natural for a Dane, as I believe it is the most popular stock to own in Denmark. If you follow me, you would also know that I am particularly fond of investing in pharmaceuticals because they are safeguarded by their patents. If you are interested in viewing or copying my portfolio, you can find instructions on how to do so here. However, I will not let any of these factors influence my analysis of Novo Nordisk, as I will maintain objectivity throughout this analysis. If you want to purchase shares or fractional shares of Novo Nordisk, you can do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.



Novo Nordisk was founded in 1923 in Bagsværd, a suburb of Copenhagen, Denmark. Novo Nordisk engages in the research and development, manufacture, and distribution of pharmaceutical products. It operates in two segments: Diabetes and Obesity Care, and Rare Disease. The Diabetes and Obesity Care segment provides products for diabetes, obesity, cardiovascular, and other emerging therapy areas. The Rare Disease segment offers products in the areas of rare blood disorders, rare endocrine disorders, and hormone replacement therapy. The company also provides insulin pens, growth hormone pens, and injection needles. In addition, it offers intelligent solutions for diabetes treatment, such as smart insulin pens and Dose Check, an insulin dose guidance application. The company has a collaboration agreement with Aspen Pharmaceuticals to produce insulin products. As with all other pharmaceutical companies, it is not difficult to determine a moat for Novo Nordisk. All pharmaceutical companies, including Novo Nordisk, have a moat due to their patents. Meaning that when investing in a pharmaceutical company, you need to know when those patents expire.

The CEO is Lars Fruergaard Jørgensen. He joined Novo Nordisk in 1994 and has held various positions until he became the CEO in 2017. He has a Master of Science in Finance and Business Administration from Aarhus School of Business. He also serves as the President of the European Federation of Pharmaceutical Industries and Associations (EFPIA) and as a member of the Board of Directors at Danmarks Nationalbank (the Danish central bank). He was named Person of the Year by the Financial Times in 2023, an award presented to the most influential person of the year. As the Person of the Year, he follows past recipients such as Bill Gates, Steve Jobs, Barack Obama, Angela Merkel, Jack Ma, Donald Trump, and Elon Musk. The Financial Times stated that "everything about Lars Fruergaard Sørensen is understated." His management style is something that I would describe as typically Danish, which I obviously like. He hosts something called Lars Live meetings, where everyone can participate and ask him any questions they want. He believes that these meetings build trust among the employees. He also believes that the most important qualities as a leader are listening and that a CEO shouldn't focus on dealing with their own problems first. Another interesting aspect of Lars Fruergaard Jørgensen is that he schedules time in his calendar for reflection, ensuring that he doesn't solely rely on a daily to-do list at work. He won the award for Leader of the Year in 2020.

I believe that Novo Nordisk has a strong moat. And we really like the management as well. Now, let us investigate the numbers to see if Novo Nordisk lives up to our requirements for a strong moat. In case you want an explanation about what the numbers represent, you can refer to "MY STRATEGY" on the website.


The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% each year. Novo Nordisk has consistently delivered a remarkable return on invested capital (ROIC) over the past 10 years. Very few companies manage to deliver a Return on Invested Capital (ROIC) like Novo Nordisk. Over the past 10 years, the Return on Invested Capital (ROIC) has never been below 53%, and in eight out of the past ten years, it has been above 60%. ROIC has decreased slightly from 2018 onwards, but Novo Nordisk managed to halt that trend in 2023 when ROIC increased once again. These numbers are very encouraging, as only a few companies manage to deliver a consistent Return on Invested Capital (ROIC) at these levels.



The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. There have been two years with a slight decrease, but it is hardly anything to worry about. Novo Nordisk has managed to grow its equity year over year in eight out of the past ten years and reached an all-time high in 2023. Not only did Novo Nordisk manage to reach an all-time high in 2023, but it also marked the largest year-over-year increase in the past decade. Thus, I am very encouraged by seeing these numbers.



Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins offer a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Novo Nordisk has managed to deliver a positive free cash flow every year in the past decade. Novo Nordisk has managed to deliver its highest free cash flow in the past three years. Levered free cash flow margin has also been high in the past four years, but it did decrease slightly in 2023. Nonetheless, the levered free cash flow margin in 2023 was still above the ten-year average, which is encouraging. The free cash flow yield is at its lowest point in ten years, which indicates that the shares are trading at an expensive valuation, but we will revisit this later in the analysis.



Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. When calculating Novo Nordisk's financials, it is evident that the company has 0,19 years of earnings in debt, a figure well below the three-year threshold. Hence, debt is not a concern if you are considering investing in Novo Nordisk.



Based on my findings thus far, I believe that Novo Nordisk is an excellent company. However, no investments are without risk, and Novo Nordisk also carries risks. One risk is patent losses. Patents covering Novo Nordisk's products typically provide market exclusivity, which is essential for the profitability of many of Novo Nordisk's products. As patents for certain of its products expire, Novo Nordisk could face competition from lower-priced generic or biosimilar products. The expiration or loss of patent protection for a product is usually followed promptly by substitutes that may significantly reduce sales for that product in a short period of time. Novo Nordisk's patent for its first-generation GLP-1 diabetes therapy, Victoza, expired in 2023. Novo Nordisk has reached a settlement with Teva Pharmaceuticals, which means that Teva Pharmaceuticals will not be able to launch a generic version until June 2024. Not only Teva Pharmaceuticals but also Viatris and Sandoz are planning to launch generic versions. Novo Nordisk. The patent for another therapy, Saxenda, also expired in 2023. Price Cap on Insulin. The Inflation Reduction Act, which President Biden signed into law in 2022, reduced the cost of insulin to $35 per month for Medicare patients. But the president has made it clear that he is thinking much more broadly. President Biden has advocated for a $35 price cap on the monthly cost of insulin for every American who needs it in his State of the Union address. The cost of insulin can be significantly high, reaching up to $1.300 per month for those without insurance. It is still unclear whether it will be approved and how it will impact companies in the sector. However, implementing a price cap will inevitably have a detrimental effect on companies. Novo Nordisk, with a global market share of 43,8% in insulin, would also be impacted if the United States were to pass the Affordable Insulin Now Act. Laws and regulations. While Novo Nordisk is Danish, the U.S. market is the largest healthcare market in the world. The U.S. healthcare industry, in particular, is highly regulated and is subject to frequent and substantial regulatory changes. It is expected that the U.S. healthcare industry will continue to be subject to increasing regulation, political, and legal actions as future proposals to reform the healthcare system are considered by the executive branch, Congress, and state legislatures. According to Fitch Ratings, pharmaceutical companies are facing escalating legislative and regulatory challenges that could increase their business and financial risk profiles. Fitch Ratings believes that sector margins will face pressure from lower negotiated prices, while regulatory challenges to mergers and acquisitions (M&A) will make it more difficult for companies to address patent cliffs for existing products.



There is also plenty of potential for Novo Nordisk moving forward. One issue is its Obesity Care. Obesity is a serious chronic disease with a significant unmet medical need that affects many aspects of a patient's life. Research conducted by the World Obesity Federation indicates that half of the world's population will be overweight or obese by 2035. Novo Nordisk has launched Wegovy, which is an injectable prescription medicine used to assist adults with obesity in losing weight and maintaining their weight loss. And it has been a great success for Novo Nordisk. Obesity care sales grew by 154% in 2023 compared to 2022, and Novo Nordisk believes that this trend will continue as the company has not been able to keep up with demand. Novo Nordisk plans to launch Wegovy in new international markets in 2024. Furthermore, management has mentioned that they generally observe a longer stay time on Wegovy compared to previous anti-obesity treatments. This indicates that fewer patients discontinue the use of Wegovy. Diabetes Care. With a 29% increase in sales in Diabetes Care in 2023, Novo Nordisk is growing faster than the overall diabetes market. As a result, its global market share in the diabetes sector increased to 33,8%, surpassing one-third of the global diabetes market value. This increase reflects market share gains in both North American and international operations. Within the diabetes market, Ozempic maintains its leadership in the GLP-1 segment with a market share of 47,5%, while Rybelsus holds just under 14% of the market share in terms of value, driven by a strong increase across different geographical regions. Novo Nordisk has also seen great results in its Phase 3 clinical trial of IcoSema, which has the potential to streamline insulin intensification by addressing the main patient barriers. IcoSema sets a new standard for once-weekly treatment by reducing the annual injections from around 1.450 to 52 injections. According to the International Diabetes Federation, the number of people with diabetes is projected to increase from 463 million today to 700 million by 2045. This indicates that it will be a significant market for Novo Nordisk for years to come. Expanding capacity. Management has mentioned that their focus will be on the continued significant expansion of Novo Nordisk's production capacity in 2024 to reach more patients. It is important because Novo Nordisk could have sold more of their therapies if they had expanded further. When management was asked about the pressure on Wegovy from its main competitor, Eli Lilly, they responded that it is more a question of supply capacity. They clarified that they are not currently competing for market share due to the substantial size of the markets. This indicates that the demand for both Novo Nordisk and Eli Lilly's products is so high that direct competition has not yet begun. Management has mentioned that Novo Nordisk will continue to expand capacities in the years to come due to the significant unmet need that they are observing. Thus, increasing capacity could significantly boost sales.



Now it is time to calculate the share price of Novo Nordisk. I perform three different calculations that I learned at a Phil Town seminar. The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of DKK 19,27, which is from the year 2023. I have selected a projected future EPS growth rate of 15%. Finbox expects EPS to grow by 15,3% in the next five years. Additionally, I have selected a projected future P/E ratio of 30, which is double the growth rate. This decision is based on Novo Nordisk's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be DKK 558,60. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Novo Nordisk at a price of DKK 279,30, which is $40,01 (or lower obviously) if we use the Margin of Safety price.


The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 108.908, and capital expenditures were 38.896. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 27.227 in our calculations. The tax provision was 20.991. We have 4.458,288 outstanding shares. Hence, the calculation will be as follows: (108.908 – 27.227 + 20.991) / 4.458,288 x 10 = DKK 230,29, which is $32,99 in Ten Cap price.


The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Nordisk's free cash flow per share at DKK 19,30 and a growth rate of 15%, if you want to recoup your investment in 8 years, the Payback Time price is DKK 304,67, which is $43,64.


I believe that Novo Nordisk is a great company with excellent management. Novo Nordisk has consistently delivered a high Return on Invested Capital (ROIC), which is something I really appreciate. Novo Nordisk is facing risks related to patent expirations. Novo Nordisk had two patents expiring in 2023, but they had already launched their replacements. However, as with all other pharmaceutical companies, patent expirations are an ongoing risk because companies will need to develop replacements. Laws and regulations pose ongoing risks for pharmaceutical companies. Fitch Ratings believes that pharmaceutical companies are encountering increasing legislative and regulatory challenges that could elevate their business and financial risk profiles. Finally, if President Joe Biden manages to lower the prices of insulin for uninsured Americans, it will also affect Novo Nordisk, but it is uncertain to what extent. Novo Nordisk operates within the fields of obesity and diabetes, two therapeutic areas expected to continue growing. Novo Nordisk cannot keep up with the demand, which is why Wegovy has not been launched in all markets yet. As Novo Nordisk expands its capacity, sales are expected to increase. These rising sales are anticipated to be long-term as patients are staying on Wegovy longer than on other anti-obesity treatments in the past. Finally, IcoSema could potentially change the lives of diabetes patients as they will only need one injection a week. This could be a major growth catalyst for Novo Nordisk, considering the expected increase in the number of people with diabetes. I really like Novo Nordisk, and I will buy shares if they reach DKK 610 (DKK is Danish Kroner), which is the intrinsic value based on the Payback Time price. If you buy U.S.-listed shares, you can see what the conversion rate is on that day.


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