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Novo Nordisk: I have never seen such a high ROIC before.

Opdateret: 18. jan.


If you regularly read my posts, you would probably know that I have a penchant for investing in pharmaceuticals. And as I'm Danish, I thought it would be a good time to investigate the large Danish pharmaceutical company Novo Nordisk and determine if you should open a position and at what price.


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 obtaining a copy of 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 objectivitythroughout 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.



I know that Novo Nordisk is well-known in Denmark, but perhaps it is not as widely recognized outside of the country.Novo Nordisk is a multinational pharmaceutical company that manufactures and markets pharmaceutical products and services, specifically focusing on diabetes care medications and devices, as well as obesity treatments. It was founded in 1989 when Novo Industri and Nordisk Gentofte merged. Their most sold therapies are Ozempic, Victoza, and NovoLog.Novo Nordisk's headquarters are located in Bagsværd, which is in Greater Copenhagen. 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 secret moat due to their patents. Meaning that when investing in a pharmaceutical company, you need to know when those patents expire.

Their CEO is Lars Fruergaard Jørgensen. He joined Novo Nordisk all the way back in 1994 and has held various positionsuntil he became the CEO in 2017. He has a Master of Science in Finance and Business Administration from AarhusSchool of Business. He is also a member of the supervisory board at Carlsberg and holds the position of Vice President-elect of the European Federation of Pharmaceutical Industries and Associations. 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 whatever 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 to listen and that a CEO shouldn't focus on dealing with their own problems first. Another interesting thing about Lars Fruergaard Jørgensen is that he allocates time in his calendar for reflection, so he doesn't just have a to-do list every day at work. He won the award as the Leader of the Year in 2020.

I believe that Novo Nordisk has a strong secret moat. And we really like the management too. Now let us investigate thenumbers to see if Novo Nordisk lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "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 10 years of history, and we want the numbers to be above 10% in all the years. Novo Nordisk has delivered a fantastic return on invested capital (ROIC) in every year for the last 10 years. I honestly don't think I have ever seen a company delivering a return on invested capital (ROIC) like this before. There really shouldn't be a concern when looking at numbers like these,but it is worth noting that the last three years have been the years where Novo Nordisk has delivered the lowest ROIC in the last 10 years. However, when a company delivers a 49% ROIC in their worst year, I don't think it is anything to worry about.



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 actualnumbers and the percentage growth year over year. Over the past 10 years, Novo Nordisk has only experienced two minor setbacks. Apart from that, Novo Nordisk has consistently increased their book value + dividend every year, resulting inrecord highs since 2018. Thus, I am very happy to see numbers like these.



Finally, we will investigate 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. Levered free cash flow is the amount of money a company has remaining after paying all of its financial obligations. I use the margin to provide a clearer understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is projected to generate in relation to its market value per share. The first thing I notice is that Novo Nordisk has consistently generated a positive free cash flow for the past 10 years. Novo Nordisk had a record year in 2016, but couldn't quite reach those highs in the period from 2017 to 2020. However, 2021 was a great year, and they reached new highs. They managed to surpass those achievementssignificantly in 2022. Hopefully, it is a trend that will continue. All in all, I am very happy with the numbers. Novo Nordisk has consistently delivered a high levered free cash flow margin, while the low free cash flow yield indicates that the stock is expensive. We will get back to that later, though.



Another important aspect to consider is the level of debt, and it is crucial to determine whether a business has a manageable debt that can be repaid within a period of 3 years. We do this by dividing the total long-term debt by earnings. Making the calculations for Novo Nordisk, it shows that Novo Nordisk has 0,37 years of earnings in debt, which is great. 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 has risks as well. The most obvious risk is their patent on Victoza. The total sales of Victoza were DKK 12.322 million ($1.821) in 2022, making it a significant part of Novo Nordisk's portfolio. It is the third highest-selling therapy. The patent for Victoza has already expired in China and Japan, while it will expire in the U.S. and Europe in 2023. And while Novo Nordisk has reached a settlement with Teva Pharmaceuticals, which means that Teva Pharmaceuticals will not be able to launch a generic version until 2024, it still poses a risk similar to other patent expirations. As with all other pharmaceuticals, there is a risk associated with the research and development of new therapies. It is not only Victoza that has a patent that will expire. Other patents will also expire, which means that Novo Nordisk, like all other pharmaceutical companies, will need to develop new therapies to compensate for the losses. It will always be a risk for pharmaceutical companies, and it is something you need to be aware of when investing in the industry. Price Cap on Insulin. President Biden has advocated for a $35 price cap on the monthly cost of insulin in his State of the Union address. It is significantly cut as the cost of insulin can be 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.


There is also plenty of potential for Novo Nordisk moving forward. Rybelsus is one of their therapies. It is the first and only oral GLP-1, which is believed to set new standards for the treatment of patients with type-2 diabetes. Rybelsus is approved for the treatment of type-2 diabetes in 29 countries, including the United States, Japan, and various countries in Europe. While it will certainly take market share from Ozempic, as it is the same therapy in pill form instead of an injection, it is also expected to take market share from other companies. Rybelsus is now the second-largest contributor to growth in Novo Nordisk, and management is highly confident in its potential. Wegovy is another interesting therapy. While Novo Nordisk has experienced some issues with the delivery of the therapy due to a temporary halt in production by their manufacturer, it still holds significant potential. Wegovy is an injectable prescription medicine used to help adults with obesity lose weight and maintain their weight loss. Obesity care has great potential for growth for Novo Nordisk, and sales in this area grew significantly in 2022. Other areas of growth for Novo Nordisk include the potential for Semaglutide (Ozempic and Rybelsus) to treat mild forms of Alzheimer's disease. Novo Nordisk is currently conducting clinical trials on Rybelsus to determine its effectiveness as a treatment for mild forms of Alzheimer's disease. Another (unfortunate) opportunity for Novo Nordisk is that an increasing number of people worldwide are developing diabetes as a result of an unhealthy lifestyle. 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. Diabetes and obesity care is Novo Nordisk's largest segment, comprising 88% of sales. Besides the treatments we have already mentioned, Novo Nordisk will also roll out other new products in that segment.



All right, we have gone through the numbers, potential and risk regarding Novo Nordisk, and now it is time for us to calculate a price for Novo Nordisk. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS of 3,63 as it was in 2022. I chose an estimated future EPS growth rate of 8% (management expects sales growth between 6-10% and operating profit growth between 4-8%), an estimated future PE of 16 (double the growth rate, as the historical PE for Novo Nordisk has been higher), and we already have a minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $10,96. 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 $5,48 (or lower, obviously) if we use the Margin of Safety price ($2.74 after the stock split September 13, 2023).


Our second way to calculate a buy price is the Ten Cap price, which is also explained at "MY STRATEGY". In order to do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions and in Danish Kroner. The operating cash flow last year was 78.887. The capital expenditures were 14.753. I tried to look through their annualreport to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 10.327 in our further calculations. The tax provision was 13.537. We have 2.249,9 outstanding shares. Hence, the calculation will be like this: (78.887 - 10.327 + 13.537) / 2.249,9 x 10 = DKK 364,89 = $53,93 in Ten Cap price (DKK 182,45 or $26.97 after the stock split September 13, 2023). .


The last calculation is the Payback Time. I also described in "MY STRATEGY". With Novo Nordisk's Free Cash Flow Per Share at $4,25 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $48,82 ($24.41 after the stock split September 13, 2023).


I believe that Novo Nordisk is a great company with excellent management. I believe they will do very well in the future due to the reasons mentioned in the analysis. There are some minor concerns regarding the loss of patent for Victoza. It is also unclear how the price cap on insulin in the United States may affect future profits for Novo Nordisk. However, Novo Nordisk is developing treatments for areas that will unfortunately experience future growth, as cases of obesity and diabetes are increasing worldwide. Novo Nordisk is a fantastic company, but it is never really cheap. I have great faith in Novo Nordisk moving forward, which is why I would buy it if it reached the highest intrinsic value price that I have calculated. This price is determined by multiplying the Ten Cap price by two. Thus, I will buy Novo Nordisk if it reaches DKK 729,78. Unfortunately, I don't think it will ever reach that price.


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