Should you get a dose of Novo Nordisk?
Opdateret: 3. maj
If you regularly read my posts, you would probably know that I like to invest in pharmaceuticals. And as I'm Danish, I thought it would be a good time to look into 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 as a Dane, as I believe it is the most popular stock to own in Denmark. If you follow me here or on eToro, you would also know that I really like to invest in pharmaceuticals, as they are protected by their patents. However, I will not let any of these things influence my analysis of Novo Nordisk, as I will stay objective throughout this analysis.
I know that everyone in Denmark knows Novo Nordisk but maybe it isn't as well known outside of Denmark. Novo Nordisk is a multinational pharmaceutical that manufactures and markets pharmaceutical products and services specifically diabetes care medications and devices. It was founded in in 1989, where Novo Industri and Nordisk Gentofte merged, and their most sold drugs are Ozempic, Victoza and NovoLog. Novo Nordisk' headquarter is located in Bagsværd, which is located 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 have 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 is also part of the supervisory board at Carlsberg and serves as the vice president elect of the European Federation of Pharmaceutical Industries and Associations. His management style is something that I will describe as typical 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 believes that the most important qualities as a leader is 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 allocated time in his calendar for reflection, so he doesn't just have a to-do list everyday at work. He won the award as the leader of the year in 2020, and he also managed Novo Nordisk to have a great year in 2020.
We now have determined that Novo Nordisk has strong secret moat. And we really like the management as well. Now let us look into the big five numbers in order to see, if Novo Nordisk does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number we will look into is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all of the benchmarks. Novo Nordisk has a fantastic ROIC in all benchmarks. I think it might be one of the best I have ever seen. This is not a growth company but a company that has existed since 1989. Looking at these numbers, you certainly should be encouraged to look further into Novo Nordisk.
The next numbers we will look into are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Once again Novo Nordisk delivers great numbers. They are well above the requirements in all benchmarks and while they do not necessarily grown each year, they are certainly great.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. All right, this is the first time that Novo Nordisk underperform, as the numbers are underwhelming in three out of four benchmarks. They are not alarming at all but just a bit underwhelming. If the tendency continues from last year though, Novo Nordisk will be at a good spot.
The Equity Growth Rate is the most important of the four growth rates. This is exactly what you would like to see in a company. The equity growth rate is above 10 % in all of the benchmarks and it is growing from benchmark to benchmark. Fantastic numbers from Novo Nordisk once again.
Finally we look into the Cash Growth Rates. The numbers are underwhelming in all of the benchmarks except for the last one. Yes, we would like to have a cash growth rate of at least 10 % in all of the benchmarks but while these numbers are below 10 % they are certainly close enough. Nothing to be worried about in my opinion.
To sum up the five numbers. The most important number will always be the ROIC, and the numbers are nothing less than fantastic, as they are much higher than the required 10 % in all of the benchmarks. The equity growth rate is the most important growth rate, and Novo Nordisk has a great equity growth rate in all of the benchmarks and even better, it is actually growing from benchmark to benchmark. The sales growth rate is another example of Novo Nordisk performing well, as it meets the requirements in all of the benchmark. The EPS growth rate and the cash growth rate are both a little underwhelming in some of the benchmarks. However, they are not catastrophic by any means and combined with the other numbers, it shouldn't really matter. It is a very east to make a conclusion based on the numbers, and that is that you should certainly be excited about Novo Nordisk.
Another important thing to look into is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. You can't make these calculations on Novo Nordisk though. The reason you can't is because Novo Nordisk has no debt. It is yet a another factor that makes Novo Nordisk an intriguing investment.
Based on my findings so far, I believe that Novo Nordisk is a great 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 18.747 million in 2020, meaning it is a big part of Novo Nordisk' portfolio. The patent of Victoza has already expired in China, while it will expire in Japan in 2022 and in the U.S. and Europe in 2023. As with all other pharmaceuticals, another risk is the research and development of new drugs, and Novo Nordisk needs to develop some drugs that will make up for the losses of Victoza. While there are other risks as well (Novo Nordisk mentions a bunch in their annual report), I think these are the most important risks to be aware of.
In this section I would like to address the risks that Novo Nordisk faces. Regarding Victoza, Novo Nordisk will still lose their patent but they have made a settlement with Teva Pharmaceuticals (a company that is known for their generic versions of drugs), and due to the settlement, Teva Pharmaceuticals are not expected to launch a generic version of Victoza until June 2024. The pipeline is also looking very interesting, first of all they have launched Rybelsus, which is the first and only oral GLP-1, which is believed to set new standards for treatment of patients with type-2 diabetes. Rybelsus is approved for treatment of type-2 diabetes in Europe, United States and Japan. While it will certainly take market shares from Ozempic, as it is the same drug as a pill instead of an injection, it is expected that it will take market shares from other companies as well. Another interesting drug in the pipeline, which is currently being reviewed by the FDA, is Semaglutide 2.4 mg for weight management. In clinical trials Semaglutide 2,4 mg has demonstrated weight loss of 17-18 % in subjects with obesity without diabetes! If this gets approved, it will be very good news for Novo Nordisk.
Other areas of growth for Novo Nordisk is that it is suggested that Semaglutide (Ozempic and Rybelsus) might be able to cure mild forms of Alzheimers. Novo Nordisk is currently doing clinical trials on Rybelsus to see, if it is an effective cure to mild forms of Alzheimers. Another (sad) upside for Novo Nordisk is that more and more people in the world is getting diabetes due to 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 om 2045. Diabetes and obesity care is Novo Nordisk's largest segment comprising 84% of sales. Besides they drugs 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 a EPS as it is now at DKK 18,05. I chose a Estimated future EPS growth rate of 10,2 (which is the average annual growth rate of Novo Nordisk. Novo Nordisk themselves expect a growth rate of 9% at the highest but I'm more bullish), Estimated future PE 21,20 (which the double of the growth rate, as the historically PE for Novo Nordisk has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of DKK 259,21, and we want to have a margin of safety on 50 %, so we will divide it by 2, meaning that we want to buy Novo Nordisk at price of DKK 129,61 (or lower obviously), if we use the Margin of Safety price.
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 DKK. The operating Cash Flow last year was 51.951 The Capital Expenditures was 22.081. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I wasn't able to find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 15.456,7 in our further calculations. The Tax Provision was 10.992. We have 2.310 outstanding shares. Hence, the calculation will be like this: (51.951 - 15.456,7 + 10.992) / 2.310 x 10 = DKK 205,57 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at DKK 12,38 and a growth rate of 10,6 %, if you want your purchase back in 8 years, the PAYBACK TIME price is DKK 159,98.
I believe that Novo Nordisk is a great company with a great management. I believe they will do very good in the future due to the reasons mentioned in the analysis. There are some slight concerns regarding the patent loss of Victoza. However, based on my findings in this analysis, I would open a position in Novo Nordisk if thee price was right. If you want to get a 50 % discount to intrinsic value, you would need to open a position at DKK 205,57. However, I find it unlikely that Novo Nordisk will ever fall that far again but as the Danish stock market does seem expensive for the time being, it might drop a bit sooner or later. If you prefer to have less than a 50 % discount, you could open a position if the company falls below DKK 411 kroner. Personally, I would feel comfortable in opening a position in Novo Nordisk with less than a 50 % discount of intrinsic value, as it is a solid company with great numbers and no debt.
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