Dave Ahern's avatar
$4.8m follower assets
$NVO Shallow Dive into this Interseting Pharma Company
Today's shallow dive focuses on $NVO Novo Nordisk, the global leader in diabetes with a market share of 31%+. We will look at the biz model, moat, capital allocation, mgmt, and valuation.

Cool money stuff from @stratosphereio

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Novo Nordisk or NVO is a global healthcare business headquartered in Denmark. They focus on diabetes and obesity medicines with a market cap of 322 dkk million. Last year they generated revenues of DKK 176,954 million and cash flow of DKK 57,362 million.

NVO reports in two segments:
  • 💊Diabetes/Obesity
  • 💉Rare Diseases
In FY2022, NVO reported diabetes/obesity sales of 88%, and Rare Diseases occupying the other 12%.

*A note, all financials will be in DKK (Danish crones), and valuation will be done in US$ *

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We can breakdown $NVO's biz model into 3 main components:

  • 🔬Innovation
  • 🏭Manufacturing
  • ⚕️Commercialization
Because $NVO operates as a vertically integrated operation allowing them to control discovery, creation, distribution, and costs of any new pipeline drugs. We can group $NVO's biz by three areas of concentration:
  • 💊Diabetes
  • ⚖️Obesity
  • 🔬Rare Diseases
Let dig into each a bit, shall we?

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$NVO continues as one of the leading diabetes biz globally. With over 45% market share globally in insulin, while the GLP-1 receptor market share hovers around 55%. Overal $NVO enjoys a 32% market share in the US and global.

The GLP-1 has become critically important to $NVO

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So what is GLP-1? And how is it impacting $NVO? The normal cycle of the pharma world is for one drug/treatment to wane and another to rise up and take its place. This is happening with $NVO as well, with the rise in Ozempic/Wegovy and other drugs.

While $NVO is seeing a drop in insulin sales, it is seeing a rapid increase in GLP-1 over the past few years, and obesity just starting to get traction. The company expects GLP-1 to drive growth in the near term, while obesity should kick into hyper drive in 2026.

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Much of the company's continued growth will stem from the growing obesity problems around the globe, which will also increase diabetes. $NVO has positioned themselves to be one of the leaders helping in the growing "pandemic" of obesity.

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Ozempic is among the most popular for GLP-1 market as of FY2022. In addition to diet and exercise, ozempic is used to treat type 2 diabetes not effectively controlled. Although the body can still create some insulin in type-2 diabetes, it struggles to produce enough.

When a person has type 1 diabetes, their body is no longer able to generate insulin and they must take injections like NovoRapid. Type-1 diabetes is far less common than type-2 diabetes.

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Now, from the standpoint of an investor, it's interesting that insulin and GLP-1 meds are a subscription-based company. $NVO could be resistant to economic downturns because patients can't stop taking their meds, even though its wrong on a moral level to think this way.

$NVO developed the GLP-1 part of the biz to help patients move away from injecting insulin everyday. While using this knowledge to help treat the "causes" of Type-2, obesity, which could lead to more growth. For $NVO, obesity and type-2 drugs shouldn't conflict with sales.

As we can see from the screenshot below, the US and Middle East are the most at risk for obesity and $NVO predicts over 650 million live with obesity, and of these only 13 million receive med help (2%). That's a big opportunity for NVO in both diabetes and obesity.

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$NVO's other segment, Rare Diseases focuses on rare bleeding disorders, growth hormone therapy, and hormone replacement therapy. While obviously important, the segment has seen slower growoth over the past five years, and only 1% in 2022.

Moving on to capital allocation and pipeline. $NVO's pipeline helps restart the clock on both meds, along with growth opportunities. $NVO has a rockstar pipeline right now. For example, once a week insulin, icodec is almost ready and will help change the insulin market. NVO continues to invest in R&D as the bread and butter of the biz.

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The ratio of R&D to revenue was 13.36% in 2022, 12.62% in 2021, and 11.89% in 2020. Commentary from Martin Lange highlights to coming pipeline and what NVO contienues to focus on.

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$NVO expects capex to reach DKK 25 billion in 2023, an increase of over 100%+ compared to 2022. The expect capex to sales to remain in low-double digits in the near term. $NVO is investing in updating manufacturing sites, and expanding capacity

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$NVO has a great reputation for capital allocation, with a strong balance sheet, great investments in R&D and capex, and shareholder distributions via dividends and buybacks. The company currently carries higher debt levels than prior used for acquisitions.

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But with great cash flows and interest coverage, they can easily cover the debt. $NVO can continue investing in future growth opportunities. And on the dividend front, they raised it 19% last year, and have a strong record of growing the divi, along with buybacks. $NVO's dividend has hovered in the 45-50% payout ratio, equal to others in the pharma industry. The current yield = 1.2% and the company returned over 49 bDKK in both buybacks and dividends to shareholders in 2022. While the growing FCF will give them ample room to grow.

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Moving on to management.

The company has a strong Glassdoor rating, with 89% recommending to a friend, and 95% approval of CEO Lars Fruergaard Jorgensen. Jorgensen has been CEO for the past 6+ years, suceeding Lars Sorensen who led the company successfully for 16 years.

The CEO pay breaksdown as follows, 60 DKK million overall, with 17.1 DKK million in salary. His pay splits between 32.3 DKK and 27.8 DKK million in short and long-term respectively. And a further 19.1 in fixed, and 40.1 in variable.

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The short-term incentives are cash, with incentives based on equal parts, sales, operations, ESG, and individual perfomance.

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The long-term based on stock options on a 3-year plan with a following 2-year vesting period of at least 50% of the shares. Love the focus on long-term targets and setting them for operations (costs controls) and sales (growth). Also a fan of mixing short-term incentives with long term, I think it helps align the company with shareholders with the focus on costs and sales.

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On a side note, the more conservative nature of $NVO's comp offsets the bad press around the pharma industry recently, with execs at $LLY taking big payouts and Martin Skrelli and his bad rep. By focusing on operations and sales over a longer-term as opposed to fast money.

Some risks associated with $NVO include regulatory, particularly in the U.S., along with political risks. They also face pressures on pricing, as well as continued pressure to spend on R&D to innovate. Patents expiring put a clock on every drug and thus the need to innovate. $NVO faces competition risk from competitor $LLY, as they have the drug tirzepatide achieved up to 22.5% weight loss over 72 weeks. Wegovy only achieved 15% weight loss over 68 weeks. If LLY achieves better marketing with their drug it could put a damper on Ozempic sales.

If $LLY's drug proves more popular it could present a problem, but realistically the market remains big enough for more than one winner. The U.S. government (Bernie Sanders) have put a lot of pressure on U.S. producers of insulin to lower prices and cap medicare. $LLY recently announced they would cap prices at $35, and others will most likely follow.

The continued pressure to reduce prices could impact the whole industry. $NVO is working to pivot to the GLP-1 type drugs which could offset this risk, at least partially. $NVO has a big Medicare exposre due to U.S. legislation that increased the percentage of the Medicare Part D donut hole covered by manufacturers in 2019 (from 50% to 70%) and increased the size of the donut hole in 2020.

The Medicare negotiation for Ozempic and Rybelsus will probably start in 2026, far before their 2032 patent expirations, and will include a 3% step reduction in U.S. sales starting in 2023 from Medicare inflation caps following the enactment of the Inflation Reduction Act.

Valuation time, using a FCFF model, inputs mine in dollars:

  • Rev growth - 10%
  • ROIC - 66%
  • WACC - 7%
  • Sales to Cap ratio - 1.84
  • Terminal value - 3.92%

All of which gives us a fair value of $165+, compared to the current market price of $143, a 16% margin of safety.

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The company trades at a higher P/E ratio (38 ish), but the company drives higher margins with their profitablity and ridiculous ROICs (over 66% consistently), which drives a higher valuation. All things being equal, the market prices in 8% revenue growth.

$NVO is unquestionably a fantastic biz, with many levers to pull for growth. The company has positioned itself well to help in the growing obesity wave, plus diabetes. It does face fierce competition from $LLY and $SNY, along with governmental pressures. I have no position yet, but I am intrigued, need to do more work on the risks, patents, and pipeline to fully understand the risks.

I could easily write another 2k words on this company without breaking a sweat, there is so much here. I only SCRATCHED the surface here.

If you made it this far, thanks for reading and I hope you find something of value.

To learn more, check out $NVO investor relations, tons of great info there.

If you enjoyed this shallow dive, please consider giving us a follow @ifb_podcast
Todor Kostov's avatar
@ifb_podcast Great post, Dave! Thanks for sharing. I would suggest you listen to the interview with the CEO of Novo Nordisk $NVO just posted.

Dave Ahern's avatar
@kostofff thanks for the kind words and it is on my list for tomorrow, looking forward to it. Thanks for sharing 🙏
Joey Hirendernath's avatar
@quiet_capital and @stockopine would appreciate this shallow dive
Nathan Worden's avatar
Oh wow, yeah $NVO is a diabetes powerhouse. Thanks for the writeup Dave! @ifb_podcast



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