World Leader in Diabetes Medication Hits 2-Year Low
- By Aly Mawji
By any metric, Novo Nordisk (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%.
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The intrinsic value of NVO
Novo is focused on just four disease areas: diabetes (79%), obesity (
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 (SNY) 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 U.S. is a great growth opportunity; according to the American Diabetes Association and the Centers for Disease Control and Prevention, if current trends continue, one in three 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 [KO] is 20%, Starbucks' [SBUX] is 19%, Walmart's [WMT] is 5%). Due to pricing pressures in the U.S. and European markets, management has reduced long-term revenue and operating income targets to 5% from 10%. This is a sharp reduction and has led to a steep dropoff in the share price. Shares reached a two-year low Monday at close to $34. At this price, the trailing five-year price-earnings (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% to 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. Disclosure: The author owns shares in Novo Nordisk. Start a free seven-day trial of Premium Membership to GuruFocus.
