What we think about Novo Nordisk (NVO)
Breaking Update: President-elect Donald Trump is threatening higher tariffs against Denmark over its ownership of Greenland. The impact of the tariffs on Denmark-based Novo Nordisk is still uncertain..
Background
Founded a century ago, Denmark-based Novo Nordisk is the world's leader in diabetes care. Over the past 100 years, Novo made a name for itself through the dependable and commercial-scale production of insulin. Its semaglutide glucagon-like peptide-1 (GLP-1) drugs, which are marketed as Ozempic and Rybelsus, are injected or taken as oral tablets to increase the secretion of insulin and to treat Type 2 diabetes.
Novo sold $26 billion USD (173 billion Danish Kroner, DKK) worth of diabetes care drugs to 40 million people in 2023, which represented around one-third of the $80 billion global diabetes market. Type 2 diabetes is increasing in prevalence, and Novo's patient count still represents less than 8% of the 537 million people globally who are estimated to be living with diabetes. That number could increase to 784 million during the next two decades.
Yet there's an even larger market for weight loss, which Novo has just begun to tap into. Its GLP-1 inhibitors are already showing results at parity with bariatric surgery as a treatment for adult obesity. Large insurers including UnitedHealth Group are on fully-onboard, helping Novo's obesity care revenues more than triple to $6.2 billion USD in 2023.
There are 813 million adults globally living with obesity, who run a greater risk of heart attacks and liver disease. Novo today has 179,000 doctors who have written at least one patient script for Wegovy (which is also semaglutide, but a different dosage than Ozempic). And while there are 50 million Americans who are either partially or fully-covered for insurance reimbursement, only around 500,000 people are currently taking the company's medications for obesity.
The market has taken full notice of Novo's potential. At 43x trailing earnings and 60x trailing free cash flow, the stock is quite expensive. After generating a 250% investment return during the past three years and now with a market cap of more than half a trillion dollars, many wonder if Ozempic's rising popularity is already fully baked into Novo's current stock price.
Yet there's no denying that there's plenty growth on the horizon. Novo's core patents for semaglutide run through 2032, and this centenarian innovator's best-in-class drugs have now found a massive new market to expand into.
Thoughts on Current Valuation and Capital Allocation
Even as a very mature company, Novo’s stock is perennially expensive. Yet the 40% selloff from its highs of last summer are finally giving us a nice entry point for a new position.
At $85 per share, Novo Nordisk currently sells for 10x trailing sales, 27x earnings, 22x operating cash flow, and 39x free cash flow. No one’s referring to those multiples as a fire sale bargain, but Novo is also a... best-in-class company who’s leading the charge into a new market that could be worth up to $80 billion. And with the exception of P/FCF, each of those multiples are the most attractive we’ve seen since 2021. Join 7investing to get access to this section
Conviction Rating Changes:
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