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Novo Nordisk: A Rare Case of Pharma With Balanced Risk and Reward

GuruFocus.com

Denmark-based Novo Nordisk (OCSE:NOVO B) (NVO) is a global developer of drugs to treat chronic diseases, including diabetes, obesity and hemophilia. The company has sales in 170 countries.

Diabetes and obesity together accounted for 84% of the company's fiscal 2018 sales. The U.S. is the most significant revenue contributor (49% as of 2018 sales), followed by Europe (19%), Africa, Asia, Middle East and Oceania (11%) and China (10%). Although we are typically cautious about the pipeline risk associated with investing in pharma, we appreciate the strategic focus, dominant market positions and secular growth opportunities at Novo Nordisk.


The company dominates the insulin market in almost every corner of the planet, holding 40% of the market share in North America, 50% in China, 44% in Europe and 50% in Latin America. Overall, it serves roughly 30% of the global diabetes value market, which has been growing at a CAGR of 16% since 2014. Investors may also want to note the significant diebetes market share increase at Eli Lilly (LLY) from 11% in 2009 to over 20% now.

Additionally, with a market share of over 50% (improved from 30% in 2017), Novo Nordisk leads the global obesity value market, which has been growing at a CAGR of 11% since 2017.

Today, around 10% of all adults globally live with diabetes and approximately 13% live with obesity. The prevalence is increasing from year to year, with 1 billion obesity cases expected by 2025 and over 600 million diabetes cases expected by 2045. At the same time, we see that less than 2% of obesity cases are receiving any pharmacological therapy and that only 6% of all diabetes cases are treated with Novo Nordisk's products. A massive runway appears to lie ahead, along with a significant industry tailwind for the business to expand sizably.

According to the chart below, Novo Nordisk delivered an improving and outperforming return on capital for the last decade compared with its major peers, including Eli Lilly, AstraZeneca (LSE:AZN) and Novartis (XSWX:NOVN). This implies the management's skillful capital allocation to grow shareholder value as well as a sustainable competitive advantage to fend off competition.

Thanks to the non-cyclical nature of healthcare, Novo Nordisk was able to increase both its revenue and operating income throughout the previous four economic downturns (see below), making the stock an ideal recession-proof candidate.

It is worth pointing out that Novo Nordisk is a "controlled" company. Novo Nordisk Foundation owns 76.2% voting rights and 28.3% economic interests through the non-floating class-A shares. The B-shares are accessible in the public market, providing the remaining voting power and capital ownership. Under such a structure, investors should take into consideration the issue relating to misalignment of interests. Adding to the minority shareholder risk is a lack of significant ownership among individual insiders, including the Chairman of the Board and other top executives.

Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We own shares of Novo Nordisk.

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This article first appeared on GuruFocus.