Novo Nordisk (NYSE: NVO) has two macro tailwinds propelling the stock. Namely, its keen interest in treating diabetes and obesity.
Diabetes and obesity are two undeniable health problems facing the western world. Sedentary lifestyles and unhealthy diets mean these conditions are growing at an alarming rate, particularly when it comes to younger generations. But is the rise of these conditions reason enough to buy NVO shares?
Who is Novo Nordisk?
Novo Nordisk A/S is a globally focused healthcare company based in Denmark. Operating through its Diabetes and Obesity Care and Biopharm segments, the company develops various medicines.
Novo's Diabetes and Obesity Care segment includes insulin, GLP-1 and related delivery systems, oral antidiabetic products (OAD), obesity, and other serious chronic diseases.
GLP-1s are a group of medications that increase levels of hormones called incretins. These hormones stabilize insulin production in the body and can reduce appetite.
The company's Biopharm segment focuses on rare blood disorders, rare endocrine disorders, and hormone replacement therapy.
Left untreated, diabetes can lead to several debilitating conditions, including cardiovascular disease and even death.
NVO Q1 Results
The company enjoyed strong growth last year, with sales growth up 14%. This growth is supported by all its therapy areas, primarily driven by solid momentum in the GLP-1-based franchises concerning diabetes and obesity.
In its Q1 earnings call Camilla Sylvest, Executive VP of Novo Nordisk, discussed the company's recent growth.
All units are contributing to company growth with 18% sales growth driven by a combination of strong growth in International Operations of 13% and North America Operations growing by 24%.
In therapy area distribution, Novo Nordisk sees mounting demand in GLP-1 (especially Ozempic), along with 107% growth in its obesity franchise. However, the company saw its insulin growth rate slip.
Novo's drugs Wegovy and Ozempic are seeing rising momentum in demand, with more patients requesting them directly from GPs. The company is confident this will continue and has raised guidance in response.
Q1 Highlights
Commercial Execution
Diabetes market share value increased by 1.2% to 30.5%
Obesity care sales increased by 107% at constant exchange rates to DKK 3.4bn ($0.48bn)
Rare disease sales increased by 3% at CER to DKK 5.4bn ($0.76bn)
Financials
Sales growth of 18% and operating profit growth of 18%:
Sales in International Operations grew by 13%
US Sales increased by 23%, with 67% of sales coming from products launched since 2015
Gross margin positively impacted by continued productivity gains in Product Supply
Free cash flow of DKK 21.6bn ($3.04bn) and DKK 20bn ($2.82bn) returned to shareholders in Q1
Innovation and therapeutic focus
Raising the innovation bar for Diabetes treatment:
In March, Ozempic® 2.0mg was approved in the US to treat Type 2 diabetes in adults
Successful completion of first phase 3 trial with once-weekly insulin Icodec
Phase 1 trial with Ideal Pump insulin successfully completed
Phase 1 trial initiated with a once-daily oral GLP-1/GIP agonist
Completed Concizumab phase 3 trial successfully in people with hemophilia A and B with inhibitors
The company is strengthening its rare disease pipeline
Recent Share Price Movement
From the March COVID-19 low to December 2021, NVO stock enjoyed a steady climb. It fell back in January and proceeded to mark a 52-week high above $122 in April. Since then, it's fallen back 15%.
Projected Growth rate vs. P/E
Novo Nordisk is working with a stable margin outlook in the medium term. It plans to pursue investment in R&D while maintaining higher sales growth rates of around 15%.
Novo Nordisk's price-to-earnings ratio (P/E) for the last twelve months is 30.7 and for the next twelve months is 28.4.
Meanwhile, the company's current price-to-sales ratio (P/S) is 11.5, which is close to double where it's been over the past decade.
Its PEG ratio is 2.1 for the year ahead. However, if Novo Nordisk's growth rate slips, this PEG ratio could go higher.
All these metrics point to an expensive stock.
Gross Profit Margin
The company's gross profit margin was the same in 2021 as it was in 2012, while its net margin has improved slightly but remained steady during the past five years.
Gross Margin: 82 (Dec 2021) vs. 82 (Dec 2012)
In Q1 2022, Novo's gross margin increased to 83.5% compared to 82.8% Y/Y. This was mainly driven by increased GLP-1 sales, a positive currency impact of 0.5%, and productivity improvements. These effects are countered by lower realized prices, mainly in the US.
Net Profit Margin
Net Margin: 33.9 (Dec 2021) vs. 27.5 (Dec 2012)
Revenues
Sales have steadily risen from around $13bn in 2012 to about $22bn in 2021, with a $3bn jump last year.
CAGR
Last year's financial results have boosted NVO's Compound Annual Growth Rate (CAGR).
Return on Equity (ROE): 72.7% (5-Year CAGR)
Sales: 33.4% (1-year CAGR)
Sales: 12.9% (5-year CAGR)
Free Cash Flow: 26.7% (1-year CAGR)
Free Cash Flow: 10.8% (5-year CAGR)
The company's clear base plan is to be investing in R&D while growing at higher rates.
It does face inflationary pressures, which may restrict R&D investment.
The company projects sales growth to be between 10% and 14% at constant exchange rates. Meanwhile, NVO shares are selling at a premium of 30 times earnings.
Ultimately Novo Nordisk shares are selling at a high valuation. It essentially has a small upside but a long way to sink if sales fall short, margins are squeezed, or bearish sentiment prevails.
Growing Market Share
Novo Nordisk enjoys a decent slice of the obesity and diabetes medication market with its leading drugs like Ozempic, Vitoza, and Rybelsus. Plus, it has several more in the pipeline.
Demand for weight loss medicine Wegovy exceeded expectations this year, and Novo ran out of supply. The company hopes to make this available during the second half of this year.
The company also runs persuasive marketing campaigns. A recent ad for the diabetes drug Rybelsus encourages diabetics to ask their health care providers about trying Rybelsus.
Novo has put its Wegovy sales and marketing on hold until it produces sufficient supplies.
M&A activity
In May, Novo Nordisk and Flagship Pioneering announced a strategic collaboration to create a portfolio of transformational medicines.
About Flagship Pioneering
Flagship Pioneering develops first-in-category bio-platform companies to transform human health and sustainability. It launched in 2000 and has since helped many companies get up and running. It has deployed over $2.9bn toward growing them.
The current Flagship ecosystem comprises 41 companies, including Axcella Therapeutics (NASDAQ: AXLA), Codiak Biosciences (NASDAQ: CDAK), Denali Therapeutics (NASDAQ: DNLI), Evelo Biosciences (NASDAQ: EVLO), Foghorn Therapeutics (NASDAQ: FHTX), Indigo Ag, Moderna (NASDAQ: MRNA), Omega Therapeutics (NASDAQ: OMGA), Rubius Therapeutics (NASDAQ: RUBY), Sana Biotechnology (NASDAQ: SANA), Seres Therapeutics (NASDAQ: MCRB), and Sigilon Therapeutics (NASDAQ: SGTX).
A lucrative venture
Pioneering Medicines and Novo Nordisk Bio-Innovation Hub will leverage Flagship Pioneering's bio-platform companies to create a portfolio of research programs on cardiometabolic and rare diseases.
This collaboration could prove exciting because it gives scientists and researchers access to extensive resources, multiple biotech companies, and novel, cutting-edge technologies and therapeutic modalities.
Novo Nordisk will provide funding for initiated research programs and have an exclusive option to license each program. The ambition is to begin three to five research programs within the first three years of the collaboration.
Share Buybacks
On 3 May 2022, Novo Nordisk initiated a share repurchase program. This is part of the overall share repurchase program of up to DKK 24bn ($3.38bn) to be executed during a 12-month period beginning 2 February 2022.
Under this latest initiation, Novo Nordisk will repurchase B shares for an amount up to DKK 4.4bn ($0.62bn) in the period from 4 May 2022 to 2 August 2022.
ESG
Lars Fruergaard Jorgensen, President and CEO, Novo Nordisk, stated:
On ESG we are very pleased in how we are living up to both our social and environmental responsibilities, making good progress.
What are analysts saying about NVO stock?
According to consensus estimates on FactSet, analysts have rated NOVO overweight with a target share price of $113.72. Thus, implying a potential 10% upside return.
In recent weeks analyst ratings have generally been revised down while still maintaining a buy or hold rating.
Wider Sector Outlook
Bearish sentiment is driving the markets, and many stocks have taken a hit in recent weeks. As inflation raises the likelihood of a recession, investors seek safe haven stocks.
What constitutes a recession-proof stock?
Traditionally, recession-proof stocks include those in the following sectors:
Utilities
Health Care
Household Products
Energy
Communications
No stock is immune to a correction in a bear market, and volatility is par for the course.
Nevertheless, recession-proof stocks can be a safer way to ride the storm than riskier alternatives.
Is NVO a recession-proof stock?
NVO Share Price Headwinds
Litigation (insulin pricing lawsuits are expected)
Competition (Eli Lilly is a clear rival)
Loss of Market Share
Trials could fail
Inflation
NVO Share Price Tailwinds
Diabetes cases are growing
Leading drugs
Market share is increasing
M&A activity
Strong track record
Dividends and Share Buybacks
Final Thoughts
Last year around 537 million adults were living with diabetes. This is projected to grow to 643 million by 2030 and 783 million by 2045, according to the IDF Diabetes Atlas Edition 2021.
In 2007, diabetes cost the US more than $174bn annually. Last year it cost at least $966bn in health expenditure (9% of total spending on adults).
Obesity is a similar problem. IBISWorld forecasts that 35.4 in every 100 individuals will be classed as obese in 2027. The number is 33 today.
Therefore, the need for diabetes and weight-loss medication is no joke.
While Novo Nordisk is clearly filling this gap, its stock valuation is high, and therefore there's not much room for slippage. If it loses market share to a competitor or fails to meet its growth expectations, its share price could suffer. So, although health care stocks can prove recession-proof, there's added risk if the stock, like NVO, has a lofty valuation.
Nevertheless, Novo Nordisk is addressing health conditions in two growing markets.
NVO stock also sports solid margins and a clear R&D investment path. It also offers investors a 1.4% dividend yield.
Novo Nordisk's P/E is on a par with rival Eli Lilly (NYSE: LLY), but it is considerably higher than pharma peers Novartis (NYSE: NVS), Sanofi (NASDAQ: SNY) and Pfizer (NYSE: PFE).