(02/19/15) Novo Nordisk: A Moat in Diabetes

This Denmark-based pharmaceutical stock was down-rated to ‘reduce’ by Swedbank analysts today; I disagree with this move and remain bullish on the shares, explains Vivian Lewis, editor of Global Investing.

Nordic analysts tend to under-estimate Novo Nordisk (NVO). Last year, the firm failed to meet its long-term financial target and barely missed its operating margin targets. Its sales growth in local currencies fell from 12% in 2013 to 8% in 2014 and operating profit growth came in at 13% versus prior year 15% and target 19%.

That is the bad side. The good side is that despite the rising Danish krone, the firm is keeping control of both capital spending and costs of goods sold (COGS) as a percentage of sales.

The main reason for this is NVO has shifted production to China and—to a lesser extent—to its current largest market, the US, which accounts for 49% of sales. China has the fastest-growing diabetes market of all, and thanks to its local production, Novo Nordisk accounts for 58% of China insulin sales.

Worldwide, NVO nabs 46%—the largest share—of the modern insulin market. Modern insulin advantages are that they are easier to administer, weekly, longer-acting, pre-mixed, fast acting, and oral rather than jabbed.

NVO is also diversifying into treatments for gross obesity using diabetes drug Saxenda or Victoza (liraglutide, a GLP-1 analog), which has the side effect of reducing weight.

This will be sold in the US and EU to non-diabetics in 2015 thanks to recently-granted approvals. But the Victoza variant already is the best-seller GLP-1 drug, which is a very fast growing market.

NVO is also in growth hormone therapies with a market leading 33% worldwide share of drug sales. It is developing existing and future hemophilia and growth disorder drugs now in phase III trials.

The Novo7 and 8 hemophilia biologic intravenous injector (for factor VIII and VII deficiency) has been launched in seven EU countries and Japan and is being tested in other blood diseases. Most hemophiliacs in developed countries are not diagnosed properly and are left untreated today.

We got into NVO because of its diabetes specialization, given that aging populations of couch potatoes who are overweight is a visible trend.

The best reason for buying NVO is the moat, the barriers to entry for new biosimilar products confronted by a patent history going back to the 1920s and a strong value chain in protein engineering. It is also helped by being a likely gainer from the stronger dollar.

Novo Nordisk is controlled by the Novo A/S Foundation, which has 74.5% of the voting rights with only 26.5% of the capital. The foundation supports scientific research. We own the B shares, which have only 25.5% of the votes.