Novo Nordisk A/S's Brief Value Run Seems Over

Novo Nordisk has a fortress franchise in diabetes, but how much should investors pay for a fortress these days?

Feb 12, 2014 at 6:30PM

Novo Nordisk (NYSE:NVO) has long been one of the best-run, most-focused, and most-successful specialty drug companies. It has also long been one of the most expensive, as investors have happily paid up for clockwork growth, leading share, and an excellent R&D enterprise.

The past year was an unusual one for Novo, though, as there were some real setbacks in the company's operations. Those setbacks had the shares trading for as close to "value" as it has in a long time, but the 30% run since November has these shares back at a premium valuation.

Closing a tough year on a weak note
Novo Nordisk did not have an especially good fourth quarter report, though most drug companies would consider themselves lucky to report these numbers for their own business. Revenue rose more than 3% as reported and about 10% in local currencies, but missed sell-side expectations by about 1% to 2%. Diabetes care sales rose nearly 4% as reported (and, again, about 10% in local currencies) as Victoza sales rose 25% and insulin analog sales climbed another 14% (both in local currencies).

Novo's gross margin was mixed; better than expected by almost a point, but still down a bit from last year. Novo also out-spent expectations on SG&A and R&D, leading to operating income growth of 9% but a 5% miss.

Is Express Scripts The First Battle In A Larger War?
Novo Nordisk lost its contract with Express Scripts, a large PBM services company that serves roughly 12% of U.S. covered lives. This was expected to be a serious headwind for both Victoza and NovoLog market share, but the initial impact has been less than feared. Prescription trends suggest Novo has lost about 2% to 4% of its prescription share, with the losses flattening. It's still very early, but it does not appear as though AstraZeneca and Lilly (NYSE:LLY) will gain as much from this move as previously thought.

My concern, though, is whether this is just an opening salvo. The three insulin companies (Sanofi, Lilly, and Novo Nordisk) have been enjoying strong pricing power of late, but more and more attention is being paid to the question of cost and how health care systems can/will afford to manage the growing incidence of diabetes worldwide (rising around 7% a year of late).

With that, I expect biosimilar insulins to be popular ... if and when they make it to market. Developing biosimilar insulin has proven challenging (Teva and Pfizer abandoned earlier partnerships), and Sanofi has filed suit to block, or at least delay, Lilly's attempt at biosimilar Lantus. If biosimilars are slow to market or fail to gain significant share, Novo Nordisk (as well as Lilly and Sanofi) may see more dramatic or drastic efforts to combat future price hikes.

Most of the data-related news in 2014 will be from others
Novo Nordisk has a deep and interesting pipeline, but 2014 is going to be pretty lackluster in terms of data coming from the company. There's a slim chance of data on oral semaglutide late in the year, and there will likely be an advisory panel meeting for the company's submission of 3mg liraglutide as a treatment for obesity.

Novo's competitors will be more active, though. Lilly will be reporting data from the AWARD-6 non-inferiority study comparing its GLP-1 drug dulaglutide to Victoza. Novo has seen Victoza withstand prior challenges from Sanofi's Lyxumia (and Sanofi) has pulled its U.S. application) and AstraZeneca's Victoza, but dulaglutide is expected to be a more formidable challenger. The data suggest that dulaglutide is competitive on HbA1c reduction but perhaps not as much on weight loss. Given the dynamics of the GLP-1 market, unless the data shows real superiority or Lilly is willing to compete aggressively on price, I think it will take a while for Lilly to really grab share.

In other news, Sanofi will be reporting data on its LixiLan combination of Lyxumia (GLP-1) and Lantus (insulin). As a reminder, Novo's combination IDegLira is being held up by the requirement of a multiyear CV outcomes study of Tresiba (the long-acting insulin). Lilly is also expected to report data around the middle of the year on Peglispro – a potential rival to Sanofi's Lantus and Novo's Tresiba and Levemir, but one with real concerns about potential side-effects.

A deep pipeline to generate value
Novo Nordisk is one of the relatively few companies still willing to make a major commitment to ongoing diabetes drug development. Tresiba (a long-acting insulin to rival Sanofi's Lantus or U300) has been held up by the need for an additional U.S. study, but interim data should be available in a couple of years. Meanwhile, the company is working on a longer-acting GLP-1 drug (semaglutide), as well as an oral formulation. Novo is also working on oral insulin, and while this is a low-probability candidate, the potential is huge. On the negative side, the company does lack DPP-IV and SGLT drugs, and doesn't seem quite as interesting in exploring new drug classes at the moment. 

The bottom line
Valuation is almost always an issue with Novo Nordisk, and so it is today. Some will argue that Novo Nordisk's high share (nearly 50% of the global insulin market and about 5% of the non-insulin diabetes medication market) deserves a premium, particularly given the underlying growth in diabetes. You could also argue, though, that Novo has above-average sensitivity to efforts to combat price inflation in diabetes therapy and the FDA's increasingly demanding requirements for new diabetes medications.

I believe Novo Nordisk will continue to grow its free cash flow at a very high single-digit rate, but I think the stock is priced more for mid-to-high single-digit returns over the long-term. That's OK, but I generally shoot for more than "OK" when considering new investment ideas.

3 stocks to help you retire rich
It's no secret that investors tend to be impatient with the market, but the best investment strategy is to buy shares in solid businesses and keep them for the long term. In the special free report "3 Stocks That Will Help You Retire Rich," The Motley Fool shares investment ideas and strategies that could help you build wealth for years to come. Click here to grab your free copy today.

Stephen D. Simpson, CFA has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers