Novo Nordisk (NVO -1.93%) is a relatively unknown name in the pharmaceutical industry compared to its peers such as Merck, Johnson & Johnson, Novartis, and Pfizer. The reason is that among its peers, it is the only company that has a concentrated portfolio. For many companies, diversification is the name of the game. But Novo's less-traveled path has delivered to its shareholders for decades. And its future looks brighter than the competition.
Here are three reasons why.
1) Performance history
Novo Nordisk is the leader in diabetes care. It owns one of the broadest product ranges in this segment, including new-generation insulins, a full portfolio of modern insulins, and a once-daily human GLP-1 analog. It has a 48% share of the insulin market by volume. In addition, Novo Nordisk has a leading position in growth hormone therapy (30% market share by value) and a strong presence in hemophilia care and hormone replacement therapy. If this does not mean much to you, look at the tables below. The first compares Novo's financial performance with its two major competitors. The second compares the company with the seven biggest players in the industry. Both tables come to us from data courtesy of S&P Capital IQ. Novo Nordisk outshines every other company.
Table 1: Comparison with competitors
|
Name |
10-Year CAGR Revenue |
Net Operating Margin |
ROIC |
10-Year CAGR Dividend |
|---|---|---|---|---|
|
Eli Lilly |
4.59% |
12.20% |
12.20% |
3.57% |
|
Sanofi |
14.10% |
5.90% |
5.90% |
10.63% |
|
Novo Nordisk |
11.92% |
30.79% |
54.90% |
26.18% |
Table 2: Comparison with peers
|
Name |
10 years CAGR Revenue |
Net Operating Margins |
ROIC |
10 year CAGR Dividend |
|---|---|---|---|---|
|
Pfizer |
-0.15% |
20.67% |
8.80% |
4.56% |
|
GlaxoSmithKline |
1.75% |
20.07% |
15.90% |
6.41% |
|
AstraZenca |
2.62% |
7.82% |
12.00% |
12.86% |
|
Roche |
3.78% |
22.50% |
27.10% |
16.80% |
|
J&J |
5.09% |
21.15% |
14.20% |
10.31% |
|
Merck |
6.57% |
13.16% |
8.10% |
1.70% |
|
Novartis |
8.35% |
15.73% |
8.20% |
13.15% |
|
Novo Nordisk |
11.92% |
30.79% |
54.90% |
26.18% |
2) Opportunities and strategy
Currently, 382 million people suffer from diabetes, and the number is expected to grow to 600 million by 2035. Only one-fourth of today's patients receive proper medication. So there is a huge untapped market.
The disease is spreading at an alarming rate in low and middle-income countries due to changes in lifestyle associated with growth and urbanization. Novo Nordisk has served 24.3 million people to date and expects to serve 40 million by 2020.
The company also aims to establish its presence in the obesity market. There are around 1.4 billion adults suffering from obesity around the world, and many have very few medical options available. A U.S. Food and Drug Administration advisory panel has already recommended approval of one of Novo Nordisk's obesity-fighting drugs.
Overall, the company should be able to grow its revenue by 10%-12% annually for next five years. It expects to improve its operating margin by another 2%-3% in coming years.
3) The patent cliff
Many companies, including Sanofi, Eli Lilly, Novartis, and Merck, either are experiencing the patent cliff or are imminently facing it. However, Novo Nordisk has two major advantages here over these rivals. First, the company has the strongest drug pipeline in diabetes, with a number of later-stage drugs and an exciting growth portfolio. Second, the company mostly generates revenue from biologics -- drugs that are manufactured from living cells and are harder to copy than small molecules.
Foolish takeaway
Like other pharmaceutical companies, Novo Nordisk faces regulatory rejection of its new drugs or further scrutiny of its established products. However, if you sum up its past, present, and future, you will find a gem. It is trading at a forward P/E of 23.5, which is not cheap. But as Warren Buffett has said, "It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." And this company supersedes all its peers and competitors in excellence.
