Novo Nordisk (NVO): underestimating the market’s ability to raise quality prices, reaffirming retention

Dear readers/followers,

Novo Nordisk (NVO) is really one of those companies we want to own. Danish – And I don’t own many Danish shares, because they are normally priced very In general, expensive – and qualitatively, with a world leader in A very important segment.

Since I finally wrote about Novo Nordisk, the company has continued to outperform the broader market averages despite what I consider a massive premium and a continuation of the massive premium.

The market takes into account that the company will It succeeds here (at least as much as you think), and continues to generate double-digit EPS growth rates. If the company does so, the company It may be worth 25-28x P/Ebut no matter how you view it, I can’t and won’t fall behind 40 times your normal P/E for the (simple) drug business.

Let’s revisit Novo Nordisk.

Novo Nordisk and its tremendous rating and quality

3Q22 is the latest set of results we obtained for Novo Nordisk. While this company’s results were by no means bad, they did not justify a 40x P/E. The company is the world’s leading diabetes treatment company, with a global market share of 31.6%.

The company blends this inherited appeal, as it continues to develop newer and better therapies, with foray into two relatively important areas with impressive potential growth rates — which, of course, is why Novo is in it.

First, there obesitywhich is seeing a 75% sales growth.

Secondly, there Rare diseaseswhich is experiencing a slight growth in sales – no more than 2%.

Novo Nordisk from a high level is a game about how well the company can maintain its market leadership in diabetes care by using its scale and experience to fend off worldwide competition while at the same time cultivating diversification potential in order not to be so dependent on it.

If you think that AbbVie’s (ABBV) reliance on Humira is a mark against the company as an investment, and the possibility that lower sales might arise, I want you to think very carefully about what would happen if a serious competitor started or a sales decline affected Novo Nordisk’s legacy diabetes sales.

Remember, for the past 6 years, the company has been trading Less than 15x P/E at timeswhen she was having more problems. That’s what makes the sudden valuation spike that we’re seeing here so obvious and, to me, so troubling.

Like I said, the recent results have been pretty good. Both sales and operating profit saw growth, and I have no doubt we’ll see a continuation of that over the next month when the company reports for fiscal ’22.

This sales growth was driven by good results from a good geographic segment (outside of China), and from an attractive mix in terms of treatment areas. Even so, I really want to take the opportunity to point out how small the company’s sponsorship of obesity and rare diseases is, despite its rapid growth. While the company may be able to rely on this in the future, I will be until far away Use caution assuming anything related to GLP-1 and insulin as well as other areas of diabetes.

Obesity and rare diseases are very minimal. It’s a possibility — no more than that in the bigger picture.

This is why increasing market leadership, up to 1.7%, is more important to me than any advances in obesity or rare diseases right now. Until these can generate profits or sales of about 20-25% of the total, diabetes treatment is what “writes the checks” for this company. And market leadership here looks good.

The company continues its milestones in all areas. 4Q22 will see the Phase 3 CagriSema obesity project, with many results from oral and other obesity projects coming in during the first half of 2013. The year has also been busy for the rare disease sector, with lots of submissions, Phase 3 treatment results, and submissions coming in.

I don’t expect the company to have trouble achieving its 2022 ambitions and updated targets. The foundations upon which Novo Nordisk builds its current investment case, and its R&D remains solid.

Use of GLP-1 therapies is already increasing globally, however, only 6 million have been treated so far, meaning only 3% of all diabetics use the technology, leaving a potentially huge market to contend with – and NVO, at most. Geographical areas, owns the flagship GLP-1.

China remains a huge opportunity, but I hesitate more about it than I did six months ago. Given the current situation, I would prefer to dismiss and dilute any China-centric projections, based on the sheer uncertainty in the nation as an investment geography. That includes these types of treatments. China for NVO is different from other companies – because 140 million people in China suffer from persistent diabetes, and it accounts for nearly 25% of the number of patients worldwide – which is why NVO, despite the many challenges coming from China, can’t afford it. Ignore geography. Don’t ignore a quarter of your potential customers.

However, the risks remain – and with the valuation at current levels, it baffles me how positively the market thinks about some of the risks I see with NVO. One of them is insulin pricing. While the NVO has the scale, those prices are set to come under pressure in the US, where upset presidential courses revolve around drug and healthcare costs.

Although companies are already offering discounted packaging, pressures in this sector will certainly remain. Besides pricing, competition is intensified by rival Eli Lilly (LLY) with its GLP-1 Trulicity filter, which has been on the market since 2014 and takes market share (primarily new patients) from Novo Victoza (2010 US approval). ).

And while China has plenty of customers, it also comes with risks to the American market Start an act. The fact that we are now at our Novo Nordisk valuation levels It has never been seen, not for at least 15 years. Not during a financial crisis, not during any time I find myself — and that worries me.

It’s concerning for those who own or invest in an NVO at that price – I know there are those.

So let me explain you more details.

Novo Nordisk review

In my last article, I wrote that Novo Nordisk is still at record valuation levels. Given where the company, which is rated AA, is trading, I am consistently unwilling to pay this type of premium for this company. That was true 3 months ago, and it’s still more true at this point.

I’m not exaggerating when I say that at this point I’d rather put that principal into a 2.25% interest protected savings account than invest in Novo Nordisk. This company at 40x, or 39.88x if we want to be precise on a normal basis, reaches the proportions of irrationality we saw during the dot-com bubble, or during the froth of modern technology.

The company’s yield is now less than 0.85% against ADR, which is 1x the ORD. Despite the impressively low debt, AA rating, and projected growth, the 19-25x P/E is the highest I would give Novo. At the current 40x, the current forward yield on a 25x P/E basis is less than 3% annually, even with EPS growth at a 17% CAGR through 2025E. Even on a P/E multiple of 26, it’s roughly 5.5% annually — and that really drives it.

History has shown us that whenever a company reaches heights as we have here, it will eventually decline. I don’t see any fundamental change in the thesis that would justify a development like this either. The company is still doing the same thing it did 5 or 10 years ago – only better. This does not mean that they are suddenly worth twice as much. And there is no fundamental change in the capital stack that would mean a change in the company’s market value added, which we can use to justify this trend.

Novo Nordisk is a very good example of a company that is grossly overrated.

if you own it – My review is “selling” – or writing some very aggressive covered calls.

If you don’t have it – My review is to stay away – to ‘keep’ your land, and not to approach Novo Nordisk with a 10-foot pole. This company is, in its own way, as dangerous as a bloated tech stock – because it has a very real potential to cut in half or 3/5 whatever you invest in it in very short order.

Decline to 25x represents a capital loss of 22 +%, And that’s even with the roughly 30% EPS increase projected for 2023.

Let me repeat and update my previous position on the present circumstances. Even if this company’s average of the currently assumed 15-18% is actually achieved (and I believe closer to 4-7%), there’s no way they’d pay a 40X P/E premium for a company like this. Not even one with an AA rating. I still expect NVO near the 5-year averages, which is about 22X P/E. Based on the forward valuation of 22X P/E, the company’s potential return is actually Denial There — even in future years as EPS growth increases.

S&P Global analysts breached their higher-range targets here, too. The current average is DKK 928 for the original NOVO-B stake in Copenhagen. That’s a 0.9% valuation increase – so even the 10 analysts who consider it a “Buy” are above their average (out of a total of 22), even if at least one of those analysts gave the company a DKK 1,200 price target (and I’d love to see how it works till then …)

Any target above DKK 720 for the native, and more than 30x P/E for the NVO bar assumes a premium for the company that I’m not comfortable with – and won’t invest in. That is why I myself sold the company after waiting. A long time ago, at nearly 800 DKK some time ago. I will continue to wait for the company to drop to the level I consider most interesting before going “again”.

I’ve been thinking for a long time how to get to NVO. I researched the original, very old, out of money PUT options options, to come to the conclusion that the RoR and risk profiles available for this investment remain the same since I started writing about it.

“not mine”.

This is my updated thesis for NVO for 2023.

thesis

The thesis for Novo Nordisk is as follows:

• Novo Nordisk is a great company that can be bought into virtually any long-term invested portfolio. However, company specifics dictate that you should be careful about NVO and when you buy it.
• I think Novo Nordisk will drop from its highs, turn around 20-25x P/E, at which point savvy valuation investors, like you and I, can pick it up if our portfolio allows. I see no reason to enter at this time.
• My target for the company here is no more than DKK 720 – so that’s still an overvaluation in the double digits. I’m not changing my PT here.

Remember, I’m all about:

1. Buying undervalued companies—even if the markdown is slight, not mind-bogglingly huge—at a discount, allowing them to normalize over time and reap capital and dividend gains in the meantime.

2. If the company goes beyond normalization and goes into overvaluation, I take the gains and roll my position into other undervalued stocks, repeat #1.

3. If the company doesn’t go overvalued, but fluctuates within fair value, or dips into undervaluation, I buy more as time permits.

4. I reinvest dividend proceeds, savings from work, or other cash flows as specified in #1.

Below are my criteria and how the company meets them.

• This company is generally quality.
• This company is basically safe/conservative and well run.
• This company pays well covered dividends.
• This company is currently cheap.
• This company has a realistic upside based on earnings growth or multiple expansion/retracement.

Novo Nordisk does not meet any of my evaluation criteria and therefore cannot be anything but “HOLD” here.