Pat McKeough recently replied to an Inner Circle member looking for an opinion on Novo Nordisk A/S—the maker of diabetes drug Victoza. While the stock’s high price is understandable, it does come with some risks, says Pat.
Q: Hi Pat: May I have your thoughts on Novo Nordisk? I believe it makes a Type 2 diabetes medication, Victoza. Thanks.
A: NOVO NORDISK A/S (ADR) (symbol NVO on New York; www.novonordisk.com) is a major producer of diabetes-care products, including insulin. Based in Denmark, it also makes products for hormone replacement therapy and treating coagulation disorders.
The company controls 50% of the global insulin market. It gets 50% of its sales from North America, followed by Europe, 18%, China, 11%, and other regions, 21%.
In the three months ended March 31, 2016, Novo’s revenue rose 8.0%, to $27.2 billion Danish Krone ($4.0 billion U.S.) from $25.2 billion a year earlier. Earnings rose 22.2%, to $0.55 U.S. per ADR from $0.45.
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Growth Stocks: Diabetes market contributes 77% of revenue
Novo gets about 77% of its revenue from the diabetes market. That adds risk, considering the many global drugmakers looking to take market share with new therapies. However, the company’s Victoza, a once-daily treatment for Type 2 diabetes, is a market leader.
As well, Novo is at the forefront of developing “next generation” drugs. These include longer-acting medications, safer drugs and oral insulin, which eliminates the need for injections. Its newest drugs, including Levemir, Tresiba, Ryzodeg and Xultophy, are all gaining market acceptance.
The company’s shares now trade at 23.1 times this year’s forecast earnings of $2.40 per ADR. That’s high but supported by Novo’s growth prospects. Still, it does leave the shares vulnerable to a sharp decline if the company has a bad quarter or suffers a setback with one of its new drugs.
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Thanks for the report. I like NVO’s high share of the diabetes market, but the stock is way too volatile.
I am looking forward to hearing positive news about this company that should shift this to a buy. I currently hold it. Thanks.