Novo Nordisk

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Novo Nordisk is a global healthcare company specializing in diabetes care, particularly the development and manufacturing of insulin, diabetes devices, and other treatments for related chronic diseases.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview Novo Nordisk operates in a relatively stable industry focused on chronic diseases, specifically diabetes and related conditions, that have a constant, growing demand for treatment. The pharmaceutical industry generally is considered to have somewhat high barriers to entry in certain segments and is considered defensive. Novo Nordisk’s products are sold to patients, medical professionals, and insurance companies around the world.

  • Revenue Distribution: The company’s revenue is categorized into various business segments with diabetes care as its primary contributor, encompassing the sale of insulin, GLP-1 receptor agonists, oral antidiabetic drugs, and devices for diabetes management. In recent years, they’ve been increasing their focus on adjacent markets like obesity treatment. International operations make up a significant portion of its sales, with the US and Europe as its primary markets, and emerging markets also contributing heavily and growing quickly.
  • Trends in the Industry: The healthcare industry is undergoing a transformative phase where innovation, specifically in treatments for chronic diseases, is being pursued, but at the same time, regulation is increasing across all developed markets and new drugs approvals are slowing down. In the diabetes and obesity care market, there are new entrants and an increase in competition. Additionally, there are pressures in some markets to lower drug prices due to government programs, or patient activism groups.
  • Margins: In 2022, the gross profit margin reached around 83%, while the operating profit margin was close to 47%. These are very high margins that indicate pricing power and competitive advantages.
  • Competitive Landscape: Novo Nordisk faces competition from companies like Eli Lilly, Sanofi, and others, especially in the space of diabetes medication and obesity drugs. These companies, while offering different treatments, operate in the same spaces and compete for market share. The genericization of insulin and other older drugs can also lower margins, however, newer patent-protected products can compensate for these.
  • What Makes Novo Nordisk Different:
    • Focus on Diabetes Care: While other companies operate on different industries as well, Novo has put almost all of its focus on diabetes care, which it has decades of experience in, giving it deep expertise, data, and expertise on the domain.
    • Dominance in Insulin: Novo is the leader in insulin production and has a vast and wide range of insulin products, this gives it a supply-chain and production cost advantage versus competitors.
    • Innovation: Novo has shown a strong ability to innovate and bring new medications in the diabetes and obesity market, like Ozempic and Wegovy, which both benefit from patents, which gives it pricing power and is a source of a sustainable moat.
    • Strong International Presence: NVO has a massive international network, with a strong presence in both developed and developing markets, which gives it distribution advantages.

  • Other relevant points:

  • Novo has been pushing into adjacent markets and developing drugs for obesity, a market that has a great growth profile.
  • The company has been very open in the past about its willingness to collaborate and use partnerships in its expansion goals.
  • While mainly focusing on medicines for Type-2 diabetes and obesity, NVO does have a small but growing presence in Type-1 Diabetes.

Financials in Detail

  • Revenue: Novo Nordisk has shown impressive revenue growth, particularly in the last few years, driven by its new obesity drugs like Wegovy and Ozempic. Their reported sales in 2022 was 177 billion DKK, an increase of 25% on a reported basis compared with 2021.
  • Margins: The company enjoys strong gross margins and operating margins which are above industry average for pharmaceutical companies, as we mentioned earlier.
  • Profits: In 2022, the reported net profits were 55 billion DKK, a substantial increase from the past.
  • Cash Flow: NVO is highly cash generative and had almost 70 billion DKK in free cash flows in 2022.
  • Debt: The company usually carries little debt. Total liabilities at the end of the year are around 120 billion DKK, with 50% in long-term liabilities. It has a history of very low debt and interest payments.
  • Guidance: The management at NVO guides the company toward double digit growth in the coming years. In 2023, management has guided for an operating profit growth between 21 to 27 % at constant exchange rates, they are also guiding for a sales growth between 24 to 30%. Growth will be driven by volume growth of GLP-1, and Mounjaro in the diabetes segment, and also sales growth in the obesity segment. The company expects to hit a sales target of 25 billion DKK for its obesity drugs in 2025.

Moat Rating: 3 / 5

  • Intangible Assets: Novo Nordisk has a very good portfolio of patents across all of its medications, with both insulin and modern GLP-1 agonists protected. Trademarks such as the “Novo” brand and its various medications are also fairly recognizable. While some of their older medications are facing competition from generic makers, most newer medications are protected by patents for the next several years.
  • Switching Costs: For most of its medications, there are some switching costs from the patient perspective, but this is not very strong and is mostly attributable to existing habits and the ease of usage for the drugs they are already accustomed to.
  • Network Effects: It doesn’t seem that NVO has a significant network effect at this moment.
  • Cost Advantage: Novo Nordisk has some cost advantages due to its scale of production, especially in insulin. This gives them the ability to price the drug competitively.
  • Overall Moat Strength: NVO has a good moat, especially because of its research and brand, that allows it to get approval and command a higher market share and margin compared to its competitors. However, the industry is becoming more competitive, so that can impact its long-term return on invested capital, and also, new technologies can undermine its drugs in future. The company is currently at a very high market valuation, so to pay a good price for it, NVO should have a very strong economic moat.

Risks

  1. Regulatory Risk: Increased government regulation, or political pressure to lower drug prices can impact profitability. In fact, the company has mentioned that there will probably be more pressure on drug pricing in the coming years. The company is now under active investigation from authorities in the US for price-fixing, though, they have maintained that this lawsuit is baseless.
  2. Competition: As GLP-1 and other diabetes medication markets grow, more companies, especially generic makers, are expected to start providing competition for NVO. Many companies are competing in this space, and it will be tough to sustain the market share that NVO holds.
  3. Technological obsolescence: New technologies, like GLP-1 agonists and other next generation drugs, might make a lot of the company’s current offerings redundant. NVO has been investing a lot in research and development, however, success is never guaranteed in pharma.
  4. Supply Chain Problems: The company has been facing supply chain issues in their production process and they expect that this is likely to continue in the coming years.
  5. Financial Risks: Even though NVO’s financial position looks solid, there are some risks that should be noted. The company is susceptible to currency fluctuations, as they operate in a number of countries. The high share price may also have to come back to earth as it represents considerable risk in the company in case something goes wrong.

Recent News/Controversies

  • The company has a major lawsuit against it, alleging it fixed the price for its products, the company’s management is of the view that the charges are baseless.
  • There has been a lot of discussion on the company’s supply chain, which has failed to meet growing demand for Wegovy, however, management said that they are actively adding more capacity and it will take some time.
  • Management is also expecting increased competition in the obesity market in the next few years.
  • While management seems very positive on the demand for their drugs, they are also being cautious about pricing pressure in the future.

Understandability: 3 / 5

  • NVO operates in the biotechnology/pharmaceutical industry, which can be very hard to understand, especially when it comes to the specifics of the various diseases, regulatory processes, and clinical trials.
  • The company offers complex products that are hard to understand for outsiders
  • However, NVO has a relatively simple business model - manufacture and selling products - that is easier to grasp than other companies in the biotechnology sector. Its main focus on one area also simplifies things.
  • NVO also presents detailed and understandable financials that make it easy to perform some financial analysis.

Balance Sheet Health: 4 / 5

  • Novo Nordisk has strong cash reserves and generates considerable free cash flows each year, giving it a safety cushion in times of economic uncertainty.
  • The company has historically held very little debt, giving it a strong and stable financial situation. Although the debt levels have increased in recent years to fund expansion activities, they are still reasonable and manageable for a company of this size.
  • The company has many liquid assets, and very little tangible assets, most of their value comes from its research and proprietary technology, which they value very conservatively on the balance sheets.