Alas, Hamlet! A Diabetes Drugmaker to Renew the Faith

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“Something is rotten in the state of Denmark,” is a line from Shakespeare’s Hamlet. If the character who uttered those words were an investor, his faith in Denmark would be renewed by the long-term stock performance -- and future potential -- of Novo Nordisk (NYSE: NVO).  

Novo Nordisk, which has a $103.8 billion market cap, is the world's biggest maker of diabetes drugs. In 2012, 78% of the Danish drugmaker’s revenue came from its diabetes segment, while the remaining 22% came from biopharmaceuticals. The company was one of four stocks I discussed in my Dec. 7 piece, Dear Santa: "A Santa Portfolio" for You. This piece is a more in-depth look at the company.

Since my Dec. piece, the stock is up 18.2% in the just under 2-month period through Feb. 1. The stock capped off its steady rise with a small pop last week after the company beat Q4 earnings estimates and raised its long-term profit margin target.

For the quarter, revenue increased 16%, while earnings increased 21.2% to $1.83 per ADR (American Depository Receipt). For the year 2012, revenues were up 18% to $13.48 billion, and earnings up 19.6% to $6.71 per ADR.  

Novo Nordisk's growth is being fueled by the exploding global diabetes rate. I'll cover the growth driver first and then the company.

The Diabetes Epidemic: "That it should come to this!" (Hamlet Act I Scene 2)

Diabetes (Type 2) is highly correlated with obesity. So, as the world's population has become increasingly more obese, diabetes has grown increasingly more prevalent. Roughly 2/3 of U.S. adults are overweight and 1/3 obese.

Diabetes affects 371 million people worldwide, and the International Diabetes Federation predicts 552 million people will have the disease by 2030. By 2050, it’s estimated that up to 1 in 3 adults in the U.S. could have diabetes.

Diabetes is the body’s inability to create or effectively use its own insulin, which is produced by cells in the pancreas. Insulin helps regulate glucose (“blood sugar”), which provides energy to the body’s cells and tissues. Without insulin, cells starve and body tissues are destroyed. Thus, some diabetics need to take insulin (or other drugs that lower blood sugar). 

Diabetes costs the U.S. an estimated $218 billion per year. It kills more people than AIDS and breast cancer combined.

While diabetes rates are considerably higher in the developed world, rates are also increasing in developing nations as they adopt more Western diets and lifestyles.

Novo Nordisk By Business Segment & Line  

In 2012, 78% of revenue came from its diabetes segment, while 22% came from biopharmaceuticals.

Revenue breakdown of the diabetes segment:

<img src="/media/images/user_13269/novo-nordisk-diabetes-unit-revenue-breakdown-2012_large.jpg" />

Chart by BA McKenna using data from Annual Report. Total >100% due to rounding.

  • Insulins 

Novo Nordisk is the #1 producer of total insulins and modern insulins; it had 49% and 46% of the global market share, respectively, as of Nov. 2012, per IMS.

The most notable drugs in the (U.S.) pipeline are the new-generation insulins, Tresiba and Ryzodeg. They were approved in Japan and Europe in 2012. FDA approval looks promising, as in Nov. an FDA Advisory Committee voted eight to four in favor of approving the drugs.

  • Victoza & GLP-1 drugs

Victoza is a GLP-1 drug, which is a relatively new class of diabetes drugs. GLP-1 drugs mimic the activity of the hormone glucagon-like peptide-1 (GLP-1), which stimulates the release of insulin from the pancreas.  

In 2012, Victoza's sales were $9,495 million in Danish Krone (DKK), or almost $1,720 million is US dollars. As of Nov. 2012, Victoza had 68% of the global market for GLP-1 drugs. GLP-1 drugs, in turn, account for 6% of the diabetes drug market. (Market share data per IMS)

Major competitors in this class are Byetta and Bydureon, made by Amylin Pharmaceuticals. Last August, Bristol-Myers Squibb (NYSE: BMY) acquired Amylin for $5.3 billion (and took on its $1.8 billion debt). After the deal closed, AstraZeneca paid Bristol-Myers $3.4 billion for a half share in Amylin's products. The two firms have recently strengthened their diabetes-drug partnership, per the Wall Street Journal.

Byetta and Bydureon are expected to generate $910 million in sales this year, per analysts’ estimates. 

Both Novo Nordisk and Bristol-Myers have their GLP-1 drugs in clinical trials for obesity indications. These drugs have been shown in some studies to reduce appetite. 

Critics are particularly concerned about one potential side effect of these drugs: an increased risk of pancreatic cancer. GLP-1 drugs do carry a black-box warning. Though it doesn't appear the FDA will reverse course on this class, investors should stay abreast of the issue.

  • SGLT2 class of drugs

This is an entirely new class of diabetes drugs, so it remains to be seen what competitive pressures they exert on Novo's insulins and GLP-1 drug. Bristol-Myers' and AstraZeneca's Forxiga, the first approved drug in this class, received approval in the E.U. last Nov. The FDA denied approval earlier in 2012 due to concerns about potential increased cancer risks. Bristol-Myers is expected to provide the FDA with the requested data and file a new drug application by mid-2013.

The diabetes segment's annual revenue growth by line:

<img src="/media/images/user_13269/novo-nordisk-annual-growth-by-line-2012_2_large.jpg" />

Chart by BA McKenna using data from Annual Report.

The regional picture:

<img src="/media/images/user_13269/novo-nordisk-georgraphic-revenue-breakdown-2012_large.jpg" />

<img src="/media/images/user_13269/novo-nordisk-annual-growth-by-region-2012_1_large.jpg" />

Charts by BA McKenna using data from Annual Report.

Novo Nordisk’s Stock Stats: "Come, give us a taste of your quality" (Act II Scene 2)

Quality, indeed, Hamlet. But quality might taste sweet – a no-go here, so let’s view the quality… 

Stock Price

<img src="" />

(Source all charts: YCharts)

Revenue & Earnings

While the majority of Big Pharmas and Biopharmas have experienced decreases in revenue and earnings, Novo Nordisk has bucked that trend.

(There is a slight delay in updating data in YCharts. Q4 results, announced last Thursday, are not yet reflected in these charts.)

<img src="" />


<img src="" />

Bottom Line

Novo Nordisk has been firing on all cylinders over the long- and short-terms. Given the company's large size, it will become increasingly difficult to match past performance. Additionally, past performance is no guarantee of future performance -- especially in the drug market, which is dependent upon regulatory approvals and subject to patent cliffs. However, the company has two main positives going for it: (1) It is in the fast-growing diabetes market; (2) It has demonstrated it can execute.

The stock's 5-year PEG is 1.49, so it's not cheap. However, PEGs in the defensive drug industry generally run high.

Long-term investors might find this a worthy candidate for further research. At the very least, investors should strongly consider adding a company involved in diabetes to their portfolios.



BAMcKenna owns Bristol-Myers Squibb. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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