The Rising Influence of Rising Affluence

[DewDiligence]

NVO—one of the premiere plays of the global diabetes epidemic—now trades at a more reasonable valuation than it has during the past several years:

http://www.barrons.com/articles/novo-nordisk-world-leader-in-diabetes-drugs-is-set-to-rally-1473485437

Novo Nordisk’s…American depositary receipts (NVO) are down 24% [during 2016], to a recent $44.04. Each ADR is equivalent to one ordinary share. This year’s performance has been a rare disappointment for the company, based in Bagsvaerd, Denmark, after the stock’s sixfold advance in the past decade. Investors had grown accustomed to management setting ambitious financial targets and beating them routinely.

The consistency of results earned Novo Nordisk a premium valuation, averaging 22 times 12-month-forward earnings in the past five years. The stock now trades 17.7 times estimated 2017 earnings.

…Diabetes care is a rapidly growing market. According to the International Diabetes Federation, the number of people suffering from the disease could climb to 642 million by 2040, from an estimated 415 million in 2015. Most countries spend 5% to 20% of their total health-care budget on diabetes treatments and management. Novo Nordisk products accounted for 28% of global diabetes-related outlays last year.

…Novo Nordisk generates almost 80% of its revenue from diabetes treatments, with drugs for obesity, hemophilia, and growth disorders contributing the remainder. Last year, sales totaled DKK107.93 billion, or $15.7 billion…

…The market for so-called modern insulins, designed to mimic the normal insulin response to changes in blood-sugar levels, is rife with competition. Novo Nordisk’s top-selling products, Levemir and NovoLog, are being squeezed by market leader Lantus, produced by France’s Sanofi (SNY). Meanwhile, biosimilars, which closely resemble existing products, are proliferating; Merck (MRK) will launch one next year.

…Management anticipates 4% erosion in prices in the U.S. this year, leading to a 2% drag on overall sales growth. As a result, Novo Nordisk has trimmed its sales-growth estimate for 2016 to 5%-7% from 5%-9%. Analysts expect a similar impact in 2017.