Novo Nordisk Stock is the Best Pharma Stock

Which company is now the largest by market cap in Europe? This is the pharmaceutical giant Novo Nordisk from Denmark. According to Danske Bank, their contribution to the Danish economy became key in 2023, saving it from recession and allowing it to build positive forecasts for the future. Now Danish and world economists are even arguing whether it is worth publishing separate statistics for the country without Novo Nordisk.

We recently wrote about the unique equipment manufacturer ASML, and the famous fashion manufacturer Hermes, and also mentioned one of the most expensive brands LVMH, but all of them are now overtaken by Novo Nordisk in terms of capitalization, reaching $570 b as of March 28, 2024.

Its shares, which can be purchased under the tickers NOVO B.CO on Nasdaq Copenhagen and NVO on the New York Stock Exchange (NYSE), are up more than 20% year to date, thanks in large part to the super successful launch of two revolutionary obesity drugs: Ozempic and Wegovy. Let’s understand the Danish company phenomenon and dive into the financial details.

What do we know about Novo Nordisk?

The company is known primarily as the largest insulin manufacturer in the world. Novo Nordisk is a global healthcare company, which is involved in the discovery, development, manufacturing and marketing of pharmaceutical products. The firm operates through two business segments: diabetes and obesity care, and biopharmaceuticals. As we can see from the company’s annual report for 2023, the Diabetes and Obesity care segment accounts for 92.6% of revenue and 97% of operating profit.

What do we think about NVO stock?

Ranked No. 1 in our best pharmaceutical stocks, Novo Nordisk has an Eyestock rating of 154%, outperforming the ideal company benchmark by 54%. NVO is not just good, it is the third company according to the final rating of 12591 companies that went through the analysis of our systems! Such a high rating can only be obtained if the company’s business is good in all 4 areas, which we examine in the analysis. And so it happened. Look. This is a kind of ideal, isn’t it?

Novo Nordisk realizes its competitive advantages

Novo Nordisk’s revenue for 2023 was DKK 232 b. The company reports in Danish krone, and to understand the scale of the business, we will convert revenue into US dollars at the rate of 6.91 at the time of writing. That works out to be over $33 b. It is important to note that the majority of the company’s revenue comes from the US region.

The cost of goods sold amounted to just over $5 b and turned out to be even lower than «research and development» costs of DKK 32.4 b or $4.7 b. Isn’t it amazing that businesses spend more money on further research and development in such a technology-dependent industry than on production costs? This indicates the company’s high foresight and strong competitive advantages and leads to a very high gross margin of 85%! After all expenses, the company has $12.1b left in net profit in 2023, which is 36% of net sales. All this, together with Net cash generated from operating activities, which exceeds accrued net profit, allows us to evaluate financial performance exceeding the benchmarks.

Novo Nordisk. If we remember that 100% is our standard for investing, then NVO received a score of 152%! We simply divided it by 4, since the profitability assessment is only one-fourth of the final rating component. That’s why you see a value of 38%.

NOVO is a solvent and liquid

With such an introduction and final rating, one could expect that the company does not resort to borrowing at all. However, the company has debts on its balance. According to the annual financial statements, the debt at the end of 2023 was DKK 27 b, which in US dollars is $3.9 b. However, this debt is completely covered by cash at bank and marketable securities and is only 0.28 from equity to shareholders. Cash Flow-to-Debt ratio is 4.15. All this means that the company if desired, can pay off its debts either with its existing cash or with quarterly cash flow from operating activities, which means that it is as liquid and solvent as possible. In this case, a Current Ratio of 0,85 does not look like a weak point of the business, but simply some kind of minor misunderstanding, not having a strong impact on the final balance sheet rating.

Return on equity is significant at 85%

Novo Nordisk has solid assets of DKK 314.5 b, equivalent to $45.5 b. With such assets, the company shows an outstanding return on assets of 29%! This is the best indicator among 120 mega and large-cap companies from the Healthcare sector all over the world!

For every krone of equity capital, the company’s management adds 3 Krones of borrowings to form assets, so the high return on assets is enhanced by a 3-fold equity multiplier, and this leads us to a grandiose return on capital of 85%!

Sustainability is the key

The company’s business was born on the fly cause it is the main driver of growth for the entire economy of Denmark with a population of 6 million people. A net growth rate of 66% is truly impressive. This is if you compare the last quarter of 2023 with the same period of the previous year. The growth rate has been increasing for the 6th quarter in a row, the average for 2 years is an equally solid 53%, and for 5 years — 24%! The most important thing when analyzing stability is not only the value of the increase but also the deviation of these figures. Novo Nordisk’s is much lower, resulting in a superior Stability Ratio that we use at Eyestock methodology when analyzing this side of the business.

Looking forward

How realistic is it for the company to continue to show equally impressive results? Unfortunately for humanity, today 537 million people suffer from diabetes. And this number will grow to 643 million in the next 6 years according to the forecast of Novo Nordisk itself. Over the past 4 years, the number of people who have access to the Danish company`s medicines has grown by 30%, but now it is only 40.5 million people! The answer to supply problems that are preventing the company from meeting growing demand is capex growth and investment in the expansion of production in Kalundborg and Hillerød, Denmark, and Chartres, France, and the acquisition of a brownfield development and production site in Athlone, Ireland. The company’s management expects sales in the next fiscal year to grow by 18-26%, and operating profit will increase by 21-29%.

Is NVO stock to buy right now?

And now it’s time for a fly in the ointment. When everything is so good in reports and prospects, there must be a catch. And this is the current value. The company is now worth 47 of its annual earnings, while the average price-to-earnings ratio over the last 20 quarters is only 30! In our opinion, NVO is not only expensive but pretty overvalued, as it trades at a premium even though the highest estimate in history is 40. And you can buy it right now in the following cases: you are ready to take any risks or believe that trees grow to the skies.

Otherwise, add Novo Nordisk stock to your watchlist, set the notification, and return to it when the price is close to the average valuation.

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