Novo Nordisk will survive the drug wars. The Danish pharmaceutical group's shares fell more than 8 per cent on August 5 after it lowered profit and sales guidance and warned of cheaper prices in its key US insulin market. Such pressures won't abate. Still, in a growing market, Novo warrants a premium over peers such as AstraZeneca or Novartis.
The world's largest insulin maker finds itself in the headlights of two brutal trends. US drug buyers are demanding price cuts and can play drug companies off against each other. Then there's the emergence of "biologic" products that create generic alternatives for complex, so-called large molecule drugs. The less exclusive the latter become, the more their prices fall.
These trends won't go away. Diabetes accounts for about a fifth of US healthcare spending, making it an attractive target for price cuts. And a wave of biologic drugs will hit the modern insulin sector, which makes up 15 per cent of Novo's sales, in the coming year or two.
It might therefore seem odd that the group is trading at 22 times its expected earnings for the next 12 months, even after the latest drop in its share price. Yet, a premium to the sector average, of around 17 times forward earnings, is perfectly justified. While some drugs are under threat, Novo is expanding its offering. It is a market leader in a different class of treatment, called GLP-1, which makes the body produce insulin and also helps weight loss. These drugs, which still only make up nine per cent of the market, are now being combined with insulin to treat more severe cases.
The diabetes market, meanwhile, continues to grow because of the addiction to sugary foods and drinks in developed economies, and increasingly in emerging ones. Berenberg analysts expect Novo's sales to grow 7.3 per cent a year through 2018, compared with just 2.2 per cent for other pharmaceutical companies. While the drugmaker can't hope to match the dizzy valuation of 29 times expected forward earnings seen in early 2015, its current premium does not look bloated.
