NOVOB DC

Publicly traded companies mentioned herein: Eli Lilly And Co (LLY), Novo Nordisk A/S (NOVOB DC / NVO), Roche Holding AG (ROG VX / RHHBY), Sanofi SA (SNY)

Highlights

The presenter is short shares of Novo Nordisk (NOVOB DC / NVO), and characterized the risk/reward setup as “one of the best” he has seen during his career. Not only is Novo a big, liquid name, but there is meaningful downside risk. The local shares are down 29% year-to-date (to ~280 DKK) but in his opinion “there’s 25% more downside to come”. The reason for his bearish outlook relates to Novo’s concentration in diabetes and obesity care (80% of sales), and the potential for longer-term shareholders to grow impatient and/ or frustrated with the company as competition enters its key market(s). Novo is the world’s largest maker of insulin (NovoLog is its top-selling product, followed by Victoza), and it has enjoyed a duopoly with Sanofi to-date. However, competition is on the horizon and pricing is already under pressure as evidenced by recent pressure in the US - which is the largest diabetes market in the world - from managed care and pharmacy benefit managers. Guidance is for 10% EBIT growth over the next five years, the Street is more cautious at 7%, and the presenter’s estimate is 3%. If he is correct, earnings could decline year-over-year in 2018, and Novo’s 17x forward earnings multiple would likely compress by 3 turns (a more fair value for the stock looking out 12-18 months is ~220 DKK in this scenario).