My Road to Half a Million

About the Author My Road to Half a Million

I have been investing in stocks since 2006. Burned my fingers with bio- and techfunds in the tech boom and again with stocks during the financial crisis in 2008. Returned to the stock market in the dip during late 2011 and focusing currently on finding value from large-cap dividend growers in the Scandinavia. I'm a professional coder and therefore I have had the privilege of designing and implementing my own strategy backtesters and testing various trading strategies for stocks and forex for many years now.

Novo Nordisk – Curing The World One Dose At A Time

Novo Nordisk was established in 1989 as a merger of two of the oldest insulin companies, Nordisk Insulinlaboratorium and Novo Terapeutisk Laboratorium founded originally in 1923 and 1925, respectively. These 2 companies had competed with each other for years becoming masters in the care for diabetes. Both of the companies’ initial success was based on the finding of two Canadian scientists. Today, almost a hundred years later, Novo Nordisk is headquartered in Denmark, provides jobs for over 40.000 people all over the world, and sells products in more than 180 countries worldwide. At the moment, the company operates in 4 business areas: diabetes care, homeostasis management, growth hormone therapy, and hormone replacement therapy. Even though the company is a clear global market leader in diabetes products, this is still not enough for them. Today Novo Nordisk’s products are used by 24 million people worldwide, but they strive to increase this number to 40 million by the end of 2020.

Market outlook
The company is currently focusing on 4 strategic areas; in September 2014 Novo Nordisk discontinued all its research and development activities within inflammatory and decided to increase its efforts within diabetes prevention and treatment, obesity, and diabetes complications.

Expanding leadership in diabetes
Diabetes is a chronic disease that occurs either when the pancreas does not produce enough insulin or when the body cannot effectively use the insulin it produces. Type 1 diabetes accompanies a complete insulin deficiency due to destruction of beta-cells in pancreas, while type 2 diabetes is characterised by some degree of insulin resistance and insulin deficiency. At the moment, there is no remedy for diabetes but there are ways to keep it under control. Insulin is the main treatment for type 1 diabetes. For type 2 diabetes, the treatment varies and can be diabetes education, exercise, medication, and insulin. The treatment for diabetes is very expensive over the course of a lifetime.

382 million people worldwide are living with diabetes and it is predicted that by 2035 close to 600 million people worldwide will have diabetes. It is estimated that half of these people are not even diagnosed, half of the diagnosed people receive treatment, half of the treated people reach treatment targets and only half (around 6%) of those reach aspired results. In human as well as financial terms, the burden of diabetes is high, being a factor in 5.1 million deaths and accounting for around 548 billion US dollars in health spending (11% of the total spend worldwide) in 2013 according to the IDF.

In the diabetes market, one size does not fit all as what works for one person may not work for other. This is why it is important to offer a wide variety of treatment options. The global market for diabetes care products amounts to approximately 238 billion Danish kroner, of which Novo Nordisk products account for about 27%. The market has been growing by around 11% annually in the last decade and is expected to experience a continued solid growth. Of this global market, insulin accounts for 52%, oral diabetes products for 41% and GLP-1 products for 7%. Diabetes care accounts for close to 78% of Novo Nordisk’s total sales, most of which comes from insulin and GLP-1 products. In both areas Novo Nordisk is the global market leader in terms of volume. In the insulin market, the biggest global competitors are Sanofi and Eli Lily.

The insulin market is characterized by 3 segments: fast-acting, long-acting and medium-acting. Each of these segments has a pretty much equal global market position. Novo Nordisk’s most important insulin products are:

  • Tresiba, which is a new-generation basal insulin with an ultra-long duration of action of more than 42 hours.
  • Ryzodeg, which is a soluble insulin combination of Tresiba and NovoRapid.
  • NovoRapid is a fast-acting insulin.
  • NovoMix is a medium-acting insulin.
  • Levemir is long-acting insulin product.

The patent for NovoRapid expires in 2017, for Levemir in 2018 for Europe and in 2019 for US market, for Novomix the patent expires in 2017 for US and 2015 for Europe. The GLP-1 portfolio includes:

  • Victoza which is taken once a day and works by stimulating the beta cells in the pancreas to release insulin only when blood sugar levels are high.

The market for Victoza is currently valued at around 16.4 billion kroner, of which Victoza accounts for approximately 70%. New key projects include a once-weekly GLP-1 analogue and GLP-1 as tablet form. The company as well sells injection devices through NovoPen and FlexPen. Novo Nordisk was the world’s first insulin pen manufacturer in 1985. Below you can see the current product portfolio for diabetes care.

Establish a presence in obesity
Obesity issues have strongly increased in US during the last 20 years. 20 years ago, majority of the states in US had less than 18% people suffering from obesity while now there are on average more than 20% throughout US suffering from obesity. As a result, diabetes issues have increased at the same pace with obesity as they are linked together. Therefore, in US there has been increased awareness and action for obesity epidemic. Obesity can be considered to lead to significant costs for society as obese people are expected to incur 42% more health care costs than normal weight people and as obesity also drives a number of indirect costs such as absenteeism and lost productivity. This is why there is huge market potential in obesity. Currently, there is significant unmet need in obesity management as only 4% of obese people in the US are being treated. The unmet need is currently seen in anti-obesity medication which lands between diet change and surgery when comparing the complexity and cost of the treatments. Despite all of this, obesity’s market value has decreased by more than half during the last few years in the US, while the number of patients being treated have stayed the same. The same trend can be seen outside US as well. All this sounds quite strange as there is estimated to be four times more people with obesity than diabetes but still diabetes sales in US are estimated to be worth of DKK128 billion while for obesity the same figure is only DKK1 billion.

Novo Nordisk has recently received approval from US officials – and most likely will receive it in Europe as well – for the launch of Saxenda which is meant for obesity treatment. In contrast to many other obesity treatments out in the market, Saxenda is injectable, much more expensive and does not produce much better results than its cheaper substitutes. Still, the company has invested quite a lot for product development and is assigning a huge amount of sales representatives for it. Saxenda is based on liraglutide which is already used in Victoza. Victoza has been available for quite some time, and in fact, already has some successful weight loss stories. Given that insurance companies have been slow to offer anti-obesity drug coverage, many people are paying obesity medicine from their own pockets.

So far, the anti-obesity market has not been an overwhelming success for any of the companies entering that space. Despite the growing prevalence of obesity globally, there are only a few pharmaceutical treatment options currently available and reimbursement for these medications is limited. The global market for obesity products currently amounts to 2-3 billion kroner.

Pursue leadership in hemophilia
Hemophilia is an inherited or acquired bleeding disorder that prevents blood from clotting. An estimated 420,000 people worldwide are living with severe or moderate hemophilia. The global hemophilia drug market is estimated at 53 billion kroner and has grown by more than 4% annually in recent years. NovoSeven is one of Novo’s products to serve this market. With NovoSeven, Novo Nordisk helps about 5% of these people – but with the launch of NovoEight, the company will be able to help many more.

Expand leadership in growth disorders
Globally it is estimated that more than 2 million people are eligible for growth hormone therapy. The market for growth disorder treatments is estimated at 16.4 billion kroner and has grown by more than 4% annually since 2009. Novo Nordisk is the leading provider of human growth hormone with a global market share of 30% measured by value. Novo Nordisk offers Norditropin in this market. Below you can see the current product portfolio for biopharmaceuticals.

Geographical segment
The company sells its products in 5 different regions:

North America
The North American region consists of the US and Canada and is Novo Nordisk’s largest in terms of sales. The US is the world’s largest pharmaceutical market. In 2012, total pharmaceutical sales in the US amounted to 327 billion US dollars, of which 6% was spent on products for treating diabetes. Since 2008, sales have more than doubled to 37 billion kroner. The main drivers of sales have been – and continue to be – the portfolio of modern insulin and Victoza. The US represent 48% of total revenues.

The US healthcare system is complex as it involves multiple payers and intermediaries with complex interactions. Roughly half of all Americans are insured by their employers and one-third by the government through programmes such as Medicare and Medicaid, while around 15% are uninsured. To manage the purchase and delivery of health care, employers and the government contract with intermediaries such as health plans and pharmacy benefit managers. Health plans contract with providers such as physicians, hospitals, and pharmacy networks to provide the required service.

Novo Nordisk holds around 29% of the total US market for diabetes care medications and 37% of the insulin market, measured in value. The insulin market is expected to continue growing in volume in the coming years due to the increasing number of people with diabetes. Moreover, in the US, only around 41% of insulin volume is delivered in a pen system such as Novo Nordisk’s FlexPen, while it is more than 95% in Europe. This means there is still significant potential to upgrade treatment in the US. Novo Nordisk is the market leader within GLP-1-based therapies in the US, where Victoza has a value market share of around 67%.

Increased US health care spending is predominantly driven by increasing costs for hospital and related services. Last year, 17% of US GDP was used for health care expenditure while 10 years later it was only 14%. This is important for Novo Nordisk as the US is at the moment the biggest market for it. Managed care, medicare and medicaid are US based corporate or government systems designed to reduce costs for health care. Roughly 83% of the insulin market is covered through these programs. In the US, the company sells its products mainly through primary care physicians, endocrinologist, health systems, hospitals, department of defence (DoD), long-term care and managed markets. The company however expects that in 2017 pharmaceutical market will grow from $339 billion to $364 billion and that diabetes would represent 10% from it.

Europe is Novo Nordisk’s second largest region in terms of sales but sales growth has been modest in recent years. This is a result of the depressed economy in many European countries in the wake of the financial crisis. This has led governments to implement cost-cutting measures. There are no signs of a return to significantly higher sales rates in the coming years, with government cost-cutting measures expected to continue. Moreover, the diabetes market is well developed, diagnosis rates are high, birth rates low and Novo Nordisk already has an insulin market share of 49% measured by volume. This means there are limits as to how much Novo Nordisk can grow in Europe. The key growth driver in the coming years is expected to be Tresiba as it becomes available to patients in more European countries. Europe represent 23% of total sales.

With sales of 7.2 billion Danish kroner in 2013 and average annual sales growth of around 19% since 2009, China has been a major contributor to Novo Nordisk’s growth in recent years. This is predicted to be the case in the coming years too, partly due to the rapidly increasing number of people with diabetes in China. According to the latest estimates from the International Diabetes Federation, more than 99 million people in China have diabetes today. With China’s economic growth comes urbanisation, with urbanisation come sedentary lifestyles – and diabetes follows. There’s also a growing market for newer and higher priced pharmaceuticals in China as both the health awareness and the purchasing power of many Chinese families are growing. Novo Nordisk currently holds a 59% market share in terms of insulin volume. China represent 9% of total sales.

Japan & Korea
Novo Nordisk currently holds a 49% market share in terms of insulin volume and hence is the clear insulin market leader there. This is the only region were sales have recently dropped due to stagnant Japanese insulin volume market and the negative impact from a challenging competitive environment. A shift in recent years from the use of premixed insulin products, where Novo Nordisk is the clear leader with NovoMix, to basal insulin products, where Novo Nordisk is in fierce competition with Sanofi, has led to a loss of market share. In 2013, there have been signs that this development is changing with the launch of Tresiba. Growth rates are expected to remain modest due to price reductions and the overall low growth of the total insulin market. Japan & Korea represent 6% of total sales.

International operations
With sales of 12 billion Danish kroner in 2013 and average annual sales growth of around 15% since 2009, International Operations is Novo Nordisk’s main contributor to growth after North America. Novo Nordisk’s insulin volume market share is around 56%. Growth in International operations will continue to be driven by the increasing number of people with diabetes in the region and the fact that more of them will have access to medical treatment as economies develop and poverty diminishes. To support growth, Novo Nordisk is expanding its organisation in many of the key growth markets and making significant investments in building health care capacity within diabetes. International operations represent 14% of total sales.

Clinical research phases
Clinical trials involving new drugs are commonly classified into four phases. Clinical trials of drugs may not fit into a single phase. The drug-development process will normally proceed through all four phases over many years. If the drug successfully passes through phases 1, 2 and 3 it will usually be approved by the national regulatory authority for use in the general population. Phase 4 is ‘post-approval’ studies. In Novo Nordisk’s experience, there is a less than 35% chance of a diabetes product candidate in phase 1 clinical trials ultimately being approved for marketing, while the chance of success is around 40% for products in phase 2 trials and rises to around 70% for products in phase 3 trials. In 2013, it took on average 450 days for Novo to reach ‘Final Report’ from ‘Protocol Approved’ as compared to industry average of 570 days.

Phase Goal Nr of participants Notes
Phase 1 Testing of drug on healthy volunteers for dose-ranging Few ten Determines whether drug is safe to check for efficacy
Phase 2 Testing of drug on patients to assess efficacy and safety Few hundred Determines whether drug can have any efficacy; at this point, the drug is not presumed to have any therapeutic effect whatsoever
Phase 3 Testing of drug on patients to assess efficacy and safety Few thousand Determines a drug’s therapeutic effect; at this point, the drug is presumed to have some effect
Phase 4 Post marketing surveillance – watching drug use in public All current users Watch drug’s long term effects

Below you can see the current product pipeline for diabetes, obesity and biopharmaceutical products.

Current business situation
For 2014, sales growth measured in local currencies is now expected to be 7-9%, 4% in Danish kroner and operating profit growth measured in local currencies is still expected at around 10%. North America was the main contributor with 65% share of growth measured in local currencies, followed by International Operations and China. The preliminary outlook for 2015 indicates high single-digit sales growth and around 10% operating profit growth, both measured in local currencies. Research and development costs increased by 23% in local currencies and by 21% in Danish kroner to DKK 9,897 million. The significant increase in costs reflects the progression of the late-stage diabetes care portfolio and the associated increase in headcount as well as the discontinuation of activities within inflammatory disorders announced in September 2014. All other costs stayed pretty much the same relative to revenue growth. Owner earnings increased by 22% while capex remained pretty much the same. The main reason for such a strong cash flow growth which has outpaced revenue growth is because working capital has not grown at all in recent years. Currency effects had a negative effect on sales. The gross margin so far this year has been a staggering 83.6%. Lately, the company has been able to decrease by more than 70% the total development costs per patient year which is astounding. This has been one of the main reasons for increased margins.

As a result of the extremely strong cash flow, the balance sheet of the company is extremely strong. Novo Nordisk’s capital structure is characterised by a substantial equity ratio. This is in line with the general capital structure of the pharmaceutical industry and reflects the inherent long-term investment horizons in an industry with typically more than 10 years’ development time for pharmaceutical products. At the moment the equity ratio is slightly above 60%.

Novo Nordisk generates a relatively high OPAT/NOA due to a low level of acquired intangible assets and a stable operating asset base despite significant business growth. This is driven by Novo Nordisk’s organic growth strategy with limited acquisition of rights or businesses, and reflects the fact that, in line with industry practice, Novo Nordisk does not capitalise internal development costs until regulatory approval is highly probable.

Novo Nordisk sells products through 2 segments: diabetes care which represents 80% of total sales and biopharmaceutical products which represent the rest. The majority of diabetes care products are insulin and protein-related. Novorapid, Novomix and Levemir are the most important products representing almost half of total revenues. These are called modern insulin. New-generation insulin, Tresiba, has just been launched and contributes to less than 1% to total revenues, human insulin represent ~12% of total revenues and protein-related products ~2% of total revenues. The roll-out of Tresiba continues with a good performance. Victoza is with a 72% global market share a leader in GLP-1 segment for type-2 diabetes and represents ~15% of total revenues. NovoNorm, Prandin and PrandiMet are oral anti diabetic products which represent only ~2% of total sales and are expected to decrease due to patent explorations. Biopharmaceutical products represent 20% of total sales. Novoseven and Norditropin are the main products in this segment. Novoseven is used for bleeding disorders therapy and Norditropin for growth hormone therapy

Novo Nordisk’s business is subject to major sales discounts and sales rebates which are predominantly issued in North America. In this region, significant sales rebates are paid in connection with US public health care insurance programmes, namely Medicare and Medicaid, as well as rebates to managed health care plans. In addition, the company is subject to US wholesaler charge-backs and to discounts, sales returns and other rebates. For example in 2013, company’s gross sales were actually ~126 billion kroner instead of ~84 billion kroner due to the latter.

While everything seems to go well for Novo Nordisk, all is not great in the pharmaceutical business. Many countries with largely publicly funded health care systems are putting in place market restrictions for new medications and in the US, pharmaceutical companies are facing increasingly tough pricing negotiations with managed care organisations and pharmacy benefit managers. Many pharmaceutical companies are seeing major products going off patent and are unable to bring out innovative products that can make up for the lost revenue. Some have chosen to cut research and development budgets and lay off thousands of employees. Some have added generic and over-the-counter medicines to their offering, while others have created a broader service offering around their core products. And all have realised that new products will only have a chance in the market if they address unmet medical needs and are accompanied by convincing data about their health-economic benefits. Novo Nordisk has decided to continue making large investments in research and development, strategic products and growth markets. The decision is based on a firm belief that huge unmet medical needs remain to be addressed, not least within diabetes, a disease that is growing at an alarming rate all over the world.

The principal market risks which Novo Nordisk experiences are price pressure and reimbursement restrictions by payers, the launch of new products by established competitors and increased competition from producers of biosimilar medicines in key markets.

A high-quality, cost-effective global manufacturing infrastructure is a prerequisite for competing successfully in an increasingly competitive pharmaceutical market. It also enables Novo Nordisk to make treatments available at very low prices in developing countries. Novo Nordisk has a global production set-up with facilities strategically located in five countries across four continents.

Novo Nordisk is a firm believer in having wholly owned affiliates and expanding them organically as the market develops. While other pharmaceutical companies may build a presence through the acquisition of local companies, joint ventures or rented sales forces, Novo Nordisk prefers to hire its own people and train them to become the best.

The Novo Nordisk Foundation is a non-profit institution, whose formal purpose is to provide a stable basis for its company’s operations. Novo A/S is an unlisted Danish public limited liability company, owned by the Novo Nordisk Foundation and established to manage the Foundation’s funds and to invest actively in other companies. Novo A/S is the major shareholder in the Novo Group’s two publicly listed companies, Novo Nordisk A/S and Novozymes A/S. With 25.5% of the total share capital, Novo A/S controls 74% of the total number of votes. In total, the management owns shares worth of around €100 million. The CEO owns shares worth of slightly below €10 million.

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