Novo Continues to Trade at a Premium
Novo Nordisk Stock Fell 6% after 4Q15 Earnings Release
Valuation for Novo Nordisk
The valuation of a pharma or biotechnology company is subject to the success of its pipeline, having a number of candidates in the late development stage, and the operating efficiency of the company. Novo Nordisk (NVO) is trading at a premium when compared with its peers.
The graph above portrays the forward price-to-earnings (or PE) ratio of Novo Nordisk in comparison with peers such as Merck (MRK), Eli Lilly (LLY), and Sanofi (SNY).
Relative valuation
To value any pharma or biotech company, one must look at multiple industry-specific factors such as the number of late-stage candidates, industry dynamics such as pricing strategy, competitor drugs, and the success rate of the company for drug development.
The discounted cash flow (or DCF) method takes into account future cash flows that would be generated by the launch of such pipeline drugs. However, a number of inputs required as a prerequisite make it a difficult valuation technique.
Relative valuation, a comparatively easy method for analysis, has the challenge of selecting an appropriate competitor.
For relative valuation, we’ll look at Novo’s peers Merck & Co, Eli Lilly, and Sanofi. Merck, Eli Lilly, and Sanofi were trading at an earnings multiple of 13x, 19x, and 12.79x, respectively, on February 3, 2016. Novo was trading at a PE multiple of 19.7x. All of these companies hold significant market share in the diabetes field. Thus, we have chosen them as peers for comparison. Novo’s innovative pipeline might be the reason for the premium multiple in comparison to peers.
Novo’s guidance for 2016
In local currency terms, Novo expects 5-9% sales growth. Modern insulin along with Victoza, Tresiba, Xultophy, and Saxenda are expected to be the critical sales drivers during 2016. While providing the outlook, Novo has accounted for the adverse impact followed by US healthcare reforms and fierce competition.
Operating profit would grow by 5-9% in line with sales growth. Further, the company plans to invest 7 billion Danish kroner for manufacturing capacity expansion. The company doesn’t expect further significant margin expansion considering the industry dynamics.
It is often risky to directly invest in a biotech company, as any news release about the success or failure of its drugs can result in volatility in the stock price. Thus, to remain on a comparatively safer side, investors can choose the PowerShares International Dividend Achievers Portfolio (PID), which holds 0.52% of its total holdings in Novo Nordisk stock.
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