Strategic trade
Trade view / 29 September 2016 at 9:37 GMT

#SaxoStrats: Novo Nordisk overvalued

Head of Equity Strategy / Saxo Bank
Instrument: NOVOb:xcse
Price target:
Market price:

News sentiment keeps on getting worse for Novo Nordisk, the world’s biggest producer of insulin drugs for the treatment of diabetes. Today, the firm announced that it is laying off 1,000 employees to offset sales weakness in North America (53% of revenue). 

Shares are down 0.7% today and 29% percent from their peak.

Novo Nordisk

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In its public statement the company says that it’s pricing uncertainty into 2018 and that growth will be low over the next two years. Should a company trade at EV/EBITDA 14.1 with low growth over the coming years and increasing competition from generic drugs? Our view is no, and we are selling Novo Nordisk shares today with a stop-loss at 305 and take-profit at 250. 

This trade will likely be short due to the tight stop and take-profit target, which fits with our longer-term view that diabetes drug companies are still a good business. 

But for now we are trading with the flow and news sentiment.
Further downside from valuation?

The growth story in the diabetes segment has been remarkably with the six largest firms in market share terms gaining almost 350% including dividends since early 2003, easily beating global equities. 

While the diabetes market is not going away anytime soon – especially not with the current health trend in China – the premium pricing may be over for now. It seems that Novo Nordisk’s big defense lies in its move to be first with insulin in a pill adding more years of protection through patents.

Novo Nordisk

Novo Nordisk has historically traded at a steep premium to its closest peers (Sanofi, Merck, Eli Lilly, AstraZeneca, and Novartis) but with the latest underperformance the difference has gone to zero. However, given today’s statement about losing market share and pricing weakness we may be entering a new phase where Novo Nordisk is going to trade at par with peers on valuation or even at a small discount.

Novo Nordisk
The chart below shows Novo Nordisk’s premium to large global pharmaceuticals. Again the company’s premium has declined from recent 40% to now only 10%

Novo Nordisk
Even more important for the downside drivers on Novo Nordisk’s share price is the overall valuation level on global pharmaceuticals. With EV/EBITDA slightly below 14, the industry is trading at historically high valuations and with the negative attention on drug prices in the US and Europe the whole industry could come under more pressure, scaring investors.

Novo Nordisk
We are getting closer to the US presidential election on November 8, so the likelihood of the news flow changing for pharmaceuticals is low. 

With the current information and very negative price momentum in Novo Nordisk shares we are selling the shares, but do acknowledge that if the shares go to 250 then the fundamentals will likely begin to take over again.


Entry: sell at market today.

Stop: 305.

Target: 250.

— Edited by Michael McKenna

For more on equities click here.

Non-independent investment research disclaimer applies. Read more
AlexF AlexF
Hi Peter having the Saxo global stock picker how can you explain that the strategy has top holding Novo if you as head recommend a sell ? Please this is important to get an answer as could determin keeping this saxo select or not
This is not overvalued, just the result of the negativ attention, which is going on, and on, and on ..... without any new bad news comming from the company, which has only reduced its expection to annual growth from 10% to 7%. it's like the old gramophone record, which runs in the same track continuously.
Dimitrios Tamvakas Dimitrios Tamvakas
Most big pharmas are on the defensive during the last 5-6 months. Take Gild or BMY , both are 30% down from highs. I assume that there are many long term passive investors taking gains ahead of US elections and the possibility Hillary will win and reshape (?) the industry.
Hillary has already had a big impact at Novo Nordisk price value, which has been over 400 DKK last year
Market seems to be very manipulated now,like Bavarian Nordic case last year
Aleksa06 Aleksa06
Is this in a right way ?
AlexF AlexF
As said they hold Novo as top position in their global pick and then issue a sell ...I am puzzled. At least they would reduce the position in the portfolio to be consistent.


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