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.
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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 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.
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%
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.
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.
— Edited by Michael McKenna
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