Monday 21 May 2018

Healthy times for pharma but landscape may change

'Of course 'cures' are an extremely precious commodity, but they are happily not rare either.' Stock Image: PA
'Of course 'cures' are an extremely precious commodity, but they are happily not rare either.' Stock Image: PA

I've noticed over the years that radio and television newsrooms have an absolute fascination with health and science.

I've noticed over the years that radio and television newsrooms have an absolute fascination with health and science.

As soon as some handsome young scientist in a clean white coat starts to whisper the word 'breakthrough', he or she will be immediately surrounded by a thousand cameras and three times as many microphones.

The public has an endless appetite for new ways of treating diseases and the magic word 'cure' can produce the media equivalent of the 1849 gold rush. Of course 'cures' are an extremely precious commodity, but they are happily not rare either.

Perhaps just as important is the task of discovering new ways to deliver drugs.

I've found that, for an investor, it is often a crucial reason for tracking a company's progress.

I'm especially interested in a Scandinavian company, Novo Nordisk, which has impressed me for years with the dedication and effort it has put into the delivery of treatments that in the past relied on injections. These are diseases like diabetes, obesity, growth disorders and haemophilia.

Novo Nordisk in its various locations around the world has been discovering ways in which its treatments for these diseases can now be taken orally or by using patches, or using other novel concepts - anything but a jab.

The Danish group has a special focus because it produces half the global market for its core product, insulin. Unfortunately, the demand for this product shows no sign of slowing down for quite some time yet. Spending on diabetes around the world could reach €1trn in the future.

The Danish group has its headquarters in Copenhagen and employs 42,000 people in 80 countries, and markets its products in more than 170 countries. The group's largest market is the US, generating more than half its total sales. While its market share has declined slightly, it is still an impressive 38pc.

Of the group's remaining four regions, Europe accounts for a quarter, and an impressive half of the total market. Japan has always been a strong market for the company where it has been the market leader for many years. Recently the Chinese market has performed strongly and now accounts for 10pc of group sales and a large 60pc of market share. The company has calculated that sales growth will be in the low single digits for all regions next year.

Over the past five years, things have been good for Novo Nordisk. Sales are up 40pc to €15bn, operating and net profits are buoyant and free cash flow is strong. Sales in its core insulin market, which accounts for 80pc of total sales, are holding up but other divisions were 'challenged'. Recently the company suffered a set-back after its failure to buy the Belgian bio-tech group Ablynx. The group was snatched by French rival Sanofi.

However, Nova Nordisk has indicated that it will still seek deals, particularly in the bio-tech area where its business is flagging.

The company's shares, like most European stock over the past few months, have been affected by the sell-off. Over a 10-year period, however, there are few complaints. Today the shares trade at €39, down from a yearly high of €47, with a modest price earnings multiple of 19.

Is the share worth having? Yes, if one considers its significant market share, growth potential, global footprint, strategic clarity and a well managed group. The only downside is political instability.

Readers of this column will be aware that emerging digital technologies are reshaping the business landscape.

There is no reason why pharma could not be next. Its business model has long focused on drug development together with armies of sales people descending on physicians to specify its medicines.

Could the 'new disrupters' using the full power of the internet, artificial intelligence, and the opinion-changing tricks that cause people to vote for the most unlikely politicians, change the landscape? The pharma industry is trying to deal with this and at the same time stop someone else controlling the business.

Interesting times ahead.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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