Monday 16 December 2019

Share Watch: 'Explosion' in diabetes presents a challenging opportunity for Novo


There is a global obesity epidemic confronting the world and the only sure thing is that the demands for insulin will explode. Stock Image
There is a global obesity epidemic confronting the world and the only sure thing is that the demands for insulin will explode. Stock Image

John Lynch

One sure way to get a 'demo' going is to pitch the interest of the sick against the profit motive of a multinational.

How many times in recent years have the streets outside Leinster House been thronged with angry sufferers from a variety of illnesses, claiming that a successful drug is their right, no matter what the producer of that drug wants to charge the State? Sometimes the claim of price-gauging on the part of pharma companies is spot on. Often it is widely short of the mark.

All in all it makes running a multinational chaotically difficult, as has been the case with the Danish pharma group Novo Nordisk, a pioneer in producing insulin and making life tolerable for diabetics. But there is a global obesity epidemic confronting the world and the only sure thing is that the demands for insulin will explode, testing the world's health budgets as never before.

Novo Nordisk (Novo) was created in 1989 through a merger of two Danish companies who had been at loggerheads since the 1920s. Following the merger, the Novo Nordisk Foundation was established and it controls 76pc of the group shares, giving it an iron-clad control and a protection against poor governance.

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Like most big pharma companies, Novo was the inspiration of a brilliant academic Professor August Krogh and his wife who suffered from diabetes.

After intensive research they received permission to produce and sell insulin from the University of Toronto where the first insulin was produced in 1921. Two years later they established Nordisk Insulin Laboratory to produce and sell insulin in the Nordic region.

A year later two employees, the Pedersen brothers, left the company to form Novo Terapeutik and so began 65 years of intense competition.

Eventually 30 years later both companies merged to become Novo Nordisk. Today it sells in 180 countries with 42,000 employees and production facilities in eight countries, with a global service centre in India. Novo has almost half of the global market for insulin, a third of the global market for growth disorders and a significant share in the haemophilia sector. More than 400 million people worldwide suffer from diabetes and it is estimated this could rise to 600 million in the next 30 years.

Since its floatation Novo has been impressive with continuous rising sales and profits, and has been a flyer on the stock market.

However, in recent times the group has hit a bump. After halving its long-term financial targets three years ago and warning of price challenges in its largest market, the US, investors became uneasy, its shares fell and it was forced to lay off 1,000 employees. Early this year the company announced a further 1,300 redundancies.

The challenge of presenting a philanthropic face like Novo is interesting, as the expanding diabetic market creates a business opportunity but also a moral quandary. The pharma industry in general is facing customers angry at the cost of medicines, and Novo is no exception. This is particularly true in the US where uninsured and low-income people are unable to afford lifesaving medicines.

As a result pharma companies are being accused of that serious crime against the public interest, price gouging. Nova's answer is to offer free insulin to some lower-income Americans. However, presumably there is a limit to the amount of 'public interest' with the insulin demand set to explode. Novo's sales growth of 22pc four years ago is a distant memory. This year Novo expects sales and operating profit growth to be 2pc.

Today its shares trade at DKK 389 (€52), just short of its five-year high, helped by a share repurchase programme.

Shareholders who have held their shares for the last decade are still smiling given that they have increased almost tenfold. The shares are worth a punt.

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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