Continental Europe Region Novo Nordisk

Stock Pitch

NOVO-B.CO 22.11.2014

Novo Nordisk

COMPANY OVERVIEW

Domicile: Denmark MCAP: 561.52bn (DKK) 3Y Growth: 301.51 % Current Price: 265.80 (DKK) Target Price: 315 (DKK) Novo Nordisk is a global pharmaceutical company specialising in diabetes care, haemophilia medication, growth hormone therapy and hormone replacement therapy. With a market share of 27% and over 24.3 million patients using its diabetes care products, ranging from devices to oral tablets and insulin, it is the market leader in this area. It also has a leading position in growth hormone therapy with a market share of 30%. The company sells its products in 180 countries, and has employees in 75 countries around the globe.

INVESTMENT RATIONALE We view Novo Nordisk as the best positioned European pharma company. It offers a leading market share in the global insulin and diabetes care market and is benefitting from large geographic tailwinds that will further grow the business. In addition Novo Nordisk currently offers one of the strongest product pipelines in the sector that will keep profitability at high levels and help the company maintain its leading research position. Further growth will be seen in the market for Novo Nordisk’s obesity drugs, which only recently got approved. Given this robust growth outlook and future potential in both emerging markets and developed countries, Novo Nordisk still enjoys an attractive valuation in comparison to their peers.

MARKET POSITION Novo Nordisk has 47% market shares for insulin and is the leader across all regions. It dominates 27% of the market for diabetes care. In addition, it has 46% of the modern and new-generation insulin volume market share. With a growing world population and more people suffering from obesity-linked conditions such as type 2 diabetes, Novo Nordisk has great potential to continue its market leadership in this sector. It is also market leader for growth hormone therapy and is second in the market for Haemophilia, which however only account for 22% of the operating revenue. Even during economic hardship, Novo Nordisk has performed well. The nature of its products means that it is insensitive to economic changes. Further Novo has recognised the importance of relationship building with local communities, doctors and hospitals. By educating people, especially in emerging markets, that support detecting the disease and at the same time develop their sales channels. We expect Novo Nordisk to maintain and further expands its market position

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NOVO-B.CO 22.11.2014

Novo Nordisk

MANAGEMENT STRUCTURE & INTEGRITY Novo Nordisk has a two tier management structure that contains the Board of Directors and Executive Management. No person is able to serve as a member of both of the tiers. The Board of Directors determines company strategy, and observes the company's performance and its management and organisation. The Executive Management team are responsible for the company's daily operations. The majority of the board members have gathered experience in health care related businesses and have a profound understanding of the company’s needs and its vision. The Board of Directors always have four independent shareholder elected members and Novo Nordisk constantly seeks to have a diverse selection, which means there are always fresh eyes looking over the management of the company.

GROWTH PROSPECTS AND RISK With the steadily growing world population and diabetes and obesity epidemics Novo Nordisk sales are expected to grow in parallel. Novo Nordisk currently has 58% market share in China, giving it attractive growth prospects. It is especially noteworthy that China accounts for only 7% of the revenue generated, which already grew 11% in the past 9 months. Overall, in emerging markets, as both medical care (diabetes detection) and individual economic wealth is improving both diabetes and obesity is expected to grow. In developed economies, albeit despite recent budgetary pressures, we expect the health expenditure to increase. The UK, for example spent GBP57 billion pounds in 2012, representing 3.6% of GDP, on treating and accounting for the effects of obesity. Furthermore, growing education and awareness of type 2 diabetes will increase market size. It is estimated that only 50% are currently diagnosed, of which 50% have access to care, of which 50% get decent care. This means that only an eighth of the potential market is currently available to NovoNordisk. Despite the fact that the diabetes care market is still relatively small, Novo Nordisk currently treats 24 million patients, but has considerable income from these activities. Novo Nordisk's business model can be scaled to meet future demand easily. Lastly, Novo Nordisk boasts a continued and strong research focus, in the form of modern insulin (oral) and advanced devices, providing a

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NOVO-B.CO 22.11.2014

Novo Nordisk

growing supply of more advanced drugs to treat an increasingly aware growing population of diabetes patients. A big risk for Novo Nordisk comes in the form of denied patent approval and expiring patents, although its strong research focus is designed to shield it from any major such setbacks. On the macroeconomic side, currency depreciation. Potential decreases in government spending can affect Novo Nordisk, as well as financial instability. However, Novo has proved to outperform the FTSE 350 for Pharmaceuticals during the recent economic recession in 2008, illustrating a resilient business model.

FINANCIAL POSITION Novo Nordisk is benefitting from (i) growing sales, (ii) market leadership and (iii) cutting edge research and development. Both profit margins and net income figures have been on the rise since 2008. In the most recent Q3 report, operating margin reached 38.55% profit margins came in at just below 30%. The growth in profit was attributed to expansion in sales, proving that Novo Nordisk has potential to further expand due to the ever-growing market. Since Novo Nordisk experienced growing sales, it has also experienced growing costs. In 2013, the cost of goods sold grew by 5% while other costs grew by 13%. Breaking up the other costs, this signalled an increase due to sales expansion, marketing investments and launching Tresiba (an insulin drug). This suggests that there is more potential for the future value of Novo Nordisk to increase, especially since their spending on research and development also increased by 9%. As well as being well placed in terms of profitability, Novo Nordisk is a strong balance sheet position. Operating profit and net profit margins are expected to approximate 48% and 30% respectively. In addition Novo Nordisk has a favourable financing position, as it is currently debt free. More than half of the liabilities are retained earnings and the current ratio, quick ratio and cash ratio are 23.30%, 14.26% and 8.21% respectively

Its current dividend yield is 2.3%.

SHAREHOLDER STRUCTURE Novo Nordisk’s shares are split into A shares and B shares. 19.5% of Novo Nordisk shares (all of the A shares) are owned by Novo A/S, a company that in turn is wholly owned by the Novo Nordisk Foundation. Each of these shares carries 200 votes. The B shares each carry 20 votes. Novo Nordisk holds 5% of these shares as Treasury Stock. The share division allows for Novo Nordisk to retain a greater voting power (Novo Nordisk Foundation has 74%) and therefore control of the company’s interests.

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