I am always on the lookout for stocks I can hold for the long haul because they are so valuable, I cannot afford to let them go. The first thing I look for is a company in a segment with strong demand during good times and bad. This means I won't have to worry about economic events that could negatively affect the markets.
The prevalence of diabetes is expected to soar in the coming decades as a result of an increasingly overweight and aging population. These demographic trends are further strengthened by a market shift toward modern insulin analogs, which offer improved efficacy, safety and convenience for patients.
As the general population struggles with a growing obesity crisis, Novo is well positioned to help patients control their diabetes. In fact, since 2006, the stock has gained more than 500%. Take a look at the chart below...
Patient conversions to more expensive, modern insulin offerings are expected to increase at a 10% annual pace during the next decade. And because the company also manufactures the industry's most modern and effective insulin analogs, which allow it to charge as much as 150% more than its competitors, the growth prospects for the company are even higher.
Much of Novo's recent growth can be attributed to sales of Victoza, a drug for the treatment of Type 2 diabetes. Sales of the drug brought in more than $1 billion in 2011. Total sales for that entire year were nearly $11.7 billion.
Novo has also developed therapeutic proteins, which have been used to create a highly profitable line of biopharmaceutical products for hemophilia and other bleeding disorders. This development has allowed Novo to diversify its business, increase its top line and increase profit margins.
The company has a strong financial position. As of June 30, the company had cash balance of $17.5 billion, which is more than 30 times its long-term debt obligations. Considering the firm's strong balance sheet and robust free cash flow generation, there are no concerns about its ability to repay its debts. In addition, one of Novo's key strengths is its successful management strategy. I have been impressed with Novo's commitment to return cash to shareholders through dividends and share repurchases.
Risks to Consider: Generic-drug competition is a major threat to Novo in several markets, especially for its relatively easy-to-manufacture human insulin. During the next several years, additional threats such as an inhaled insulin alternative or even a cure for Type 1 diabetes, could negatively affect Novo's sales.
With new health care legislations sweeping several countries, Novo has seen steep price declines for many of its drugs. This could reduce its revenue base and lower profitability if the trend continues. Additionally, Novo faces a bit of currency risk with a significant portion of its sales coming in U.S. dollars while a larger portion of its costs are denominated in Danish krone. Adverse currency fluctuations could impair its profitability.
Action to Take --> Having said that, the upside still far exceeds the potential downside. Fighting the diabetes crisis is an uphill battle and Novo appears to have the upper hand for the unforeseeable future.
As such, buy Novo Nordisk up to $175 a share. This stock has been delivering annual gains of more than 20% for the past 15 years (four times the return of the S&P 500). I expect Novo to continue to outperform the market and hit $200 within the next six to 12 months.