Patience required

The stock market has turned the global obesity and diabetes epidemic into a two-horse race between Novo Nordisk and Eli Lilly. Today, almost all investor focus is on the market shares of their GLP-1 franchises and on the potential success of oral versions of these anti-obesity drugs. Today’s graph shows Novo Nordisk’s P/E ratio versus the MSCI World and the MSCI World Healthcare index. For most of the past decade Novo traded at a clear premium to both – but that premium has vanished.

At ECP we are still invested in Novo Nordisk, even if our initial entry in Q1 proved too early in market terms. Short-term negative sentiment has been compounded additionally by internal governance questions around the new CEO and renewed board, as well as political noise – including fears that a Trump administration could turn more aggressive on drug pricing and healthcare regulation.

The long-term case, however, is unchanged: Novo Nordisk remains at the centre of the global diabetes and obesity epidemic with a unique combination of intellectual property, manufacturing scale and global reach. At today’s valuation, after losing its historical premium, we see Novo as a cheap entry point into a very high-quality franchise and are comfortable keeping it as a core position in our portfolios. However, patience will be required before the tide turns.

Note: This daily comment does not constitute a recommendation to buy or sell any security.