• Nishlen Govender, Portfolio Manager, Citadel

Tired of Aspen? We have a drug (company) for that

Most South African investors will be well acquainted with Aspen, the global pharmaceutical business founded in Durban that achieved its position as a market leader through the purchase of drug franchises from global peers across key therapeutics such as anesthetics, oncology and blood clotting.

However, investors who believe that pharmaceutical businesses, or healthcare businesses in general, represent attractive investment opportunities needn’t limit themselves to the one global pharmaceutical business available on the Johannesburg Stock Exchange (JSE). South Africa represents just 1% of the global economy, and there is a plethora of other businesses available offshore including hospital groups, managed care providers, and biotechnology and pharmaceutical companies.

One such company that merits further consideration is global drug company Novo Nordisk, one of the largest insulin providers in the world.

Originally starting as two separate companies, Novo and Nordisk each developed their businesses over time across areas such as insulin production, blood clotting and even penicillin. Novo started selling insulin in the United States in 1981, while in 1983 Nordisk introduced the Nordisk infuser – a pump that led to a refillable injector that looked like a fountain pen, which released small quantities of insulin. In 1989 the two companies merged, thus bringing together the world’s second and third largest insulin providers into one diabetes conglomerate in order to compete against then number one provider Eli Lilly.

Fast forward to 2019, and the company is now widely recognised as the provider of choice for diabetes treatment. Novo Nordisk holds a 45% share of the insulin market achieved through innovations such as slower acting insulin, longer lasting insulin and improved methods for injectable insulin, as well as its work towards the creation of an oral insulin medication which should achieve regulatory approval in 2019.

Insulin currently provides 81% of its revenue in a market that is growing rapidly – 450 million people suffer with diabetes globally, and rising obesity levels means that this number is expected to compound.

Although future returns are not guaranteed, rising demand and a firm commitment to innovation has also meant that the company’s share price has significantly outperformed the S&P 500, the benchmark for US equities which itself has achieved significant performance over time.

Source: Citadel (2019) *Both rebased to 100 and presented in US dollars

Industry challenges

However, despite Novo Nordisk’s position as a company in a compelling industry with a significant market share and a demonstrated history of market leadership, its share price reached its highest level in 2015 – a level that it has struggled to breach in the subsequent years.

This price resistance stems from a perceived risk to drug pricing, and the threat that competitors could in time encroach on its dominant position in the treatment of diabetes.

Many, for instance, will be aware of increased pressure on drug companies over pricing in recent times, especially in the US where pharmaceutical companies have previously taken advantage of limited regulation to increase drug prices. Infamous cases such as Valeant and Martin Shkreli’s Turing Pharmaceuticals immediately come to mind, although other companies have likewise introduced steady price increases on much needed and life-saving products.

Novo Nordisk itself has benefitted from the US operating environment, although it should be noted that the company has consistently introduced significant innovations to warrant higher prices, resulting in exponentially better provision o