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Stock Strategist

Novo's Scale Advantages and Drug Lineup Broaden Its Wide Moat

Regulatory issues that we believe have little impact on Novo Nordisk's long-run prospects have finally helped shares of the leading insulin maker go on sale.

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 Novo Nordisk (NVO) has been consistently at the forefront of diabetes care, and we expect favorable industry dynamics and the firm's formidable research and development and diabetes-focused commercialization infrastructure to continue to drive strong returns on shareholder capital.

We expect growth to come from increased market penetration in diabetes care and stable growth in biopharmaceuticals. Once-daily Victoza continues to outperform once-weekly Bydureon in the GLP-1 market thanks to the competing drug's inability to prove noninferiority in trials, and we expect Victoza to break the $2 billion mark in annual sales this year. Novo's next-generation products, Tresiba and Ryzodeg, will help the company defend its leading insulin franchise, though we expect that a complete response letter will delay U.S. launch by two to three years. This regulatory setback, along with recent safety concerns for the incretin class--of which Victoza is a member--has caused shares to underperform, and Novo is now trading at one of the steepest discounts to fair value (over 20%) in the large-cap biotech space (see the following table). However, we think these issues have little long-term impact on the company's value, and instead present investors with the rare opportunity to own this high-quality name at an attractive price.

Lauren Adams does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.