Diabetes is a chronic illness that seems to keep getting worse. Some people are born with it. However, we think the primary cause is diet. In particular, we point to sugar and processed foods.
Mark’s doctor suggests he keep to meat, chicken, fish, fruits, vegetables, and nuts. Everything else is a cheat. He goes on to say absolutely no processed foods. Avoiding processed foods is nearly impossible in today’s fast-paced, mass-market world. Processed food is just about everything that is sold in a grocery store. Since our meals have too much sugar and not enough nutrients, diabetes and obesity are ever-growing problems.
Leave it to big pharma to find a solution to health problems. Novo Nordisk focuses on chronic diseases that seem to be getting worse globally. In particular, they address the following diseases.
Type 1 diabetes is a lifelong disease that affects the body’s ability to convert glucose from food into energy. In most cases, type 1 diabetes develops early in life and is often diagnosed during childhood. The disease starts when the immune system attacks cells in the pancreas that produce insulin, the hormone that helps convert glucose into energy for the body’s cells. People living with type 1 diabetes require daily injections of insulin to survive.
Type 2 diabetes is a complex chronic disease that occurs when the body cannot make enough insulin or use it effectively. People living with type 2 diabetes need treatment to keep their insulin and blood sugar levels under control. Insulin is a hormone made by the pancreas that controls the amount of glucose in the blood. Too little insulin means the body cannot absorb glucose from our food. When this happens, blood glucose levels rise, and over time, these increased levels can damage blood vessels and reduce the supply of oxygen and nutrient-rich blood to the body’s organs and nerves.
Obesity can seem straightforward to explain. If a person consumes more calories than they need, they gain weight. But the real explanation is not that simple. And it is about more than weight. Obesity is a complex chronic disease, and losing weight is not just a question of eating less and moving more. Obesity can be influenced by genetics, physiology, environment, job and education, and what is going on in the brain. Understanding these factors is critical because obesity is associated with other diseases, including type 2 diabetes, heart disease, and certain types of cancer.
Haemophilia is a rare and serious X-chromosome-linked congenital bleeding disorder that affects the blood’s ability to clot, meaning that people with hemophilia bleed for a longer time than normal. It is estimated that about 1 in 10,000 people are affected by hemophilia, with 450,000 people living with hemophilia worldwide. Deficiencies of coagulation factors characterize Haemophilia and is typically passed down from parent to child, although a spontaneous mutation causes about a third of cases. There are two types of hemophilia, each associated with a deficiency of a particular coagulation factor.
Growth Disorders: For most people, growth hormones are produced naturally by the pituitary gland in the brain. As its name implies, growth hormone is responsible for making us grow. However, it also contributes to many other important bodily functions such as growing strong and healthy bones, regulating the body’s metabolism, specifically the balance between lean muscle and fat, developing and maintaining the body’s organs, and general well-being and energy levels.
Obesity is the disease that has captured investors’ imagination. At least 1 billion people on the planet suffer from this chronic disease. Novo Nordisk makes a GLP-1 injectable hormone that was designed to treat diabetes. They branded this drug Weagove. People taking this weight loss hormone often lose significant weight. Mark has a relatively that lost 80 pounds on the treatment in about 2 years.
The price chart for NVO is long-term bullish and exemplifies the nature of the pharmaceutical industry. The most successful pharmaceutical companies treat diseases and do not cure them. Diabetes and hemophilia are lifelong diseases, and with the proper treatment, one can live long, enjoyable, and productive lives. This means NVO has customers who provided repeat business for decades. We are learning that the same is the case for their weight loss treatments. The GLP-1 hormones regulate appetite and blood sugar levels. This mechanism helps reduce food intake and promote weight loss with a healthy diet and exercise. The drug’s generic name is semaglutide, which they brand as Ozempic for diabetes and Wegovy for weight loss.
GLP-1s started as a diabetes drug, and the company found that people lost weight on the therapy. Because of its effectiveness and the dangers of excess weight, doctors started prescribing it “off-label.” This is a legal practice where doctors prescribe medicines that the FDA and other health agencies have not approved for a specific use. Insurance companies often do not cover the payment of drugs when used off-label, so people have to pay the full cost. The popularity of GLP1s caused the share price to rocket higher from less than $50 a share to just over $150. Once the buying frenzy had settled, the share price fell close to 30% to $106.13, and the share price ended Wednesday’s trading.
We think the recent selloff is a buying opportunity. We hold this view because Medicare and Medicaid coverage of Wegovy (semaglutide) is limited and conditional: Medicare: Wegovy is covered under certain Medicare Part D plans for people at high risk of cardiovascular events, such as heart attacks or strokes and who are obese or overweight. This expanded coverage stems from its approval as a treatment to reduce cardiovascular risk, not solely for weight loss. However, Medicare generally excludes coverage for drugs prescribed strictly for obesity due to legal prohibitions.
Medicaid: Coverage for Wegovy under Medicaid is determined at the state level. Many state programs currently do not cover weight-loss medications unless they are explicitly tied to another medical condition, such as diabetes or cardiovascular disease.
We think that will change in the months ahead. When the drug becomes more highly covered, we think sales will grow substantially, and so will earnings. Not every day can one define a growth company in the healthcare space that has the runway to grow for years to come. But we think this is the case with NVO.
The company is growing revenue at 20%, and EPS is growing a little faster at 24%. The exhibit above is denominated in DSS (Danish Krone, 1 DKK = $0.14). We think that this growth rate will continue for a few more years. Other companies are developing competing GLP-1s. These are injectables. Companies are trying to find an equivalent treatment in pill form. Pills are always preferred to infections. NVO is working on this as well. There will be more competition at the end of the day, so there are limits to how much the company can charge for their treatment, which we understand costs $1,400 a month. That is far more than most people can afford. Some people can get a $500 discount. When the government starts paying for the treatment, sales growth will continue.
Given our bullish view, we think long-term, long-only stock investors should consider buying the stock. Options traders may want to sell a cash-covered put on the shares. With NOV trading at $106.13, consider the following structure.
In this trade, the investor will collect $625 upfront, which they get to keep. Since this structure is a cash-covered put, one will need an additional $9,875 in cash to back up the trade. The investors will have to put this money to work if the share price trades at $105.00 or less at expiration. The breakeven level is $98.75, $7.38, or 6.9% below the current price. Since it is a bit out-of-the-money, there is a 63% chance of making money on the trade. If the stock trades down and the put is exercised, that is not a horrible outcome, as one will buy the stock at 25 times forward earnings and collect a dividend of $1.45 a year. The investor can then write a call against the stock and collect an additional premium. This might look like a small trade. But the potential ROE is attractive. If it works, the investor will earn $625 by risking 9,875 for a 6.3% return in 50 days. That is an annual rate of return of about 46%.
The risk in this trade is that the new administration will not cover the cost of the medications. Given they are on a cost cutting mission, that is a significant risk. At the same time, they are moving to make people healthy again, so they have a reason to cover the cost. There are lots of diseases that are associated with being overweight. Thin people are generally metabolically healthier than overweight people. That could save healthcare dollars in the long run, so there is a potential reason for the government to cover the cost. The other risk is that someone comes up with a weight loss drug in a pill form, thus shifting demand away from injectables.
Photo by Towfiqu barbhuiya: https://www.pexels.com/photo/hands-grasping-belly-fat-through-shirt-11309666/
