Investor Update May 2016

Transcription

1 Investor Update May 2016 Novo Nordisk poised for growth through helping care for rising global diabetes epidemic On Marsico Capital Management s trip to Australia in March, Portfolio Managers Tom Marsico and Brandon Geisler highlighted how the firm s investment process looks to macro trends which serve as a tailwind to inform its fundamental bottom up work in finding high quality growth companies for Marsico Capital s Global Growth portfolios. One such example revolves around the demographic trends associated with the growing global diabetes epidemic. Rising obesity rates are one of the reasons diabetes rates continue to rise. In the following pages we want to share why we believe this epidemic will continue to worsen and why Denmark-based pharmaceutical company Novo Nordisk is poised for growth. The Opportunity The International Diabetes Federation ( IDF ) estimates that 415 million individuals worldwide currently have diabetes (Exhibit 1). This figure has more than doubled from the year 2000 when 177 million people were estimated to have diabetes. Extrapolating this growth forward, the IDF estimates that 642 million individuals will be living with diabetes by 2040.

2 As Novo Nordisk develops and markets human insulin, insulin analogs, GLP-1 receptor agonists, and other agents for diabetes management, the company should experience long term compounded annual growth that exceeds the overall diabetes market growth rate. Consider that in 2015, Novo Nordisk provided medical treatments to an estimated 26.8 million patients, representing approximately 7% of the global patient population. In addition, when looking at Novo Nordisk s global diabetes market share, the number of patients currently using Novo Nordisk s products would suggest that fewer than 25% of diabetics globally receive diabetes care treatment. The market remains undertreated and the opportunity exists for the number of patients receiving therapy to increase substantially. Given this backdrop, we believe Novo Nordisk is a compelling investment opportunity as its suite of products is specifically indicated for controlling diabetes. Exhibit 1 Source: International Diabetes Federation Globally, China represents the largest demographic group by population, and as it moves from an agrarian economy to a services economy, the country s obesity rates will continue to rise. What is Diabetes? Diabetes is a chronic condition caused by the body s inability to produce or make use of insulin, a hormone made by the pancreas. Insulin acts like a key, unlocking cells so that glucose in the blood can enter and produce energy. Without insulin, blood glucose levels rise and can, over the long term, cause damage to organs and body tissue. 90% of the people with diabetes have type 2 diabetes and up to 70% of type 2 diabetes cases can be prevented or delayed by adopting healthier lifestyles. On the other hand, Type 1 diabetes develops most often in children or young adults, affecting 86,000 children every year 1. There are two primary reasons that diabetes rates are on the rise. First, diabetes rates increase with age. According to the U.S. Centers for Disease Control and Prevention, year olds represent less than 10% of diagnosed diabetes cases. More than 50% of the newly diagnosed individuals are over the age of 55. Much of this is due to the fact that sedentary lifestyle increases with age. Globally, China represents the largest demographic group by population, and as it moves from an agrarian economy to a services economy, the country s obesity rates will continue to rise. Overall, we expect to see an increase in diabetes given the aging of the world s population. Second, diabetes rates rise with obesity rates and while the United States carries the dubious distinction of having the highest proportion of overweight citizens, obesity is a global phenomenon. As emerging 1 International Diabetes Federation, IDF Atlas, 7th edition,

3 market populations earn more discretionary income and move into the middle class, many tend to adopt a Western diet, consuming more calories through meat, fast food and soft drinks, which leads to increased obesity and incidence of diabetes. A Global Epidemic Exhibit 2 We believe the company is the purest way to invest in this theme given 94% of revenues are related to diabetes care and/or insulin used for the treatment of diabetes. Given the aforementioned obesity rates, it would make sense that the portion of the population with diabetes is higher in the United States than in India or China. However, the number of people with the disease in India and China is much greater and is expected to increase significantly (Exhibit 2), reflecting a global epidemic. Around the world, aging demographic trends, obesity rates and the growth of the middle class all contribute to an unfortunate long-term macro tailwind of demand for treatment and a cure for diabetes. Making matters worse, diabetes is a life long illness. Once a person develops the disease, it is with him or her for life. The company that is best positioned, in our view, to meet these ongoing demands is Novo Nordisk. Why Novo Nordisk? Novo Nordisk is by far the dominant player in global diabetes care. While the company focuses on four disease areas (diabetes, obesity, hemophilia and growth disorders), it has a leading 28% market share of global diabetes care (Exhibit 3). We believe the company is the purest way to invest in this theme given 94% of revenues are related to diabetes care and/or insulin used for the treatment of diabetes. In 2015, Novo Nordisk provided medical treatments to an estimated 26.8 million patients. The company s long term target goal is to reach 40 million people with its diabetes care products by Although this would be considered substantial patient growth, it should be achievable given that there are 415 million people living with diabetes today, only half of whom have been diagnosed. As a result of the large unmet medical need and the continued growth in the incidence of diabetes, Novo Nordisk has established long term financial targets of 10% operating income growth over the next three years. As the company continues to innovate with its next generation insulins product portfolio including Tresiba, Ryzodeg, Xultophy and Saxenda, we believe it should be able to achieve these 3

4 long term targets given its established infrastructure. As the market has moved from traditional insulin to more modern (designer) insulins, Novo Nordisk s revenues have more than doubled in this market and operating margins have improved from 31% to 46%. We anticipate the company will continue to innovate with its product portfolio over time and as a result will remain the global leader in the diabetes market. Exhibit 3 Source: Novo Nordisk, February Primary Revenue Drivers Novo Nordisk s major revenue drivers are in three primary areas: basal (long acting) insulin, prandial (meal time) insulin, and GLP-1 receptor agonists. Levemir is Novo Nordisk s current basal insulin product with total global revenues of $2.8 billion and a current 24% market share of the basal insulin market. In the (basal) insulin market, the risk with product use is that blood sugar levels decrease to abnormally low levels (hypoglycemia). Incidence of hypoglycemia can cause a variety of symptoms such as confusion, seizures, and sometimes death. Importantly, Novo Nordisk recently received approval for its next generation basal insulin, Tresiba, which has been shown in studies to lower the incidence of severe hypoglycemia by more than 35% when compared to the market leader in the basal insulin market, Sanofi s Lantus. As Lantus currently has a greater than 65% market share in the basal insulin market, Novo Nordisk is anticipating moving market share away from Sanofi s product to Tresiba due to the recent positive results of the studies. This is one of the near term opportunities for the company and one we believe Wall Street underestimates. After basal insulin, the next opportunity for Novo Nordisk is in the prandial insulin market with its NovoRapid and NovoMix products which account for $4.8 billion in worldwide revenues. As Novo Nordisk s market share has been more dominant in the basal insulin market, these drugs have experienced five year compound annual growth rates ( CAGR ) of 12% and 7%, respectively. As the market has moved from traditional insulin to more modern (designer) insulins, Novo Nordisk s revenues have more than doubled in this market and operating margins have improved from 31% to 46%. Outside of the insulin market, Novo Nordisk has leading market share in the GLP-1 receptor agonist market at 56% with its product Victoza. GLP-1 mechanisms are a differentiated approach to controlling insulin for diabetics and appear to restore glucose 4

5 sensitivity of the pancreas cells that are depleted due to diabetes. Victoza initially received approval in the EU in 2009 and the U.S. in 2010, and achieved $2.7 billion in revenues by the end of Most recently, the company released data that showed that Victoza significantly reduces the risk of major adverse cardiovascular events over five years when added to the standard of care. As this is the first and only trial to show a reduction in cardiovascular events with the GLP-1 mechanism, this data, when approved by the U.S. Federal Drug Administration, should lead to additional Victoza growth which the market is underappreciating. Catalysts and Valuation Given the opportunity for additional sales growth based on the data seen for Tresiba and Victoza in recent research studies, we believe market participants are underestimating Novo Nordisk s future growth. In addition, because diabetes is a largely unmet medical need and given the expected global growth in the incidence of diabetes, Novo Nordisk has established long term financial targets of 10% operating income growth over the next three years. As the company s marketing team is equipped to offer new drugs without the need to expand personnel, Novo Nordisk is expected to increase revenues at a greater rate than operating expenses. We believe this should lead to higher incremental margins, higher earnings, and greater cash flow than the Street is projecting. For example, in 2015, Novo Nordisk reported 8% constant currency growth, grew operating expenses slower than revenues and reported incremental operating margins of 79%. We believe this trend will continue given the overall market growth and Novo Nordisk s continuing market share gains with Tresiba and Victoza. Marsico Capital is currently modeling a revenue CAGR of 11% and operating income CAGR of 13% for Novo Nordisk, which compares to the Streetprojected revenue CAGR of 8% and operating income CAGR of 7% for this same time period. As a result of this growth, we believe Novo Nordisk warrants a premium multiple as it is expected to have greater growth than its peers in the European pharmaceutical industry and can achieve a price target of $72 by the end of This example is intended for hypothetical, illustrative purposes only. Data above is cited in U.S. dollars, unless otherwise noted. Please keep in mind that our views on investments discussed herein are subject to change at any time and the holdings represented here do not represent all of the securities purchased, sold, or recommended by Marsico Capital. References to specific securities mentioned herein are not to be construed as a recommendation to buy or sell those securities, and it should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list. Each investment thesis stated above is based on information available to Marsico Capital at the time it was prepared, including statements of good faith beliefs and forward-looking projections. This information is subject to uncertainties and future events that could cause actual results to differ from those expected or projected. 5

6 BREAKING NEWS! Marsico Capital Management Wins Award Institutional Investor names Marsico s Global Growth Equity strategy as best in class The Institutional Investor Awards recognise U.S. money managers in 39 asset classes who stood out in the eyes of the investor community for their exceptional performance, risk management and service. The Institutional Investor award selection process starts with a short-list of top performing managers identified by Institutional Investor magazine s editorial and research teams in consultation with evestment s research team. # Investment strategies are analysed based on factors such as one-, three- and 5-year performance, Sharpe ratio, information ratio, standard deviation and upside market capture. Each category is analysed based on the factors used by institutional investors in their own searches on evestment. # More than 1000 leading U.S. pension plans, foundations, endowments and other institutional investors are then asked to vote for up to three of the top performing managers in each strategy in which they invested during the past year. The Marsico team is proud to have been chosen for this coveted and respected award. There is a great deal of rigour behind Institutional Investor s selection criteria, and we appreciate being recognised for the quality of our investment process, people and performance, said Mr Marsico. Our objective is to help investors achieve their long-term goals. A key differentiator is the way we blend top-down macroeconomic analysis and theme development with bottom-up stock selection. This truly sets us apart from other fund managers, and it s an approach that s been tested in a variety of market conditions. We believe the experience of our team and depth of our internal research are contributing factors in how we ve been able to deliver long-term growth of capital for our investors. Marsico s award-winning global growth strategy can be accessed in Australia by institutional, wholesale and platform investors via Channel Capital. # evestment provides the largest, most comprehensive global database of traditional and alternative strategies, delivered through leading-edge technology Global Growth Strategy Performance Please note - the performance returns set out below are for the US$ Marsico Global Growth Strategy (not the CC Marsico Global Fund which has only recently launched) and have been converted to AUD to illustrate the results achieved. Marsico Global Growth Strategy (US$ monthly returns converted to AUD). Performance is as at 31/03/ Year 3 Years p.a. (%) 5 Years p.a. (%) Since Inception p.a. (%) (02/01/2008) Marsico Global Growth (Gross) MSCI ACWI NR # Annualised Excess Return (Gross)

7 Please note the Marsico Global Growth Strategy is domiciled in the U.S. and is not for offer in Australia. The above performance is for illustrative purposes only. The performance returns set out above for the Marsico Global Growth Strategy is a composite of the performance of similar portfolios managed by MCM. The composite performance returns include non-taxable, discretionary, fee-paying global style accounts that have an objective of long-term growth of capital by investing primarily in the common stocks of US and foreign companies of any size that are selected for their long-term growth potential. The gross performance returns stated are for the Marsico Global Growth Strategy in U.S. Dollars (converted to Australian dollars). # The benchmark refers to the MSCI ACWI Net in USD (converted to Australian dollars). Data source: Morningstar Direct and MCM. The performance information presented represents past performance and does not guarantee future results. Returns have not been examined. Returns shown include the reinvestment of dividends and income. The gross-of-fees performance information presented does not reflect the deduction of investment advisory fees or other fees incurred in the management of an account, which will reduce investment returns. About Marsico Capital Management, LLC (MCM) Marsico Capital is a Denver based Global Equity manager, headed by renowned investment manager Tom Marsico. Marsico Capital manages U.S., international and global equities totalling more than US$4.6 billion. For the past 35 years Tom has been involved in financial markets, but it was in the 1990s at Janus Capital that he made a name for himself as a high-profile health and technology investor. Tom launched Marsico Capital Management in 1997 along with an investment team of 20 people. For more information please visit marsico-funds/ Accessing the CC Marsico Global Fund Australian investors can now access Marsico Capital s high quality growth investing approach via a partnership with multi-affiliate financial services group, Channel Capital. The CC Marsico Global Fund ARSN (the Fund) is an Australian domiciled global equities fund managed by Marsico Capital and offered by Channel Investment Management Limited ACN AFSL The Fund is managed in accordance with the Marsico Global Growth Strategy and is available to sophisticated or wholesale investors only. To register your interest in the Fund - please click here. CC Marsico Global Fund ARSN Responsible Entity: Channel Investment Management Limited ACN AFSL (Channel). Investment Manager: Marsico Capital Management, LLC (MCM). This is general information only and is not intended to provide advice to any particular investor, nor take into account an individual s investment objectives, circumstances or needs. The value of an investment can rise and fall and past performance is not indicative of future performance. This information is not financial product advice and has been prepared without taking into account the objectives, financial situation or needs of any particular person. The information is not intended for any general distribution or publication. Please keep in mind that our views on investments discussed herein are subject to change at any time and the holdings represented here do not represent all of the securities purchased, sold, or recommended by MCM. References to specific securities mentioned herein are not to be construed as a recommendation to buy or sell those securities, should not be assumed to be or have been profitable investments, and are not guaranteed to be in portfolios today. 7