Novo Nordisk Earnings Shares Remain Overvalued Despite Our $100 Billion GLP-1 Market Forecast

Morningstar Equity Analyst Report | Report as of 2 Nov 2023 18:53, UTC | Reporting Currency: DKK | Trading Currency: USD
| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 21
Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC
Last Price Fair Value Estimate Price/FVE Market Cap Economic MoatTM Equity Style Box Uncertainty Capital Allocation ESG Risk Rating Assessment1
97.68 USD 70.00 USD 1.40 435.64 USD Bil Wide 3 Large Growth Medium Exemplary ;;;;;
1 Nov 2023 19 Sep 2023 06:51, UTC 1 Nov 2023 1 Nov 2023 05:00, UTC
Price vs. Fair Value
Last Close: 97.68

200 Fair Value: 70.00
19 Sep 2023 06:51, UTC
150 Over Valued

Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD
Analysis
0.89 1.07 1.03 1.15 1.33 1.40 Price/Fair Value
-11.80 28.31 22.93 61.85 21.86 45.87 Total Return %
Morningstar Rating
Total Return % as of 1 Nov 2023. Last Close as of 1 Nov 2023. Fair Value as of 19 Sep 2023 06:51, UTC.
Contents
Analyst Note (2 Nov 2023) Novo Nordisk Earnings: Shares Remain Overvalued Despite
Business Description
Business Strategy & Outlook (10 Aug 2023) Our $100 Billion GLP-1 Market Forecast
Bulls Say / Bears Say (20 Sep 2023)
Analyst Note Karen Andersen, CFA, Strategist, 2 Nov 2023
Economic Moat (10 Aug 2023)
Fair Value and Profit Drivers (20 Sep 2023)
Novo Nordisk’s 33% sales growth and 37% operating profit growth at constant currencies for the first
Risk and Uncertainty (10 Aug 2023) nine months of 2023 were consistent with the firm’s pre-announced results in October. Management’s
Capital Allocation (20 Sep 2023) updated 2023 guidance from October—32%-38% top-line growth and 40%-46% operating profit
Analyst Notes Archive growth—is slightly above our prior expectations, as U.S. GLP-1 sales are exceeding management’s
Financials
expectations on both volume (diabetes drug Ozempic) and price (both Ozempic and obesity drug
ESG Risk
Wegovy). We’ve slightly raised our 2023 estimates (now at 33% top-line and 44% operating profit
Appendix
Research Methodology for Valuing Companies growth at constant currencies for the full year) and we continue to model strong double-digit growth
through at least 2026, adding support to our wide moat rating for Novo Nordisk. However, we’re
Important Disclosure
The conduct of Morningstar’s analysts is governed by Code of Ethics/Code of maintaining our DKK 475/$70 fair value estimate, as we stand by our existing long-term forecast for
Conduct Policy, Personal Security Trading Policy (or an equivalent of), and
Investment Research Policy. For information regarding conflicts of interest, please GLP-1 based drugs (including diabetes, obesity, heart failure, NASH, and Alzheimer's) of more than $100
visit: http://global.morningstar.com/equitydisclosures.
billion at the end of the decade. We think shares are overvalued at recent prices, but we continue to
The primary analyst covering this company does not own its stock.
watch trends on patient compliance with GLP-1 therapies and pipeline development at Novo and
The ESG Risk Rating Assessment is a representation of Sustainalytics’ ESG Risk
1
competitors for potential catalysts to raise or lower our long-term forecast.

Rating.
Overall, GLP-1 sales across diabetes and obesity care are driving growth as insulin and rare disease
units decline, and 73% of third-quarter sales (and likely an even higher share of profits) are derived from
GLP-1 therapies, largely semaglutide. In North America, Novo estimates that GLP-1 therapies are now
14.6% of diabetes prescriptions, up from 9.9% a year ago. In addition, roughly 50 million obese
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Morningstar Equity Analyst Report | Report as of 2 Nov 2023 18:53, UTC | Reporting Currency: DKK | Trading Currency: USD | Exchange: NEW YORK STOCK EXCHANGE, INC. Page 2 of 21
Sector Industry
d Healthcare Biotechnology Americans have access to Wegovy now, through either private (employer-sponsored) insurance or
Medicaid, an improvement from the 45 million estimate in the second quarter.
Business Description
With roughly one third of the global branded diabetes
treatment market, Novo Nordisk is the leading provider Business Strategy & Outlook Karen Andersen, CFA, Strategist, 10 Aug 2023
of diabetes-care products in the world. Based in As a pioneer in diabetes care, Novo has been in the business for over 85 years and claims 32% of the
Denmark, the company manufactures and markets a $50 billion-plus diabetes treatment market and roughly half of the more than $15 billion insulin market.
variety of human and modern insulins, injectable Diabetes' prevalence is expected to soar in coming decades as a result of an increasingly overweight
diabetes treatments such as GLP-1 therapy, oral
and aging population, and we expect Novo to maintain its wide moat as it continues to dominate in
antidiabetic agents, and obesity treatments. Novo also
has a biopharmaceutical segment (constituting roughly
diabetes and obesity therapy innovation.
10% of revenue) that specializes in protein therapies for
Insulin need will grow as more patients are diagnosed with and treated for diabetes, and as patients
hemophilia and other disorders.
require more-intense regimens as their disease progresses. Demographic trends are strengthened by a
market shift from human insulin toward modern insulin analogs (such as Novo's Levemir and NovoLog)
and next-generation insulin analogs (Tresiba, Fiasp), which offer improved efficacy, safety, and
convenience for patients. However, pricing pressure is intense, particularly in the U.S. (due to pressure
from pharmacy benefit managers, or PBM, and biosimilar usage) and China (volume-based
procurement). In addition, delayed insulin treatments due to the success of GLP-1 therapy are creating a
temporary volume headwind.
Growth is largely coming from GLP-1 therapies, which include daily Victoza, weekly Ozempic, and daily
oral Rybelsus; strong efficacy and cardiovascular benefits should allow Novo to continue growing sales
of GLP-1 therapies in diabetes. While Novo lost share to Lilly's once-weekly Trulicity, Ozempic's recent
launch, the launch of Rybelsus, and high-dose versions of each drug are revitalizing growth and
expanding Novo's reach. Lilly's novel drug Mounjaro is again gaining share, although class growth is so
strong that we expect both franchises to see double-digit growth for years to come.
Semaglutide's potential in new indications also gives us confidence in Novo's wide moat. The drug
received U.S. approval as Wegovy in obesity in June 2021 and is in phase 3 testing in areas like NASH,
Alzheimer's disease, and heart failure. Novo is also testing new combination regimens like cagrisema
that could offer even more compelling blood sugar control and weight loss, which could help Novo
maintain solid positioning against Lilly.
Bulls Say Karen Andersen, CFA, Strategist, 20 Sep 2023

u Novo's new obesity therapy Wegovy is significantly expanding the obesity treatment market given its
strong efficacy.
u With a solid portfolio of GLP-1 products, including Ozempic and Rybelsus, Novo is well positioned to
defend its formidable diabetes market share.
u Semaglutide is also being studied in areas including liver disease (NASH) and Alzheimer's, and Novo
ß
Competitors
Novo Nordisk A/S ADR NVO Eli Lilly and Co LLY AstraZeneca PLC AZN Sanofi SA SAN
Last Close
97.68 Fair Value Fair Value
Last Close 12,400.00 113.00
554.46 Uncertainty : Medium Uncertainty : Medium
Fair Value Fair Value
70.00 368.00 Last Close Last Close
Uncertainty : Medium Uncertainty : High 10,336.00 86.85
Analysis Security 1 Security 2 Security 3 Security 4

Economic Moat Wide Wide Wide Wide
Currency USD USD GBX EUR
Fair Value 70.00 19 Sep 2023 06:51, UTC 368.00 24 May 2023 21:04, UTC 12,400.00 8 Sep 2023 19:19, UTC 113.00 23 Mar 2023 20:05, UTC
1-Star Price 94.50 570.40 16,740.00 152.55
5-Star Price 49.00 220.80 8,680.00 79.10
Significantly Over 1 Nov Over Valued 1 Nov 2023 Under Valued 1 Nov 2023 Under Valued 1 Nov 2023
Assessment
Valued 2023
Morningstar Rating Q1 Nov 2023 21:24, UTC QQ1 Nov 2023 21:24, UTC QQQQ2 Nov 2023 01:14, UTC QQQQ2 Nov 2023 01:20, UTC
Analyst Karen Andersen, Strategist Damien Conover, Sector Director Damien Conover, Sector Director Damien Conover, Sector Director
Capital Allocation Exemplary Exemplary Exemplary Standard
Price/Fair Value 1.40 1.51 0.83 0.77
Price/Sales 15.42 16.98 4.37 2.35
Price/Book 33.94 47.57 5.17 1.48
Price/Earning 46.15 77.22 31.57 11.87
Dividend Yield 1.06% 0.79% 2.27% 4.10%
Market Cap 435.64 Bil 526.35 Bil 160.20 Bil 108.90 Bil
52-Week Range 54.85—104.00 302.14—629.97 100.20—128.28 80.60—105.18
Investment Style Large Growth Large Growth Large Growth Large Core
could achieve a strong share in these nascent markets.
Bears Say Karen Andersen, CFA, Strategist, 20 Sep 2023

u Tresiba's strong profile in the long-acting insulin market hasn't been enough to defend it from U.S.
pricing pressure due to competition from Sanofi and Lilly, and biosimilar insulins have weighed on
category pricing since 2017.
u Novo's Victoza and Ozempic have made GLP-1 therapies a key part of the firm's growth, but oral GLP-1
Rybelsus has had slower uptake, and Lilly's newly approved Mounjaro provides strong competition.
u Novo's obesity drug Wegovy had a slow launch due to supply constraints, and Mounjaro could launch in
2024 in obesity with a potentially superior profile.
Economic Moat Karen Andersen, CFA, Strategist, 10 Aug 2023

Novo Nordisk accounts for 32% of the global diabetes market, including roughly half of both the $15
billion insulin therapy market and the more than $30 billion GLP-1 market . Novo Nordisk's global scale
and strong intangible assets in diabetes and related cardiometabolic diseases like obesity give the firm
ß
a wide economic moat that will shield profitability for the long run. A focused research and
development strategy allows the firm to repeatedly extend patent protection through innovation. We
think the firm does face environmental, social, and governance risks, particularly related to potential
U.S. drug price-related policy reform (Novo Nordisk sees roughly 50% of its sales from the U.S.
pharmaceutical market) and ongoing potential for product governance issues (including litigation).
While we have factored these threats into our analysis, we don't see them as material to our valuation
or moat rating.
Novo's insulin business is continuing to evolve as next-generation versions steadily replace older
versions under pricing pressure and competitive threats among the top three insulin players, making it
difficult for new entrants to take share. Novo's human insulin has been largely replaced by modern
insulin and next-generation insulin analogs that provide better blood sugar control---with less
hypoglycemia and weight gain--than their human counterparts. In addition, generic and branded
competitors entering the insulin market face significant up-front costs, including high costs for clinical
trials as well as high-cost manufacturing relative to small-molecule therapies. Prices for most insulins
have been negotiated down over the years due to generic and branded competition and strong
pharmacy benefit manager negotiation, making it harder for new entrants to recoup costs.
Sophisticated pen systems are standard in most markets, another up-front investment that adds to
manufacturing costs. Efficient manufacturing techniques and economies of scale allow Novo's insulin
business to provide strong global profitability, qualities that it shares with the only two other global
insulin players, Sanofi and Eli Lilly. Successful commercialization of diabetes products also requires a
strong global sales presence.
These dynamics have led to branded insulin products and generic versions from branded players (like
Lilly's Basaglar, a generic version of Sanofi's Lantus) retaining most of the insulin market. While GLP-1
treatment appears to delay the need for insulin and has reduced insulin demand recently, we expect
Novo, Sanofi, and Lilly to enjoy continued insulin volume growth in the long term, as the increasingly
overweight and aging global population initiates or requires more intensive treatment to control blood
sugar and prevent diabetes-related complications or death. U.S. patents have expired for Novo's three
biggest modern insulin therapies NovoLog (2017), NovoMix (2017), and Levemir (2019), but the patent
clock is reset with Novo's newer insulin therapies like Tresiba (2029) and Fiasp (2030). We expect further
insulin improvements--like Novo's weekly insulin icodec, on track to launch in 2024--to continue to
refresh the firm's insulin portfolio.
While insulin accounts for 30% of Novo's top line, Novo's GLP-1 franchise is now more than 50% of sales
and growing. Injectable GLP-1 analog Ozempic (patent 2032) looks best-in-class over Lilly's Trulicity, and
oral Rybelsus (patent 2032) expands reach into the oral diabetes treatment market. Obesity drug
Wegovy is also protected through 2032 (as it is composed of the same semaglutide molecule as
Ozempic and Rybelsus), and has had stellar uptake seemingly limited only by supply. Cardiovascular and
ß
weight loss benefits on top of blood sugar control position the GLP-1 market for continued double-digit
growth, and we expect global market GLP-1 sales in diabetes and obesity to reach $100 billion by 2030.
While Lilly's novel GIP/GLP-1 therapy Mounjaro is launching strongly in diabetes and poised to launch in
obesity in 2024, Novo's own pipeline continues to move forward, with combination therapy cagrisema in
phase 3 in diabetes and obesity.
GLP-1 therapies also have potential in other cardiometabolic and adjacent indications, like heart failure,
fatty liver disease, sleep apnea, and Alzheimer's, and Novo and Lilly are running phase 3 trials of
semaglutide and Mounjaro in many of these indications.
Novo's historically more profitable biopharmaceutical arm (roughly 10% of sales) includes hemophilia
drug NovoSeven and endocrine therapy Norditropin. We think newer hemophilia competition has made
it difficult for Novo to maintain its competitiveness in this area, but Novo does have its own newer
hemophilia and growth hormone products at the launch phase or in the late-stage pipeline.
Fair Value and Profit Drivers Karen Andersen, CFA, Strategist, 20 Sep 2023
Our Novo Nordisk fair value estimate stands at $70 per ADR, reflecting the Sept. 20 2:1 share split for
Novo Nordisk's class B ADR. We expect Novo’s obesity sales could peak at $23 billion by 2031, ahead of
semaglutide’s 2032 patent expiration. In obesity, semaglutide forms the basis of injectable obesity
medicine Wegovy as well as a potential oral, high-dose semaglutide that recently generated positive
data in a phase 3 trial.
To factor in the potential impact of the Inflation Reduction Act, we include a 3% step down in U.S. sales
starting in 2023 from Medicare inflation caps, and we assume Medicare negotiation for Ozempic and
Rybelsus beginning in 2028, well ahead of their 2032 patent expirations. We do not include a step down
from Medicare Part D redesign, as this could actually make cheaper drugs like Novo's diabetes
medicines more affordable for patients.
While the pandemic has slightly slowed the launch of new oral GLP-1 therapy Rybelsus, and supply
constraints slowed the launch of obesity drug Wegovy in early 2022, we expect Novo to gain $46 billion
of an $80 billion global GLP-1 market in diabetes and obesity by 2027, with Lilly standing as the firm's
key competitor. We now forecast sales in obesity at DKK 157 billion by 2031, as Saxenda's growth,
Wegovy's strong early uptake, and pipeline progress all improve our confidence in Novo's ability to
expand the drug-treated obesity market. GLP-1 growth and foreign exchange tailwinds drive our overall
five-year forecast for 17% top-line and 20% bottom-line growth through 2027.
We convert our fair value estimate to dollars at the current spot rate of DKK 6.96 per $1.
We rate the systematic risk surrounding Novo Nordisk shares as below average, and we therefore use a
ß
7.5% cost of equity, which we believe aligns our capital cost assumptions with the returns equity
investors are likely to demand over the long run. We include a placeholder for future litigation risk at
roughly 2% of non-GAAP net income (high relative to the rest of the branded drug industry).
Risk and Uncertainty Karen Andersen, CFA, Strategist, 10 Aug 2023

We assign Novo Nordisk a Medium Morningstar Uncertainty Rating, as the firm has a broad global
insulin business, but price pressure and growing reliance on the high-growth GLP-1 class add some
volatility to potential cash flows. Our Uncertainty Rating for Novo Nordisk is not materially affected by
environmental, social, and governance risks, although we see access to basic services (tied to drug
pricing) as the biggest ESG risk the firm needs to manage. Novo Nordisk sees roughly 50% of its sales
from the U.S. pharmaceutical market, giving it significant exposure to U.S. policy changes. Novo's
portfolio has high exposure to Medicare, and the firm faced pressure due to U.S. legislation that
increased the portion of the Medicare Part D donut hole covered by manufacturers in 2019 (from 50% to
70%) and increased the size of the donut hole in 2020. Following the passage of the Inflation Reduction
Act, we include a 3% step down in U.S. sales starting in 2023 from Medicare inflation caps, and we
assume Medicare negotiation for Ozempic and Rybelsus beginning in 2027, well ahead of their 2032
patent expirations. We do not include a step down from Medicare Part D redesign, as this could actually
make cheaper drugs like Novo's diabetes medicines more affordable for patients. Looking ahead, we see
Novo Nordisk as less exposed than its peers to U.S. pricing risks, given the cost-effectiveness of its
medicines and the steep price discounts already present in the U.S. insulin market. We assume a more
than 50% probability of Novo seeing future costs related to product governance ESG risks (such as off-
label marketing, side effect litigation) and model annual legal costs at 2% of non-GAAP net income. This
is somewhat higher than many peers due to Novo's exposure to large, chronic disease markets and the
history of side effects from cardiometabolic drugs, but it has an immaterial effect on our valuation.
Capital Allocation Karen Andersen, CFA, Strategist, 20 Sep 2023

We assign Novo Nordisk an Exemplary capital allocation rating. The rating reflects our belief that Novo
Nordisk possesses a sound balance sheet, exceptional investments outlook, and appropriate
shareholder distributions. As of the end of 2022, Novo held roughly DKK 1 billion in short-term liabilities
against DKK 24 billion in cash and equivalents. Historically, Novo has held low debt levels, but used
debt to finance the Emisphere (delivery technology) acquisition in 2020 and Dicerna (RNAi technology)
acquisition in 2021. With minimal net debt as well as annual cash flow from operations approaching
DKK 100 billion, Novo is in a solid position to continue investing in its internal and externally acquired
pipeline and distributing cash via dividends and share repurchases.
On investments, Novo Nordisk does not have a substantial record of collaborations and acquisitions,
opting instead to focus on incremental (but significant) innovation within its insulin and GLP-1
franchises in diabetes. However, external activity has increased in recent years. For example, the debt-
ß
financed $1.8 billion acquisition of Eligen SNAC oral technology (used in oral GLP-1 Rybelsus) from
Emisphere in 2020 saves Novo from future royalty payments on the technology, which is likely to be
useful in both diabetes and obesity. Also in 2020, Novo spent $725 million (and up to $1.4 billion in
milestones) to purchase IL-6 ligand antibody ziltivekimab, which has had promising phase 2 data in the
diabetes-adjacent field of cardiovascular disease. In 2021, Novo acquired rights to Prothena's PRX004
(in phase 2 in cardiomyopathy) and Heartseed's HS-001 (in phase 1/phase 2 in heart failure), which
further extends its reach into cardiology. The $3.3 billion Dicerna acquisition in 2021 also brings rights to
kidney disease drug candidate nedosiran and a full RNAi-based drug pipeline. We think these recent
acquisitions are helping Novo build a more diversified pipeline, although we expect the firm's
competitive advantages in diabetes and obesity, built on internal core competencies, will continue to be
the key support for Novo's wide moat.
On distributions, Novo has an impressive record of protecting shareholder value and focusing on
returning value through share repurchases and dividends. These distributions have steadily grown from
a total of DKK 34 billion in 2018 to DKK 50 billion in 2022. Share prices have risen considerably over this
time, giving us a positive view on past repurchases, although we think more recent prices could be
slightly above the firm's fair value. Novo's payout ratio is around 50%, similar to other pharma firms, and
we expect rising cash flows to still preserve room for bolt-on acquisitions in coming years, or a larger
acquisition that might add more debt to the capital structure (which could lower Novo's cost of capital).
Stellar execution by management has helped the stock outperform its peer group by a large margin
during the past decade. CEO Lars Rebien Sorensen retired at the end of 2016, and Lars Fruergaard
Jorgensen became CEO in 2017. While Sorensen’s 16 years as CEO and 34 years at the firm led to
tremendous share appreciation and pipeline advancement, Jorgensen has also been at the firm for
more than 25 years and served in various leadership positions. We believe executive compensation to
be very reasonable, especially compared with the often-excessive compensation packages at competing
firms such as Eli Lilly.
Analyst Notes Archive
Novo Nordisk: Earnings Preannouncement With Increased Guidance Largely in Line With Our
Expectations Karen Andersen, CFA, Strategist, 13 Oct 2023
Novo Nordisk raised full-year 2023 guidance that runs slightly higher than our expectations, but we are
not making any fair value estimate changes as the improved outlook is just slightly above our
expectations. We believe the robust demand for weight loss drugs Wegovy and Ozempic (off label) is
driving the increased expectations. We continue to project annual Wegovy and Ozempic sales of DKK 88
billion and DKK 136 billion by 2027, largely in line with consensus expectations. While we expect robust
sales for these two leading drugs based on excellent efficacy, we continue to view the firm as
overvalued with the market likely too optimistic on the weight loss market. Nevertheless, the strong
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innovation in weight loss and other cardiometabolic indications continues to support the firm’s wide
moat.
We expect more details on the company’s third-quarter earnings call that should help better understand
the evolving obesity market. In particular, updates on insurance coverage, supply capacity, and duration
of drug usage will all be important in helping to project long-term sales of obesity drugs. Additionally,
third-quarter earnings updates from Eli Lilly on a competitive drug Mounjaro will help frame the
competitive market share outlook, as well. We see Novo and Lilly as largely splitting the market equally
by 2027, with Novo benefiting from a first-mover advantage with Wegovy and Lilly supported by
showing slightly stronger efficacy with Mounjaro.
Novo Nordisk: More Positive Semaglutide Trial Outcomes Bolster Double-Digit Ozempic Growth
Karen Andersen, CFA, Strategist, 11 Oct 2023
Novo Nordisk announced that the Flow trial testing semaglutide in patients with Type 2 diabetes and
chronic kidney disease will be stopped early after an independent committee concluded that efficacy
reached a high enough bar to warrant the decision. While specific data won’t be available until the first
half of 2024, we think this bodes well for the drug’s ability to slow the progression of renal impairment
in these patients, including a potential ability to reduce the risk of death from kidney or cardiovascular
disease. We expect this further improves the case for patients to take a GLP-1 therapy early in diabetes
treatment, which will likely continue to drive strong double-digit growth through at least 2025 for Novo
Nordisk drug Ozempic and supports our wide moat rating for the company. However, we’re maintaining
our DKK 475/$70 fair value estimate for Novo Nordisk and we think shares are overvalued at recent
prices.
There is significant overlap between the multiple indications where Novo Nordisk is testing
semaglutide. Among diabetics—the first patients approved to use this GLP-1 agonist—40% have
diabetic nephropathy (kidney disease) and 50% have obesity. We expect strong data from the Flow
study will delay the time until diabetic nephropathy patients need dialysis, similar to the way the drug
appears to delay the time until diabetics require insulin to control their blood sugar. Our broader
forecast for GLP-1-based drugs (including diabetes, obesity, heart failure, nonalcoholic steatohepatitis,
or NASH, and Alzheimer's disease) comes to more than $100 billion annually at the end of the decade.
Biopharma Industry: Medicare Drug Price Negotiation Impact Reduced by Expected Generic
Pressures Damien Conover, CFA, Sector Director, 29 Aug 2023
As part of the Inflation Reduction Act, the U.S. Department of Health and Human Services on Aug. 29
announced the first 10 drugs selected for mandated 2026 Medicare price negotiations. This doesn’t
have a major impact on our valuations or moat ratings for the biopharma industry. The 10 drugs have
been on the market for a prolonged period (seven years for small-molecule drugs and 11 years for
biologics) and were selected based on the largest gross (before discounts) spending in Medicare Part D.
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We had expected three of the 10 drugs selected for 2026 negotiations: Bristol-Myers/Pfizer’s Eliquis,
AbbVie/Johnson & Johnson’s Imbruvica, and Eli Lilly/Boehringer Ingelheim’s Jardiance. We have
already projected a 45% forced negotiated discount for these drugs starting in 2026, although the exact
discount will be determined over the next 12 months. We expect generic pressures for these drugs by
2028-29, which limits the impact of Medicare negotiations.
The majority of the remaining drugs face major patent losses before or very close to 2026, which also
limits the impact of the negotiations. This is particularly true for J&J's Stelara and Novo Nordisk's
insulins Novolog/Fiasp, as we see potential biosimilars by 2026. Amgen’s Enbrel is the only surprise
selection that doesn’t face heavy generic pressures by 2026; its patents expire in 2028. Enbrel's
inclusion is likely a result of the drug's massive discounts, making it qualify on gross sales using a high
list price. This forced price negotiation will likely accelerate declines in 2026, but most Enbrel sales are
outside of Medicare, so this doesn't have a major impact on Amgen’s valuation.
Big winners in this first initial round include AstraZeneca’s Tagrisso and Calquence and Eli Lilly's
Verzenio, which we had expected to be included in 2026. Another 15 drugs will be negotiated beginning
in 2027, so we expect to see these three on the next list, as well as Novo Nordisk’s semaglutide
(diabetes drugs Ozempic and Rybelsus).
Novo Nordisk Earnings: Raising Our FVE on GLP-1 Demand, but Shares Remain Overvalued Karen
Andersen, CFA, Strategist, 10 Aug 2023
We're raising our fair value estimate for Novo Nordisk to $140/DKK 950 from $130/DKK 900 following a
strong second quarter and another full-year guidance increase from management. Sales of the most
effective Novo Nordisk GLP-1 medicines available to patients in their geography—Wegovy in the U.S.
and Ozempic globally—were higher than we had expected, as the firm's constrained supply of
semaglutide outpaced our expectations. While Novo will continue to limit the lowest, starter doses of
Wegovy, we think the firm is putting in the necessary international investment—and adding new
contract manufacturer lines—to help alleviate supply constraints heading into 2024. In the quarter, 50%
year-over-year growth in the firm's GLP-1 diabetes business and 188% growth in its GLP-1 obesity
business countered declines in insulin (4%) and rare diseases (20%), leading to overall 36% top-line
growth on a constant currency basis. We now assume constant currency growth of 29% for the full
year, near the midpoint of the new 27%-33% range. The sheer size of the firm's total GLP-1 sales is
beginning to dwarf its other established products, making the firm's fate more tied to the semaglutide
molecule than ever. That said, with proven efficacy in diabetes and obesity, solid cardiovascular
benefits, additional potential expansion into areas like Alzheimer's and liver disease, and a growing
pipeline of new therapies and combinations that could build on semaglutide's success, we think the
firm's moat remains wide. With our new higher estimates, we now see the global diabetes and obesity
GLP-1 market reaching $100 billion annually by 2030, split relatively evenly between the two indications.
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Despite these estimates, we think the market is still overly bullish on Novo's shares, given significant
risks from new competition and pricing pressure that aren't being factored into investor sentiment.
Novo Nordisk: Wegovy’s Cardiovascular Benefit Is Confirmed, Consistent With Our Expectations
Karen Andersen, CFA, Strategist, 8 Aug 2023
We’re maintaining our DKK 900/$130 fair value estimates for Novo Nordisk following additional positive
data on the cardiovascular benefits of the semaglutide molecule that extend beyond diabetes and into
obesity. Long-term use of Wegovy in obese or overweight patients with cardiovascular disease (but not
diabetes) showed a 20% reduction in major adverse cardiovascular events (like heart attack or stroke)
relative to patients taking placebo. Novo expects to file to add this to Wegovy’s prescribing labels this
year. We think these positive results could be driven by a combination of weight loss, improved lipid and
blood sugar levels, and improved blood pressure. GLP-1-targeting drugs have already generated positive
cardiovascular outcomes data in the past in diabetes patients, including Novo’s Ozempic (26% risk
reduction), and we expect additional data to come from Novo’s oral diabetes drug Rybelsus (2024) and
from Lilly’s Mounjaro in two studies: against Trulicity in overweight or obese patients with diabetes
(data in 2024) and against placebo in overweight or obese patients without diabetes (data in 2027).
Positive cardiovascular data supports Novo Nordisk’s wide moat in cardiometabolic diseases, although
we will be more comfortable once we see phase 3 data from the firm’s combination drug cagrisema, as
much of Novo’s valuation is wrapped up in semaglutide.
We think Wegovy’s positive data further makes the case that obesity drugs do not treat a cosmetic
issue but a medical condition, and we continue to expect obese Medicare patients with cardiovascular
disease could begin to get coverage beginning in 2024. While Novo Nordisk and Lilly should continue to
dominate this market, we think the market is overly enthusiastic regarding the potential of these drugs.
Our roughly DKK 360 billion (nearly $54 billion) forecast for Novo’s GLP-1 sales by 2030 remains slightly
ahead of consensus, yet we still see shares as significantly overvalued on a discounted cash flow basis.
Novo Nordisk and Eli Lilly Lead Potential $60 Billion Obesity Drug Market; Valuations Look Rich
Karen Andersen, CFA, Strategist, 25 May 2023
The approval of Novo Nordisk's GLP-1 agonist Wegovy in 2021 has led to a demand surge for the active
ingredient semaglutide in various forms, including diabetes drug Ozempic. Eli Lilly's approved diabetes
drug Mounjaro is poised to generate even stronger weight loss and to launch in obesity around the end
of 2023. We think Novo and Lilly will continue to lead the obesity market over the next 10 years, with
incremental innovation in this rapidly expanding market that will support their wide moats. We assume
Novo Nordisk's Wegovy, higher-dose oral and injectable semaglutide, and novel GLP-1/amylin
cagrisema will support more than 35% share in 2032. Eli Lilly is likely to remain Novo's chief competitor,
driven by potential launches of Mounjaro in obesity as well as an oral GLP-1 and a novel triple agonist in
2025, resulting in a 40% share by 2032. We think Amgen, Pfizer, and other biopharma firms could begin
ß
to launch their own GLP-1-based obesity drugs as early as 2025, with these new players growing to
roughly one quarter of the market by 2032.
We think the average global price for GLP-1 therapy in obesity is poised to rise to roughly $5,400 as
Wegovy and Mounjaro launch and then gradually decline beginning in 2025 as additional therapies
launch, falling to roughly $2,800 by 2032. Furthermore, we expect 21 million individuals globally could
be taking GLP-1-based therapy for obesity by 2032, creating potential for a $60 billion market. We think
there is high uncertainty around the potential size of this market, with likely potential sales in the range
of $37 billion-$86 billion annually. While demand is soaring today, our valuations incorporate potential
risks. Beyond pricing pressure from new brands (2025) and generic semaglutide (2032), potential risks
include payer restrictions on coverage, patients falling off of chronic therapy, weaker demand among
nondiabetic obese patients, or any long-term safety risks that could emerge as more patients receive
treatment. K
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Competitors Price vs. Fair Value
Eli Lilly and Co LLY
Last Close: 554.46

800 Fair Value: 368.00
24 May 2023 21:04, UTC
600 Over Valued

Under Valued
400
200
0
Analytics
2018 2019 2020 2021 2022 YTD
1.11 1.09 1.00 1.18 1.34 1.51 Price/Fair Value
39.68 15.81 30.72 65.61 33.86 52.48 Total Return %
Morningstar Rating
Total Return % as of 1 Nov 2023. Last Close as of 1 Nov 2023. Fair Value as of 24 May 2023 21:04, UTC.
AstraZeneca PLC AZN
Fair Value: 12,400.00

8 Sep 2023 19:19, UTC
10K
Last Close: 10,336.00
7800 Over Valued
Under Valued
5200
2600
0
2018 2019 2020 2021 2022 YTD Analytics
1.21 1.09 0.88 0.99 0.90 0.83 Price/Fair Value

18.63 33.25 -0.88 21.25 31.82 -5.77 Total Return %
Morningstar Rating
Total Return % as of 1 Nov 2023. Last Close as of 1 Nov 2023. Fair Value as of 8 Sep 2023 19:19, UTC.
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Sanofi SA SAN
Fair Value: 113.00

23 Mar 2023 20:05, UTC
200
Last Close: 86.85
150 Over Valued
Under Valued
100
50
0
2018 2019 2020 2021 2022 YTD Analytics
0.85 0.87 0.79 0.89 0.82 0.77 Price/Fair Value

9.52 22.51 -8.67 16.62 5.18 -0.65 Total Return %
Morningstar Rating
Total Return % as of 31 Oct 2023. Last Close as of 1 Nov 2023. Fair Value as of 23 Mar 2023 20:05, UTC.
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Morningstar Historical Summary

Financials as of 30 Jun 2023
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
Revenue (DKK Bil) 84 89 108 112 112 112 122 127 141 177 108 201
Revenue Growth % 7.1 6.3 21.5 3.6 -0.1 0.1 9.1 4.0 10.9 25.7 29.3 28.0
EBITDA (DKK Bil) 35 38 47 51 52 52 54 59 65 77 53 87
EBITDA Margin % 42.4 42.3 43.1 45.7 46.5 46.2 44.6 46.7 46.4 43.4 49.6 43.5
Operating Income (DKK Bil) 31 34 49 48 49 47 52 54 59 75 49 86
Operating Margin % 37.7 38.8 45.8 43.3 43.8 42.3 43.0 42.6 41.7 42.3 45.4 42.8
Net Income (DKK Bil) 25 26 35 38 38 39 39 42 48 56 39 67
Net Margin % 30.1 29.8 32.3 33.9 34.1 34.5 31.9 33.2 33.9 31.4 36.4 33.4
Diluted Shares Outstanding (Mil) 5,387 5,260 5,155 5,069 4,956 4,849 4,757 4,680 4,606 4,545 4,508 4,519
Diluted Earnings Per Share (DKK) 4.68 5.04 6.76 7.48 7.70 7.97 8.19 9.01 10.37 12.22 8.71 14.89
Dividends Per Share (DKK) 1.81 2.25 2.52 4.67 3.79 3.92 4.13 4.27 4.66 5.55 4.03 6.18
Valuation as of 31 Oct 2023

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Price/Sales 6.5 8.0 9.9 5.8 7.4 6.7 7.7 7.8 12.6 12.9 14.4 15.3
Price/Earnings 21.7 26.4 31.0 17.1 21.6 19.1 23.8 23.9 36.8 40.7 43.1 45.9
Price/Cash Flow 24.5 23.0 29.0 13.6 18.0 16.9 18.8 17.5 29.2 31.3 32.4 34.4
Dividend Yield % 1.68 1.96 1.26 3.94 2.12 2.75 2.13 1.86 1.31 1.18 1.13 1.07
Price/Book 14.0 18.1 23.9 15.6 17.8 15.5 17.5 16.7 25.7 27.7 31.7 33.7
EV/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Operating Performance / Profitability as of 30 Jun 2023 Years Years Years Years Years Years Years Years Years Years Years
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 YTD TTM
ROA % 37.0 35.9 41.3 40.1 38.2 36.3 33.0 31.2 28.1 25.5 15.0 26.9
ROE % 60.5 63.9 79.9 82.2 80.2 76.0 71.2 69.7 71.2 72.0 45.1 81.5
ROIC % 60.0 63.1 78.3 81.1 78.6 74.4 66.6 62.1 55.9 53.8 34.7 60.2
Asset Turnover 1.2 1.2 1.3 1.2 1.1 1.0 1.0 0.9 0.8 0.8 0.4 0.8
Financial Leverage
Fiscal Year, ends 31 Dec 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Recent Qtr TTM
Debt/Capital % — — — — — — 5.0 4.4 15.5 22.6 17.7 —
Equity/Assets % 60.5 52.3 51.2 46.4 48.7 46.8 45.9 43.7 36.4 34.6 32.2 —
Total Debt/EBITDA 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.4 0.3 0.5 —
EBITDA/Interest Expense 643.5 963.4 694.1 785.5 577.3 607.4 247.4 152.0 226.2 203.2 112.3 -22.8
Morningstar Analyst Historical/Forecast Summary as of 20 Sep 2023

Financials Estimates Forward Valuation Estimates
2021 2022 2023 2024 2025
Fiscal Year, ends 31 Dec 2022 2021 2022 2023 2024 2025
Price/Sales 12.0 11.9 13.9 12.2 10.4
Revenue (DKK Mil) 140,799 177,008 219,204 248,486 292,730 Price/Earnings 35.3 38.6 38.0 34.7 29.0
Revenue Growth % 10.9 25.7 23.8 13.4 17.8 Price/Cash Flow 34.7 31.6 58.7 50.0 42.2
EBITDA (DKK Mil) 64,096 82,171 107,070 123,980 146,729 Dividend Yield % 1.4 1.3 1.0 1.1 1.2
EBITDA Margin % 45.5 46.4 48.8 49.9 50.1 Price/Book 23.8 25.7 22.7 18.4 14.9
EV/EBITDA 26.0 25.5 28.3 24.4 20.6
Operating Income (DKK Mil) 58,644 74,809 99,095 114,705 135,485
Operating Margin % 41.7 42.3 45.2 46.2 46.3
Net Income (DKK Mil) 47,757 55,525 81,742 89,207 105,368
Net Margin % 33.9 31.4 37.3 35.9 36.0
Diluted Shares Outstanding (Mil) 2,303 2,272 4,502 4,495 4,436
Diluted Earnings Per Share(DKK) 20.74 24.44 18.16 19.85 23.75
Dividends Per Share(DKK) 10.40 12.40 6.82 7.50 8.25
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ESG Risk Rating Breakdown
Values
Exposure Subject Subindustry (47.0) u Exposure represents a company’s vulnerability to ESG
Company Exposure 1
46.1 risks driven by their business model
46.1
u Exposure is assessed at the Subindustry level and then
– Manageable Risk 43.0 Medium
2 0 55+ specified at the company level
Unmanageable Risk 3.0 u Scoring ranges from 0-55+ with categories of low, me-
Low Medium High
dium, and high-risk exposure
Management Values u Management measures a company ’s ability to manage

Manageable Risk 43.0 ESG risks through its commitments and actions
53.4%
– Managed Risk3 23.0 Strong
u Management assesses a company's efficiency on ESG
Management Gap4 20.0 100 0 programs, practices, and policies

Strong Average Weak u Management score ranges from 0-100% showing how
Overall Unmanaged Risk 23.1 much manageable risk a company is managing
ESG Risk Rating ESG Risk Rating Assessment5

23.06
Medium
Negligible Low Medium High Severe ESG Risk Rating is of Oct 04, 2023. Highest Controversy Level is as of Oct 08,
2023. Sustainalytics Subindustry: Pharmaceuticals. Sustainalytics provides
ESG Risk Ratings measure the degree to which a company’s value is impacted by environmental, social, and governance Morningstar with company ESG ratings and metrics on a monthly basis and
risks, by evaluating the company’s ability to manage the ESG risks it faces. as such, the ratings in Morningstar may not necessarily reflect current
Sustainalytics’ scores for the company. For the most up to date rating and
1. A company's Exposure to material ESG issues 2. Unmanageable Risk refers to risks that are inherent to a particular business model that cannot be managed by more information, please visit: sustainalytics.com/esg-ratings/.
programs or initiatives 3. Managed Risk = Manageable Risk multiplied by a Management score of 53.4% 4. Management Gap assesses risks that are not
managed, but are considered manageable 5. ESG Risk Rating Assessment = Overall Unmanaged Risk = Management Gap plus Unmanageable Risk
Peer Analysis 04 Oct 2023 Peers are selected from the company's Sustainalytics-defined Subindustry and are displayed based on the closest market cap values
Company Name Exposure Management ESG Risk Rating
Novo Nordisk A/S 46.1 | Medium 0 55+ 53.4 | Strong 100 0 23.1 | Medium 0 40+
Eli Lilly and Co 48.3 | Medium 0 55+ 53.4 | Strong 100 0 24.2 | Medium 0 40+
Roche Holding AG 48.3 | Medium 0 55+ 53.8 | Strong 100 0 24.0 | Medium 0 40+
Sanofi SA 50.4 | Medium 0 55+ 61.8 | Strong 100 0 21.5 | Medium 0 40+
AstraZeneca PLC 49.4 | Medium 0 55+ 59.9 | Strong 100 0 21.8 | Medium 0 40+
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Appendix
Historical Morningstar Rating
Novo Nordisk A/S ADR NVO 1 Nov 2023 21:24, UTC
December November October September August July May May April March February January
Dec 2023 Nov 2023 Oct 2023 Sep 2023 Aug 2023 Jul 2023 Jun 2023 May 2023 Apr 2023 Mar 2023 Feb 2023 Jan 2023
- Q Q QQ QQ QQ QQ QQ QQ Q QQ QQ
QQ QQ QQQ QQQ QQQ QQQ QQQ QQQ QQ QQ QQQ QQQ
QQ QQ QQ QQ QQ QQ QQ QQQ QQQ QQQ QQQ QQQ
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QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQQ QQQ QQQ QQQ QQQ QQ QQQ QQQ QQQ QQ QQ QQ
Eli Lilly and Co LLY 1 Nov 2023 21:24, UTC

- QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
QQ Q Q QQ QQ QQ QQ QQ QQ QQ QQQ QQQ
QQ QQ QQ QQQ QQ QQ QQQ QQQ QQQ QQQ QQ QQ
QQQ QQQ QQQQ QQQ QQQ QQQ QQ QQ QQ QQQ QQQ QQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQ QQ QQ
QQQ QQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ
AstraZeneca PLC AZN 2 Nov 2023 01:14, UTC

- QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ
QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQ
QQQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ QQQ
QQQ QQQ QQQ QQ QQ QQ QQQ QQQ QQQ QQ QQ QQ
QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ QQ
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Sanofi SA SAN 2 Nov 2023 01:20, UTC

- QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQQ QQQ QQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQ QQQ QQQQ QQQ QQQQ QQQQ QQQQ
QQQQ QQQ QQQ QQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ QQQQ
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Research Methodology for Valuing Companies
Overview turns on invested capital (or ROIC) over and above our es- rive our annual free cash flow forecast.
At the heart of our valuation system is a detailed projec- timate of a firm’s cost of capital, or weighted average
Stage II: Fade
tion of a company’s future cash flows, resulting from our cost of capital (or WACC). Without a moat, profits are
The second stage of our model is the period it will take
analysts’ research. Analysts create custom industry and more susceptible to competition. We have identified five
the company ’s return on new invested capital—the re-
company assumptions to feed income statement, balance sources of economic moats: intangible assets, switching
turn on capital of the next dollar invested (“RONIC”)—to
sheet, and capital investment assumptions into our glob- costs, network effect, cost advantage, and efficient scale.
decline (or rise) to its cost of capital. During the Stage II
ally standardized, proprietary discounted cash flow, or
Companies with a narrow moat are those we believe are period, we use a formula to approximate cash flows in
DCF, modeling templates. We use scenario analysis, inde-
more likely than not to achieve normalized excess returns lieu of explicitly modeling the income statement, balance
pth competitive advantage analysis, and a variety of other
for at least the next 10 years. Wide-moat companies are sheet, and cash flow statement as we do in Stage I. The
analytical tools to augment this process. Moreover, we
those in which we have very high confidence that excess length of the second stage depends on the strength of
think analyzing valuation through discounted cash flows
returns will remain for 10 years, with excess returns more the company’s economic moat. We forecast this period to
presents a better lens for viewing cyclical companies,
likely than not to remain for at least 20 years. The longer last anywhere from one year (for companies with no eco-
high-growth firms, businesses with finite lives (e.g.,
a firm generates economic profits, the higher its intrinsic nomic moat) to 10–15 years or more (for wide-moat com-
mines), or companies expected to generate negative
value. We believe low-quality, no-moat companies will panies). During this period, cash flows are forecast using
earnings over the next few years. That said, we don’t dis-
see their normalized returns gravitate toward the firm’s four assumptions: an average growth rate for EBI over the
miss multiples altogether but rather use them as support-
cost of capital more quickly than companies with moats. period, a normalized investment rate, average return on
ing cross-checks for our DCF-based fair value estimates.
new invested capital (RONIC), and the number of years
We also acknowledge that DCF models offer their own
When considering a company's moat, we also assess until perpetuity, when excess returns cease. The invest-
challenges (including a potential proliferation of estim-
whether there is a substantial threat of value destruction, ment rate and return on new invested capital decline un-
ated inputs and the possibility that the method may miss
stemming from risks related to ESG, industry disruption, til a perpetuity value is calculated. In the case of firms
shortterm market-price movements), but we believe these
financial health, or other idiosyncratic issues. In this con- that do not earn their cost of capital, we assume marginal
negatives are mitigated by deep analysis and our
text, a risk is considered potentially value destructive if its ROICs rise to the firm’s cost of capital (usually attribut-
longterm approach.
occurrence would eliminate a firm’s economic profit on a able to less reinvestment), and we may truncate the
cumulative or midcycle basis. If we deem the probability second stage.
Morningstar’s equity research group (”we,” “our”) be-
lieves that a company’s intrinsic worth results from the of occurrence sufficiently high, we would not characterize
the company as possessing an economic moat. Stage III: Perpetuity
future cash flows it can generate. The Morningstar Rating
Once a company’s marginal ROIC hits its cost of capital,
for stocks identifies stocks trading at a discount or premi-
2. Estimated Fair Value we calculate a continuing value, using a standard per-
um to their intrinsic worth—or fair value estimate, in
Combining our analysts’ financial forecasts with the petuity formula. At perpetuity, we assume that any
Morningstar terminology. Five-star stocks sell for the
firm’s economic moat helps us assess how long returns growth or decline or investment in the business neither
biggest risk adjusted discount to their fair values, where-
on invested capital are likely to exceed the firm’s cost of creates nor destroys value and that any new investment
as 1-star stocks trade at premiums to their intrinsic worth.
capital. Returns of firms with a wide economic moat rat- provides a return in line with estimated WACC.
Four key components drive the Morningstar rating: (1) our ing are assumed to fade to the perpetuity period over a
longer period of time than the returns of narrow-moat Because a dollar earned today is worth more than a dollar
assessment of the firm’s economic moat, (2) our estimate
firms, and both will fade slower than no-moat firms, in- earned tomorrow, we discount our projections of cash
of the stock’s fair value, (3) our uncertainty around that
creasing our estimate of their intrinsic value. flows in stages I, II, and III to arrive at a total present
fair value estimate and (4) the current market price. This
value of expected future cash flows. Because we are
process ultimately culminates in our singlepoint star rat-
Our model is divided into three distinct stages: modeling free cash flow to the firm—representing cash
ing.
available to provide a return to all capital providers—we
discount future cash flows using the WACC, which is a
1. Economic Moat Stage I: Explicit Forecast
weighted average of the costs of equity, debt, and pre-
The concept of an economic moat plays a vital role not In this stage, which can last five to 10 years, analysts
ferred stock (and any other funding sources), using ex-
only in our qualitative assessment of a firm’s long-term make full financial statement forecasts, including items
pected future proportionate long-term, market-value
investment potential, but also in the actual calculation of such as revenue, profit margins, tax rates, changes in
weights.
our fair value estimates. An economic moat is a structural workingcapital accounts, and capital spending. Based on
feature that allows a firm to sustain excess profits over a these projections, we calculate earnings before interest,
3. Uncertainty Around That Fair Value Estimate
long period of time. We define economic profits as re- after taxes (EBI) and the net new investment (NNI) to de-
Morningstar’s Uncertainty Rating is designed to capture
the range of potential outcomes for a company ’s intrinsic
Morningstar Equity Research Star Rating Methodology
value. This rating is used to assign the margin of safety
required before investing, which in turn explicitly drives
our stock star rating system. The Uncertainty Rating is
aimed at identifying the confidence we should have in as-
signing a fair value estimate for a given stock.
Our Uncertainty Rating is meant to take into account any-

thing that can increase the potential dispersion of future
outcomes for the intrinsic value of a company, and any-
ß
thing that can affect our ability to accurately predict Morningstar Equity Research Star Rating Methodology
these outcomes. The rating begins with a suggested rat-
ing produced by a quantitative process based on the trail-
ing 12-month standard deviation of daily stock returns.
An analyst overlay is then applied, with analysts using
the suggested rating, historical rating data, and their own
knowledge of the company to inform them as they make
the final Uncertainty Rating decision. Ultimately, the rat-
ing decision rests with the analyst. Analysts take into ac-
count many characteristics when making their final de-
cision, including cyclical factors, operational and financial
factors such as leverage, company-specific events, ESG
risks, and anything else that might increase the potential
dispersion of future outcomes and our ability to estimate
those outcomes.
Our recommended margin of safety—the discount to fair

value demanded before we’d recommend buying or
selling the stock—widens as our uncertainty of the es-
timated value of the equity increases. The more uncertain
we are about the potential dispersion of outcomes, the
greater the discount we require relative to our estimate of
the value of the firm before we would recommend the
purchase of the shares. In addition, the Uncertainty Rat-
ing provides guidance in portfolio construction based on
risk tolerance. Once we determine the fair value estimate of a stock, we justed return is highly likely over a multiyear time frame.
compare it with the stock’s current market price on a Scenario analysis developed by our analysts indicates
Our Uncertainty Ratings are: Low, Medium, High, Very daily basis, and the star rating is automatically re-calcu- that the current market price represents an excessively
High, and Extreme. lated at the market close on every day the market on pessimistic outlook, limiting downside risk and maximiz-
which the stock is listed is open. Our analysts keep close ing upside potential.
Margin of Safety
tabs on the companies they follow, and, based on thor-
Qualitative Analysis
QRating ough and ongoing analysis, raise or lower their fair value QQQQ We believe appreciation beyond a fair risk-ad-
Uncertainty Ratings QQQQQRating
estimates as warranted. justed return is likely.
Low 20% Discount 25% Premium
Medium 30% Discount 35% Premium QQQ Indicates our belief that investors are likely to re-
Please note, there is no predefined distribution of stars.
High 40% Discount 55% Premium ceive a fair risk-adjusted return (approximately cost of
That is, the percentage of stocks that earn 5 stars can
Very High 50% Discount 75% Premium equity).
fluctuate daily, so the star ratings, in the aggregate, can
Extreme 75% Discount 300% Premium serve as a gauge of the broader market’s valuation. When
there are many 5-star stocks, the stock market as a whole QQ We believe investors are likely to receive a less than
Our uncertainty rating is based on the interquartile range, fair risk-adjusted return.
is more undervalued, in our opinion, than when very few
or the middle 50% of potential outcomes, covering the
companies garner our highest rating.
25th percentile–75th percentile. This means that when a Q Indicates a high probability of undesirable risk-adjus-
stock hits 5 stars, we expect there is a 75% chance that ted returns from the current market price over a multiyear
We expect that if our base-case assumptions are true the
the intrinsic value of that stock lies above the current time frame, based on our analysis. Scenario analysis by
market price will converge on our fair value estimate over
market price. Similarly, when a stock hits 1 star, we ex- our analysts indicates that the market is pricing in an ex-
time generally within three years (although it is im-
pect there is a 75% chance that the intrinsic value of that cessively optimistic outlook, limiting upside potential and
possible to predict the exact time frame in which market
stock lies below the current market price. leaving the investor exposed to Capital loss.
prices may adjust).
4. Market Price Our star ratings are guideposts to a broad audience and Other Definitions
The market prices used in this analysis and noted in the individuals must consider their own specific investment Last Price: Price of the stock as of the close of the mar-
report come from exchange on which the stock is listed goals, risk tolerance, tax situation, time horizon, income ket of the last trading day before date of the report.
which we believe is a reliable source. needs, and complete investment portfolio, among other
factors. Capital Allocation Rating: Our Capital Allocation (or
For more details about our methodology, please go to Stewardship) Rating represents our assessment of the
https://shareholders.morningstar.com The Morningstar Star Ratings for stocks are defined be- quality of management’s capital allocation, with particu-
low: lar emphasis on the firm ’s balance sheet, investments,
Morningstar Star Rating for Stocks QQQQQ We believe appreciation beyond a fair risk ad- and shareholder distributions. Analysts consider compan-
ß
ies’ investment strategy and valuation, balance sheet starting at zero (no risk) with lower scores representing mendations made herein may not be suitable for all in-
management, and dividend and share buyback policies. less unmanaged risk and, for 95% of cases, the unman- vestors: recipients must exercise their own independent
Corporate governance factors are only considered if they aged ESG Risk score is below 50. judgment as to the suitability of such investments and re-
are likely to materially impact shareholder value, though commendations in the light of their own investment ob-
either the balance sheet, investment, or shareholder dis- Based on their quantitative scores, companies are jectives, experience, taxation status and financial posi-
tributions. Analysts assign one of three ratings: "Exem- grouped into one of five Risk Categories (negligible, low, tion.
plary", "Standard", or "Poor". Analysts judge Capital Alloc- medium, high, severe). These risk categories are absolute,
ation from an equity holder’s perspective. Ratings are de- meaning that a ‘high risk’ assessment reflects a compar- The information, data, analyses and opinions presented
termined on a forward looking and absolute basis. The able degree of unmanaged ESG risk across all subindus- herein are not warranted to be accurate, correct, com-
Standard rating is most common as most managers will tries covered. plete or timely. Unless otherwise provided in a separate
exhibit neither exceptionally strong nor poor capital alloc- agreement, neither Morningstar, Inc. or the Equity Re-
ation. The ESG Risk Rating Assessment is a visual representa- search Group represents that the report contents meet all
tion of Sustainalytics ESG Risk Categories on a 1 to 5 of the presentation and/or disclosure standards applic-
Capital Allocation (or Stewardship) analysis published pri- scale. Companies with Negligible Risk = 5 Globes, Low able in the jurisdiction the recipient is located.
or to Dec. 9, 2020, was determined using a different pro- Risk = 4, Medium Risk = 3 Globes, High Risk = 2 Globes,
cess. Beyond investment strategy, financial leverage, and Severe Risk = 1 Globe. For more information, please visit Except as otherwise required by law or provided for in a
dividend and share buyback policies, analysts also con- sustainalytics.com/esg-ratings/ separate agreement, the analyst, Morningstar, Inc. and
sidered execution, compensation, related party transac- the Equity Research Group and their officers, directors
tions, and accounting practices in the rating. Ratings should not be used as the sole basis in evaluating and employees shall not be responsible or liable for any
a company or security. Ratings involve unknown risks and trading decisions, damages or other losses resulting from,
Capital Allocation Rating: Our Capital Allocation (or uncertainties which may cause our expectations not to or related to, the information, data, analyses or opinions
Stewardship) Rating represents our assessment of the occur or to differ significantly from what was expected within the report. The Equity Research Group encourages
quality of management’s capital allocation, with particu- and should not be considered an offer or solicitation to recipients recipients of this report to read all relevant is-
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Novo Nordisk Earnings Shares Remain Overvalued Despite Our $100 Billion GLP-1 Market Forecast

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Novo Nordisk Earnings Shares Remain Overvalued Despite Our $100 Billion GLP-1 Market Forecast

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Morningstar Equity Analyst Report | Report as of 2 Nov 2023 18:53, UTC | Reporting Currency: DKK | Trading Currency: USD

| Exchange: NEW YORK STOCK EXCHANGE, INC. Page 1 of 21

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Price vs. Fair Value

Last Close: 97.68

150 Over Valued

competitors for potential catalysts to raise or lower our long-term forecast.

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Bulls Say Karen Andersen, CFA, Strategist, 20 Sep 2023

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Analysis Security 1 Security 2 Security 3 Security 4

could achieve a strong share in these nascent markets.

Bears Say Karen Andersen, CFA, Strategist, 20 Sep 2023

Economic Moat Karen Andersen, CFA, Strategist, 10 Aug 2023

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Risk and Uncertainty Karen Andersen, CFA, Strategist, 10 Aug 2023

Capital Allocation Karen Andersen, CFA, Strategist, 20 Sep 2023

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Analyst Notes Archive

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Competitors Price vs. Fair Value

Eli Lilly and Co LLY

Last Close: 554.46

600 Over Valued

AstraZeneca PLC AZN

Fair Value: 12,400.00

1.21 1.09 0.88 0.99 0.90 0.83 Price/Fair Value

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Fair Value: 113.00

0.85 0.87 0.79 0.89 0.82 0.77 Price/Fair Value

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

Morningstar Historical Summary

Valuation as of 31 Oct 2023

Morningstar Analyst Historical/Forecast Summary as of 20 Sep 2023

Novo Nordisk A/S ADR NVO Q 1 Nov 2023 21:24, UTC

ESG Risk Rating Breakdown

Management Values u Management measures a company ’s ability to manage

Management Gap4 20.0 100 0 programs, practices, and policies

Overall Unmanaged Risk 23.1 much manageable risk a company is managing

ESG Risk Rating ESG Risk Rating Assessment5

Eli Lilly and Co LLY 1 Nov 2023 21:24, UTC

AstraZeneca PLC AZN 2 Nov 2023 01:14, UTC

Sanofi SA SAN 2 Nov 2023 01:20, UTC

Research Methodology for Valuing Companies

Our Uncertainty Rating is meant to take into account any-

Research Methodology for Valuing Companies

Our recommended margin of safety—the discount to fair

Research Methodology for Valuing Companies

Research Methodology for Valuing Companies

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