Adopting a long-term view can be a powerful force in investment management, but its strength can be amplified when fund managers identify company management with the same focus.
 
Danish drugmaker Novo Nordisk is hitting headlines now – raising its profit guidance and propelling itself to become Europe’s largest listed company by market capitalisation – but this wasn’t the case when we invested in the firm back in 2017.
 
During 2016, we witnessed the company’s shares drop 37% and its long-serving chief executive, Lars Rebien Sorensen, announce he would step down early as competition from the US was putting pressure on the insulin maker. But for us this period of uncertainty presented a compelling opportunity for Henderson EuroTrust (HNE) to gain a position in the pharmaceutical firm. Examining, but ultimately setting aside the pressure Novo appeared to be under, our research process identified a business with huge potential.

Digging deeper

Novo developed a diabetes medication called Semaglutide in 2012, with the drug securing approval in 2017. It revolutionised the treatment of Type 2 diabetes, with scientific studies proving it was able to control blood sugar levels. However, early evidence also indicated that it could help with weight loss and may be able to improve cardiovascular outcomes and other common co-morbidities of diabetes.
 
Our investment thesis was also partly predicated on Novo’s potential to develop a drug that may be able to be used as a treatment specifically targeting obesity. We realised a breakthrough in this area would be hugely significant given the far larger addressable market for weight-loss than diabetes management and the lack of efficacious products.
 
Of course, there was no guarantee that this potential would be realised. Drug development is unpredictable, and goals can be missed. But the stability afforded by the investment trust structure meant we could take a long-term view and engage with the firm, understand its approach, and wait for the long-term R&D programs to reach commercial success.
 
That promise came to full fruition in 2021, when Novo launched its Wegovy drug in the US, with demand almost instantly dramatically outstripping supply. To the present day, the demand for this product still materially outstrips the amount that Novo can supply.

Persistence rewarded

Our ability to stick with Novo Nordisk since 2017 was aided by our investment trust structure.
 
Unlike an open-ended fund, trusts have a fixed pool of capital and investors can gain exposure to them via the purchase of shares. This means that when investors sell shares in an investment trust, the amount of money the trust manager can invest is not impacted. In contrast, open-ended fund managers may have to sell some holdings to meet investor redemptions.
 
In the case of our investment in Novo, our structure allowed us to adopt a long-term view, and buy into a new chief executive’s vision and his firm’s potential just one month after he started in January 2017.
 
Buying in when the stock was valued at a price/earnings multiple of 15x – having fallen from 30x – has proven hugely beneficial for the trust. Novo’s shares have risen 552% since we took our initial position, well above the 56% return from the broader market.

Assessing challenges

Of course, it won’t necessarily be plain sailing from here. While enjoying a first-mover advantage, Novo is not operating in a vacuum and others will inevitably join the fray.
 
Indeed, US rival Eli Lilly submitted a proposal to the Food and Drug Administration in June for approval of its tirzepatide as a weight-loss treatment. It is already sold in the US for treatment of diabetes under the brand Mounjaro.
 
This means that Novo will soon face competition, although we believe this is a healthy development in such a large and underserved market.
 
A further potential risk facing Novo is its ongoing supply chain challenges, driven in part by the outsized demand it has seen for Wegovy. It has sought to reduce this risk by broadening its manufacturing base, opening several production lines with two different contractors. The proactivity of its management in the face of this challenge gives us confidence in the ongoing investment case for Novo Nordisk.

Patient returns

Innovation has been at the heart of Novo’s story over the past decade and investors must be able to take a long-term view if they want to benefit from this powerful driver.
 
Innovation is about constantly pushing the boundaries, but at the cutting-edge steps can be small and progress piecemeal. Thanks in part to the benefits of the investment trust structure, Henderson EuroTrust can wait for businesses to become successful when we are confident that they are deploying a sensible strategy for achieving their aims.

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