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Novo-Nordisk - Good first half, targets upgraded

Nicholas Hyett | 9 August 2019 | A A A
Novo-Nordisk - Good first half, targets upgraded

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Novo-Nordisk A/S DKK0.2 B

Sell: 346.95 | Buy: 347.20 | Change 4.60 (1.34%)
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First half sales were up 5% at constant exchange rates, to DKK 59.3bn (Danish Kroner), with international sales offsetting weakness in North American pricing. Operating profits rose 6% to DKK 27.7bn.

The board announced an interim dividend of DKK 3 per share.

Guidance for full year sales and profit has been increased - both are now expected to grow by between 4% and 6%.

The shares rose 1.2% following the announcement.

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Our view

Novo-Nordisk was one of the first industrial producers of insulin; and 90 years later treating diabetes remains the company's core business. The group supplies nearly half of all insulin worldwide, and it accounted for 51% of first half sales.

Diabetes is a chronic rather than acute illness, and potentially fatal if not managed correctly. That means patients will be injecting insulin for the rest of their lives - providing a regular and predictable revenue stream. It's also an increasingly common disease. In 1980 there were 108m people in the world with diabetes, by 2014 that number had risen to 422m. That rise is linked to increasing wealth in emerging markets, and that's a trend that looks sent to continue for decades.

However, recently Novo has been branching out of simple insulin. The group has launched a series of GLP-1 products specifically to treat type 2 diabetics. These drugs stimulate the body to produce more insulin after eating, avoiding having to inject insulin straight into the body and reducing the chances of complications. Sales of this category of drug have been impressive and growth of recently launched Ozempic has been rapid.

The group's knowledge of GLP-1 treatments also led it to develop new obesity treatments. Saxenda, the most important, is growing quickly and could ultimately help reduce type 2 diabetes globally.

A dominant market share and attractive end markets would be enough to attract investors' attention on their own, but Novo also runs a pretty tight ship operationally. That supports operating margins of over 45%.

It's not all smooth sailing though. Pricing pressure has increased in North America, and it looks like competition could increase in the GLP-1 space too. That probably explains why the group's current 18.8 times PE ratio is below the longer run average.

Only time will tell if those headwinds cause a major upset, however, we respect what Novo's achieved so far. A pharmaceutical company with net cash on the balance sheet, a defensive market and dividend yield of 2.7%, really does offer something unique.

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Half Year Results (constant exchange rates)

Overall diabetes and obesity sales rose 6% to DKK 50bn. The group's value share of the global diabetes treatment market increased to 28.3%.

Within that, total insulin sales fell 1% at constant exchange rates, to DKK 30.3bn, with growth in Premix insulin failing to offset weakness elsewhere. Lower pricing in the US meant insulin sales in North America fell 15%, however volume share improved slightly to 40.3%.

Sales of GLP-1 products, non-insulin treatments for Type 2 diabetes, rose 18% to DKK 14.9bn, and as a segment it represents an increasing share of the global diabetes industry. Recently launched Ozempic is now available in 21 countries and delivered rapid growth in the half.

Obesity drug Saxenda also delivered a strong performance, with sales up 56% to DKK 2.7bn. International sales increased substantially, with the drug now available in 43 countries.

The Bio-Pharmaceuticals unit saw sales rise 3% to DKK 9.3bn, with a particularly good performance in haemophilia - up 5% on a good NovoEight result.

Good cost control meant group operating margins improved to 46.7% (2018:45.4%), although that also meant R&D expenditure fell. The group received regulatory approvals for several diabetes and haemophilia treatments during the half.

The group finished the half with DKK 10.2bn of net cash, having generated DKK 12bn of free cash in the second quarter, down 9% year-on-year as working capital requirements increased.

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