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Novo Nordisk - Broad based growth

Nicholas Hyett | 1 November 2019 | A A A
Novo Nordisk - Broad based growth

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Novo-Nordisk A/S DKK0.2 B

Sell: 459.70 | Buy: 459.75 | Change 1.20 (0.26%)
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Total sales for the first nine months of the year rose 5% at constant exchange rates, to 89.6bn Danish Kroner (DKK) with good growth in obesity and non-insulin diabetes treatments. Operating profit rose 5% to DKK 40.6bn.

The shares were broadly flat in early trading.

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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, 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 with Novo gaining overall market share as a result.

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 19.7 times PE ratio is a touch 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 2.5%, really does offer something unique.

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Third quarter results (constant exchange rates)

Total insulin sales fell 2% at constant exchange rates to DKK 44.8bn. That reflects falling sales in the US, partly offset by strong growth in newer insulin types in the rest of the world.

Non-insulin diabetes treatments (GLP-1 therapies) saw revenues rise 20% to DKK 23.4bn, thanks to very strong growth in Type-2 treatment Ozempic. GLP-1's share of the total diabetes market increased to 17% (compared to 13.7% a year ago).

Obesity treatment Saxenda saw sales rise 50% to DKK4.1bn, with particularly strong sales growth in Asia

BioPharmaceuticals sales rose 4% to DKK 14.1bn, with Haemophilia treatment NovoEight sales up 14%.

Operating margins improved at constant exchange rates, despite increased investment in growth markets and products, as the group benefitted from the completion of some clinical trials and good administrative cost control.

Novo reported free cash flow for the year to date of DKK32.7bn. Net cash finished the quarter at DKK14.4bn.

Full year sales guidance narrowed slightly towards the top end of the range, and is now expected to be between 5% and 6% for the year as a whole. Free cash flow guidance also improved slightly, although operating profit expectations remain unchanged.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.