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Novo Nordisk - New drugs drive growth

Nicholas Hyett, Equity Analyst | 5 February 2020 | A A A
Novo Nordisk - New drugs drive growth

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Novo-Nordisk A/S DKK0.2 B

Sell: 441.45 | Buy: 441.50 | Change 2.45 (0.56%)
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Novo reported a 6% increase in constant currency sales during 2019, which reached 122bn Danish Krone (DKK), driven by strong growth in recently launched insulin free diabetes treatments and international markets. Operating profits also rose 6% at constant exchange rates to DKK 52.5bn. Both were at the top end of guidance.

The group announced a final dividend of DKK 5.35 per share, taking the total dividend for the year to DKK 8.35, up 2.5% year-on-year. A new share buyback programme worth DKK17bn was also announced.

The shares were broadly unmoved 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 nearly 50% of 2019 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 set 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 share of the diabetes treatment market 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 40%.

It's not all smooth sailing though. Insulin pricing is under pressure in the US, while competition is heating up in the smaller haemophilia business too. So far the group's newer products and international expansion are more than offsetting those headwinds, but it's something to keep an eye on. That's especially the case given that the shares are now trading a touch above their long term average on a PE ratio of 22.1.

Whether current headwinds continue remains to be seen, but we continue to think Novo offers something distinctive. Pharmaceutical companies with net cash on the balance sheet, a defensive market and dividend yield of 2.3%, are few and far between.

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Full Year Results (Constant Exchange Rates)

Sales were negatively impacted by pricing pressure in the US insulin market, with North American insulin sales down 16%. Overall US sales were flat, as good results elsewhere in the portfolio offset the insulin headwind, and still account for almost half of the group total.

Sales outside North America rose 11% year-on-year, with growth in every region. Growth was especially strong in emerging markets, with Latin American sales up 24%, China up 12% and Asia, Africa, the Middle East & Oceania (AAMEO) up 14%.

At a group level total Insulin sales were down 3% at constant exchange rates to DKK59.7bn. However, that was more than offset by rapid growth in new GLP-1 treatments. Ozempic sales reached DKK11.2bn from DKK1.8bn last year, partly offset by lower Victoza sales. Recently launched Rybelsus achieved DKK50m of sales, and management are pleased with the early performance of this tablet form GLP-1 treatment. Obesity treatment Saxenda saw sales rise 42% to DKK5.7bn.

The small Biopharm segment saw total sales rise 4% to DKK 19.2bn. Haemophilia treatment NovoEight was the stand out performer, with sales up 10%.

Novo delivered free cash flow during the year of DKK34.5bn, finishing the year with net cash of DKK11.0bn.

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