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Novo Nordisk - CV related stocking boosts sales

Nicholas Hyett, Equity Analyst | 6 May 2020 | A A A
Novo Nordisk - CV related stocking boosts sales

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Novo-Nordisk A/S DKK0.2 B

Sell: 438.65 | Buy: 438.80 | Change 2.10 (0.48%)
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Novo reported a 14% increase in first quarter sales at constant exchange rates, reaching 33.9bn Danish Kroner (DKK). That reflects growth across all geographic regions, benefiting from coronavirus related stockpiling in insulin and rapid growth in newer diabetes, obesity and haemophilia treatments.

Operating profits rose 12% to DKK 16.3bn as launch costs for Rybelsus and increased Research & Development expenses partly offset sales growth.

Guidance for the full year remains unchanged, with sales growth expected to increase by 3-6% and operating profits by 1-5% (both at constant exchange rates).

The shares rose 2.1% in early trading.

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Our view

Novo-Nordisk manufactures nearly half of all insulin worldwide, and maintaining supply to patients through the current crisis is absolutely crucial. That's led to a spike in sales in the first quarter, as patients and providers stocked up. However, this should just be a pull-forward of future sales - after all the number of diabetics remains unchanged - and full year guidance and the longer term outlook remain unaffected.

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 recent Rybelsus launch has the potential to turbo-charge sales in the short term - as the only GLP-1 product in tablet form (rather than injectable). 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 well 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. It's not impossible healthcare systems emerge from the current crisis unwilling to pay the high prices pharma companies demand for their drugs. That would be especially concerning given the shares are now trading a touch above their long term average on a PE ratio of 21.

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 prospective dividend yield of 2.2%, are few and far between.

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First Quarter Results (Constant exchange rates)

Total diabetes and obesity sales rose 14% in the first quarter to DKK 28.6bn. That reflects growth in GLP-1 treatments, which drove an increase in overall diabetes market share from 28% to 28.7%.

Total insulin sales rose 2% to DKK 15.9bn. That reflects the continued impact of price declines and affordability schemes in the US, offset by growing international sales and coronavirus related stocking. Total GLP-1 sales rose 37%, driven by 226% growth in Ozempic and the launch of Rybelsus, reaching DKK 10.0bn. Sales of obesity treatment Saxenda rose 30% to DKK 1.6bn.

The Biopharm division saw sales rise 16% to DKK 5.3bn. Growth was spread across both Haemophilia and Growth disorders, with coronavirus stocking boosting sales.

Research & Development spending rose 40%, reflecting the reversal of writedowns the previous year. Major pipeline developments during the quarter include the approval of Rybelsus in the EU and the successful completion of Phase II NASH trials for a liver disease treatment.

Free cash flow in the year rose 15% year-on-year to DKK 7.7bn. The group finished the year with net cash of DKK 5.7bn and access to DKK 20.9bn of funding.

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