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Novo Nordisk - GLP-1 treatments continue to drive growth

Nicholas Hyett, Equity Analyst | 5 May 2021 | A A A
Novo Nordisk - GLP-1 treatments continue to drive growth

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Novo-Nordisk A/S DKK0.2 B

Sell: 642.10 | Buy: 642.50 | Change -2.30 (-0.36%)
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Novo reported first quarter sales of 33.8bn Danish Kroner (DKK), up 7% at constant exchange rates. That reflects continued strong growth in GLP-1 diabetes treatments, partially offset by another decline in North American insulin sales and customer de-stocking as global trade conditions ease.

Operating profits rose 3% at constant exchange rates to DKK15.0bn.

The group modestly increased full year revenue and operating profits guidance, and also increased the share buyback programme to DKK18bn.

Shares were up 2.7% following the announcement.

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Our view

Novo Nordisk manufactures nearly half of all insulin worldwide, and since diabetes is a chronic disease demand for insulin is very reliable. Unsurprisingly then the pandemic hasn't had much of an impact on the group's results - and the core narrative remains unchanged.

Novo has been branching out of simple insulin with GLP-1 products 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 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.

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%, despite extra investment in new releases. The group's balance sheet is in a good position too, with net debt equivalent to less than 5% of annual cash profits.

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.

Governments and patients are increasingly unwilling to pay extortionate prices for lifesaving but acute medicines. With health systems likely to emerge from the current crisis with budgets severely stretched, that trend is only likely to continue. That would be especially concerning given the shares are now trading a touch above their long-term average on a price to earnings ratio.

We continue to think Novo offers something distinctive. Pharmaceutical companies with a strong balance sheet, a defensive market and a prospective dividend yield of 2.2%, are few and far between. But whether current headwinds continue remains to be seen.

Novo Nordisk key facts

  • Price/Earnings ratio: 22.9
  • Prospective dividend yield (next 12 months): 2.2%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Results (constant exchange rates)

Total sales across all Diabetes and Obesity Care product lines rose 9% to DKK28.8bn. That reflects a 23% increase in GLP-1 treatments, with particularly strong growth in oral treatment Rybelsus. Total insulin sales were flat year-on-year, with 5% growth in International markets offset by a 10% decline in North American operations.

Sales of obesity drug Saxenda rose 9% to DKK1.6bn, driven by very strong growth in Europe, the Middle East and Africa (up 18%) and the rest of the world outside EMEA, North America and China.

BioPharm sales rose 1% to DKK5.0bn. That reflects modest growth across both rare blood disorders and rare endocrine disorders. That reflects the launch of new Haemophilia treatments Esperoct and Refixia.

Novo reported a modest decline in gross margins, as insulin prices continue to decline in the US, and an increase in sales and distribution costs as the group increased investment behind the launches of Rybelsus and Ozempic. Research & Development costs rose 7%, as the group continues to invest in cardiovascular and obesity treatments.

Free cash flow in the quarter totalled DKK9.9bn, up from DKK8.3bn a year ago. The group finished the quarter with net debt of DKK2.0bn, compared to net cash of DKK2.4bn.

Management now expects full year sales to grow 6-10% at constant exchange rates and operating profit to grow 5-9%.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.