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Novo Nordisk - High demand piles pressure on production

Ignoring the effects of currency fluctuations, Novo's full year sales have increased by 16% to DKK 177bn.

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Ignoring the effects of currency fluctuations, Novo's full year sales have increased by 16% to DKK 177bn. North American sales outpaced the rest of the world, and revenues grew by 21%.

Despite a ramp up in Research & Development spend to DKK 24bn, operating profits were able to climb roughly in-line sales, up 15% to DKK 74.8bn.

Free cash flow nearly doubled to DKK 57.4bn. Net debt of DKK 13.1bn was down from DKK 15.9bn.

Novo intends to declare a final dividend per share of DKK 8.15, and has launched a new 12-month share repurchase programme of up to DKK 28bn.

Higher than expected demand, and capacity limitations have resulted in shortages of certain products, and Novo has invested DKK 12.7bn over 2022 to expand capacity.

In terms of 2023 guidance, both sales and operating profit growth are expected to be 13-19%.

The shares were broadly flat in early trading.

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Our view

Novo Nordisk continues to grow its market share of diabetes treatments, now responsible for nearly a third of all treatment sales globally. Insulin makes up a touch shy of 30% of the group's sales. That's been shrinking, but Novo is hopeful that the potential launch of its once-weekly icodec could bring insulin back into the spotlight. Regulatory approval is the next hurdle.

For now, the key growth driver remains its GLP-1 products to treat type 2 diabetics. These drugs stimulate the body to produce more insulin after eating, avoiding the need to inject insulin straight into the body, which reduces the chances of complications. Sales of this category have been impressive and growth of Ozempic has been rapid. The launch of Rybelsus, a tablet form of the treatment, has also added to Novo's growing market share within the diabetes care market, and is enjoying steady growth in prescriptions in the United States.

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's allowed the group to boast operating profit margins of over 40%. Cash conversion of these profits are impressive allowing Novo to pounce on strategic acquisition opportunities such as Forma Therapeutics, a specialist in rare blood disorders.

This acquisition is one part of Novo's attempt to diversify beyond diabetes care, a move which we welcome. Novo has demonstrated it can do this successfully in its Obesity care franchise, which although relatively small for now, was the fastest growing therapeutic area in 2022.

One risk to note is that insulin pricing is under pressure in the US, and 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. We also note that Novo's GLP-1 therapy Victoza will soon see its patent protection expire, but take comfort that Novo's other treatments in this class have been more than offsetting Victoza's decline.

Governments and patients are increasingly unwilling to pay extortionate prices for lifesaving, but chronic, medicines. With health systems emerging from the current crisis with budgets stretched thin, that trend is only likely to continue.

The valuation is some way above the long-term average and at the upper end of its peer group. Against solid consensus operating profit growth forecasts, we think this is quite demanding. The rating suggests that investors are expecting further successful drug launches to emerge from Novo's pipeline. This is by no means guaranteed. Furthermore, until the ongoing production issue are resolved, they are likely to hold back investor sentiment.

Novo Nordisk key facts

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. Overseas dividends can be subject to withholding tax which might not be reclaimable.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Article history
Published: 1st February 2023