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Novo Nordisk - Wegovy sales soar in H1, guidance upgraded

Novo Nordisk grew its first-half revenue by 29% to 107.7bn Danish Kroner (DKK)...

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Novo Nordisk grew its first-half revenue by 29% to 107.7bn Danish Kroner (DKK). Diabetes and Obesity care products were the main driver of sales growth. Obesity treatment Wegovy saw the strongest uplift more than quadrupling to 12.1bn DKK.

Operating profit was up by 30% to 48.9bn DKK. Free cash flow rose at a slower rate of 7%, to $45.5bn as capital expenditure more than doubled to support production capacity. The net cash balance totalled 10.7bn DKK.

The company returned 32.3bn DKK to shareholders in dividends and buybacks, and has declared an interim dividend of 6.00 DKK per share.

The guidance range for full year sales and operating profit growth has been raised again, when ignoring the effects of exchange rate movements. Sales are expected to grow 27-33%, and operating profits 31-37%.

The shares were down 1.4% in early trading, following a strong rise earlier in the week off the back of clinical trials data for Wegovy.

View the latest Novo-Nordisk share price and how to deal

Our view

Novo Nordisk continues to grow its market share of diabetes treatments, now responsible for about a third of all treatment sales globally. Insulin makes up under 30% of the group's sales and is trending downwards. 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 for the treatment of type 2 diabetes, and more controversially as a weight-loss aid.

The market opportunity for this new generation of obesity treatment has the potential to support strong growth for many years. For now, positive data from recent clinical trials demonstrating benefits for cardiovascular health should provide the medical profession, and health care payers, with some added comfort around the growing patient interest in GLP-1 therapies. Novo Nordisk hopes this will support approvals that will enable clinicians to prescribe it's Wegovy injections for more medical conditions.

But concerns are emerging about its long-term safety and Novo has attracted criticism for its marketing practices for one of its other obesity treatments. Potential restrictions on usage and marketing as well as emerging competition are risks to watch out for further down the line.

Another risk to note is that insulin pricing is under pressure. So far, the group's newer products and international expansion are more than offsetting those headwinds. But it's worth noting that the cost of these newer therapies is proving to be contentious, so there could be further calls to reduce prices.

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 is impressive, allowing Novo to indulge in acquisition opportunities such as last year's addition of Forma Therapeutics, a specialist in rare blood disorders. It's also allowing it to invest heavily in increasing capacity, but manufacturing bottlenecks still seem to be the main constraint on growth across the business.

The valuation is some way above the long-term average and at the upper end of its peer group. We think this reflects the impressive track record of growth but also an expectation that this will continue but remember past performance is not a guide to the future.

It also suggests that investors are expecting further successful drug launches to emerge from Novo's pipeline. This is also by no means guaranteed. The high rating leaves the valuation vulnerable to earnings disappointments and until the ongoing production issues are resolved, the risk of that happening is higher than usual.

Environmental, social and governance (ESG) risk

The pharmaceuticals sector is relatively high-risk in terms of ESG. Product governance, particularly with safety and marketing, and affordable access to treatment are the key risk drivers. Labour relations, business ethics and bribery and corruption are also contributors to ESG risk

According to Sustainalytics, Novo Nordisk's management of ESG risks is strong.

We have some concerns though. Executive pay is linked to both financial and non-financial targets, including sustainability targets, though it's unclear exactly how the two are linked. Novo Nordisk's product quality and safety programmes are adequate. The company also addresses pricing and access to medicine in emerging markets and the US. In general, Novo Nordisk has strong policies and programmes to address business ethics issues, but fails to address anti-competitive practices and has been implicated in alleged price fixing and questionable promotional activity controversies.

ESG data sourced from Sustainalytics.

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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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 10th August 2023