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Novo Nordisk - sales and profits jump higher

Novo Nordisk's full-year revenue rose by 36% to DKK 232.3bn, ignoring the impact of exchange rates, driven largely by...

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Novo Nordisk's full-year revenue rose by 36% to DKK 232.3bn, ignoring the impact of exchange rates, driven largely by a 42% uplift in its Diabetes and Obesity care segment. North America was the fastest-growing region, with sales up 54% as demand for its obesity care drug, Wegovy, exceeded supply.

Operating profit increased by 44% to DKK 102.6bn, reflecting the top-line growth and modest price increases.

Free cash flow improved from DKK 57.4bn to DKK 68.3bn. There was a net cash position of DKK 3.2bn, compared to a net debt position of DKK 2.2bn at the prior year-end.

In 2024, Novo expects sales to grow between 18-26%, with operating profit set to expand faster at 21-29%.

The group will propose a final dividend of DKK 6.40 per share, taking the full-year total to DKK 9.40, up 51.6%. A new share buyback programme of up to DKK 20bn has also been announced.

The shares rose 3.6% following the announcement.

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Our view

Novo Nordisk is a leading provider of diabetes-care products such as insulin. Currently, the key growth driver is its range of GLP-1 products for the treatment of type 2 diabetes and, more controversially, as a weight-loss aid.

Sales of the group's headline weight-loss drug, Wegovy, saw a more than fourfold increase in over 2023. This strong demand supported higher prices and helped boost group margins and profits. With this higher-than-expected demand, Novo has faced challenges keeping pace. Efforts are underway to boost both short and long-term supply, but these capacity constraints are likely to remain a limiting factor to sales growth in the immediate future.

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 is demonstrating benefits for cardiovascular health. This should provide the medical profession, as well as healthcare payers, with some added comfort around the growing patient interest in GLP-1 therapies.

Novo Nordisk hopes this will support regulatory approvals that will enable clinicians to prescribe its Wegovy injections for more medical conditions, increasing its potential sales ceiling. Importantly, in the US, signs are emerging that more health insurers are willing to cover the cost to patients.

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.

The rare disease market is another area of focus and one which has met with recent clinical success. This is something we'll be monitoring with interest, but it's currently only a small part of the business.

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 consistently over 40%.

Cash conversion of these profits is impressive, allowing Novo to indulge in acquisition opportunities such as Forma Therapeutics, a specialist in rare blood disorders. It's also left room to invest heavily in increasing capacity, but manufacturing bottlenecks still seem to be the main constraint on growth across the business. Despite these challenges, the group expects operating profit to grow between 21-29% this year - hardly a snail's pace.

The valuation's sitting some way above the long-term average and towards the upper end of its peer group. That reflects Novo's strong growth prospects and formidable market position. But with execution risks ahead and increasing competition to be mindful of, the high rating also leaves Novo vulnerable to earnings disappointments.

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. 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.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 31st January 2024