Novo Nordisk’s underlying sales fell by 4% in the first quarter to DKK 70.1bn (Danish Kroner), with increased GLP-1 sales volumes only partially offsetting lower prices.
Underlying operating profit fell by 6% to DKK 32.9bn.
Free cash flow increased by 12% to DKK 12.8bn reflecting a decrease in capital expenditure. Net debt stood at DKK 115.9bn. Dividend payments were stable at DKK 35.3bn with buybacks rising from DKK 1.4bn to DKK 2.4bn.
Full year guidance has improved slightly, with both underlying sales and operating profit now expected to fall between 4% and 12%
The shares rose 7.3% in early trading.
Our view
Novo Nordisk’s first quarter suggests new launches and sharper pricing are lifting demand for its weight-loss drugs, validating the recent rebound in investor confidence and nudging shares higher on the day. New sales partnerships and a marketing push are also helping. Results were a little flattered by customer restocking, so it’s too early to call whether guidance can improve further.
Competition from arch-rival Eli Lilly remains intense. But the GLP 1 market is a huge, underpenetrated arena. If patient access can improve, we think Novo has plenty of room to grow over the longer term. Expanding into different disease areas is another lever, and one where Novo’s products are building up a strong evidence base. It’s not all about the top line, though, and management is watching costs closely. Despite lower prices, operating margins are holding up at well over 40%.
With 35 new country launches made for Wegovy last year, overseas progress is something to watch, and sales outside of the US have been encouraging so far this year. Momentum for the Wegovy pill remains strong, and so far, it’s competing well with Eli Lilly’s newly launched oral option. Approval of a high-dose formulation of injectable Wegovy brings another choice for doctors to prescribe.
Longer term, much depends on who wins in the next generation of anti-obesity medicines. Novo’s pipeline spans several approaches, but competition is building. There’s also no guarantee of regulatory approval. The same can also be said of its rare disease pipeline, where the group has made some impressive clinical breakthroughs.
While it’s unlikely to move the dial in the same way as GLP 1 development, we think it’s something that could become more meaningful over time. Several key trial read-outs are due this year, and we support the growing focus on research and development.
Novo’s 3.9% dividend yield looks sustainable with share buybacks also on the table, but there are no guarantees. Management actions to turn the ship around have begun to restore investor confidence. The valuation continues to trail the long-term average, reflecting expectations that this year’s revenue will decline for the first time since 2017.
If Novo continues to deliver on its turnaround plan, we do see some upside to forecasts. But the narrative needs to move from managing decline to returning to strong profit growth. Fierce competition and the risks inherent with investing in the sector continue to present a challenging backdrop, so patience is needed.
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
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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 LSEG. 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.
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