Novo-Nordisk A/S (NOVO B) DKK0.2 B
HL comment (6 August 2020)
Novo Nordisk reported a 7% increase in sales in the first half, reaching 63.9bn Danish Kroner (DKK). That was driven by rapid growth in GLP-1 treatments, which more than offset weakness in insulin. Earnings per share rose 14% to DKK 9.58.
The company returned DKK 21bn to shareholders through dividends and buybacks in the half, and announced an interim dividend of DKK 3.25.
The shares were broadly flat following the announcement.
Novo-Nordisk manufactures nearly half of all insulin worldwide, and aside from moderate stockpiling which saw sales increase in the first half, there has been very little direct effect on the group. Full year guidance and the longer term outlook remain broadly unchanged.
Novo has recently 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. The group's knowledge of GLP-1 treatments also led it to develop new obesity treatments. Saxenda, the most important, is growing quickly and could ultimately help reduce type 2 diabetes globally.
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%.
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.
It's not impossible healthcare systems emerge from the current crisis unwilling to pay the high prices pharma companies demand for their drugs. That would be especially concerning given the shares are now trading a touch above their long term average on a price to earnings ratio.
Whether current headwinds continue remains to be seen, but we continue to think Novo offers something distinctive. Pharmaceutical companies with net cash on the balance sheet, a defensive market and prospective dividend yield of 2.3%, are few and far between.
Novo Nordisk key facts
- Price/Earnings ratio: 21.2
- 10 year average Price/Earnings ratio: 20.7
- Prospective yield: 2.3%
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Half Year Results (Constant Exchange Rates)
Novo's global insulin sales fell 3% in the first half to DKK 29.5bn. That was driven entirely by a 23% decline in North American sales - where changes in channel mix, higher rebates and new affordability initiatives all affected pricing. Novo improved its share of the global insulin market during the half.
GLP-1 sales rose 28% year-on-year, driven by growth in Ozempic and the launch of Rybelsus, and now stand at DKK 19.4bn. The group increased its market share of the GLP market to 49.1% and the GLP-1 segments share of the overall diabetes market also continues to grow.
Obesity treatment Saxenda saw sales rise 9% to DKK 2.9bn. That gives the group a 60.5% share of the global obesity prescription drug market.
Novo's Biopharma business saw sales rise 6% to DKK 10.0bn. China delivered particularly strong growth of 46%, albeit from a low base. Progress was driven by increased sales of growth hormone, partially offset by lower revenues from haemophilia treatments.
Operating margins improved year-on-year to 47.2%, from 46.7%. That was despite a 13% increase in research & development spending and costs associated with recent product launches.
Free cash flow rose 62% year-on-year to DKK 30.3bn. The group finished the half with net cash on the balance sheet of DKK 20.7bn compared to DKK 11.0bn a year ago.
The group has inched up guidance for full year operating profit and narrowed full year free cash flow guidance to DKK 33-38bn. The relatively modest free cash flow guidance for the remainder of the year reflects the acquisition of Corvidia Therapeutics for $725m announced in June.
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