Novo Nordisk grew its first quarter revenue by 25% to 53.4bn Danish Kroner (DKK), ignoring exchange rate movements. Within Diabetes and Obesity care, growth in GLP-1 based medicines far outpaced declines in insulin sales. Sales of obesity care products were particularly strong, more than doubling, as patient uptake of Wegovy gathered momentum.
Operating profit was up by 28% to 25.0bn DKK and free cash flow by 13.8% to $25.1bn. Net debt fell from 13.1bn DKK to 10.6bn DKK.
Full year guidance was recently raised with sales and operating profit growth ignoring exchange rate movements, now expected to be between 24-30% and 28-34%, respectively.
The shares were down 4.6% following the announcement.
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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 for the treatment of type 2 diabetes, and more controversially as a weight-loss aid. 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 with the strongest growth being seen in usage for weight-loss. Manufacturing bottlenecks now seem to be the main constraint on growth.
However, the treatment which goes by the trading name Wegovy should soon be available for prescription by pharmacists in the UK. But concerns are emerging about its long-term safety and Novo has been suspended from the UK's pharmaceutical trade association, due to its marketing practices of another of its 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 in the US. 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. 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.
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 last year's acquisition of Forma Therapeutics, a specialist in rare blood disorders.
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. It also suggests that investors are expecting further successful drug launches to emerge from Novo's pipeline. This is 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
Product governance is a primary driver of ESG risk for this sector, with safety and marketing of medicines the key focus. Access to medicines and their affordability, as well as business ethics concerning intellectual property rights, ethical clinical research and price collusion are other topical issues. Labour relations and Bribery and Corruption are also material ESG risks.
According to Sustainalytics, Novo Nordisk's management of ESG risks is strong, but we have some concerns. 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
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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.
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