Novo Nordisk (NOVO B) DKK0.1 B

Novo Nordisk’s first quarter results came in ahead of expectations. Sales grew by 24% to 65.3bn Danish Kroner (DKK), ignoring the effect of exchange rates. Sales growth in the US of 35% far outpaced the levels seen in international markets.

Operating profit increased by 30% to DKK 31.8bn.

Free cash flow fell from DKK 25.1bn to DKK 5.8bn reflecting higher tax payments and increased capital expenditure. Novo also spent DKK 31.4bn on dividends and share buybacks. Net debt was DKK 17.6bn compared to a net cash position of DKK 3.2bn three months earlier.Full year sales growth is now expected to be 19-27% and operating profit growth is now expected to be 22-30%, up from 18-26% and 21-29% respectively.

The shares fell 1.5% following the announcement.

Our view

Novo Nordisk’s investors are becoming accustomed to good news, as demonstrated by the luke warm market response to the latest upgrade.

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, nearly doubled in the US in the first quarter. The market opportunity for this new generation of obesity treatment has the potential to support strong growth for many years. Having launched in several European countries last year, and with China reportedly scheduled in the coming months, there’s plenty to be excited about.

Positive data from recent clinical trials is demonstrating benefits for cardiovascular health. A regulatory approval of Wegovy for this use case, opens up additional patient populations. And it’s a disease area where the company has a strong development pipeline of new products. Whilst early trial data indicates that these may include more effective treatments, there are no guarantees that these will ever make it to market.

But concerns are emerging about the long-term safety of GLP-1 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%. There are some headwinds to margins as Novo seeks to internalise more of its supply chain and drive the research agenda, but overall management is confident of further expansion.

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 22-30% this year - hardly a snail's pace. The strong financial position means it can afford the $11bn pledged to acquire three manufacturing sites from Catalent later this year.

But that won’t be an instant fix. Wegovy production is still struggling to keep up with market expectations. And with a valuation sitting some way above the long-term average there’s real pressure to resolve the situation. We’re excited about the long-term potential but the likelihood of ups and downs remains elevated.

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.

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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.

Previous Novo Nordisk updates