Analyst Note, Karen Andersen, 30/10/2014
Novo Nordisk reported strong third-quarter results that put it on track to meet our estimates for the year, and most important, management's preliminary guidance for high-single-digit revenue growth and similar operating profit growth in 2015 is also in line with our forecast. We don't expect to make any significant changes to our $46 fair value estimate, and the shares once again look fairly valued after a volatile week. We continue to think that Novo's scale and innovation contribute to its wide moat and a strong pipeline will keep this moat stable despite regulatory and pricing headwinds.
Novo's 2015 outlook reassures us about pricing in the long-acting insulin space, as it doesn't appear to incorporate extreme discounting for Levemir in the U.S. market. Management was quiet regarding specific pricing decisions for 2015, noting that U.S. pricing overall should still be flat to a slight positive for the firm's gross margin in 2015. Our long-term forecast points to gross margins approaching 85% (from 83% in 2013), due to manufacturing improvements and increased sales from higher-margin products like Victoza, Tresiba, and Xultophy. Novo's growth benefits from underlying demand for Levemir, as market share has steadily grown to almost one fourth of the basal market in the U.S. versus Sanofi's Lantus.
Tresiba's U.S. launch remains key to valuation, and we still expect a filing in the first half of 2015. For the first nine months, Novo saw 8% growth, with half of sales (and two thirds of growth) coming from North America. Given increased pricing pressure in the long-acting market as Lilly's biosimilar Lantus approaches the U.S. market (launch likely in the second half of 2016), Novo needs to be able to market Tresiba in the U.S. to hang on to its pricing power. While we won't see the interim data, we will find out whether Novo's designated team and the FDA have decided that data warrant a submission, or whether the final analysis (likely in 2017) will be needed.
Bull og bear scenarier for Novo Nordisk
Bulls say
- The increased prevalence of obesity and patient conversion to pricier modern insulin offerings should expand the branded diabetes-care market by 12% annually over the next five years.
- With a promising pipeline full of next-generation insulins, Novo is well positioned to defend its formidable diabetes market share in the long run.
- Novo's prowess developing therapeutic proteins has led to the creation of a highly profitable line of biopharmaceutical products for hemophilia and other disorders, helping to diversify its top line and further boost margins.
Bears say
- Tresiba, Ryzodeg, and Xultophy won't reach the lucrative U.S. market until at least 2016, allowing Sanofi to continue to dominate with Lantus and introduce new insulin offering Toujeo in the interim.
- Novo and its insulin market peers have enjoyed tremendous U.S. pricing power in recent years, but the passing of the patent cliff and increased consolidation of PBMs could limit this power in the future.
- Novo's Victoza has been a strong growth driver, but exclusion from the Express Scripts formulary in 2014 and the introduction of other potent GLP-1 analogs could weigh on growth.
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