Investeringskommentar, Karen Andersen, Strategist, 05/08/2016
Novo Nordisk reported second-quarter results and U.S. pricing guidance for 2017 that were slightly below our estimates, and we've modestly reduced our fair value estimate to DKK 341 ($51 per ADR). While shares fell significantly on the news, our previous estimates of 5% top-line and 9% bottom-line CAGRs over the next five years were well below consensus (closer to 7% and 12%, respectively), as we remain wary of the receptiveness of U.S. payers to Novo's newest insulin therapies and of the sustainability of the firm's hemophilia franchise. Novo remains the most innovative player in the diabetes space, and cost advantages as well as significant intangible assets in the therapeutic protein space give it a stable, wide moat.
Novo's top line grew 7% at constant currencies in the second quarter, with similar growth in both diabetes care and bioopharmaceuticals. Novo’s growth normally comes primarily from the U.S. market, but second-quarter growth came equally from the U.S. (relatively weak 3% growth) and China (explosive growth of 19%). In diabetes care, basal insulin Tresiba and GLP-1 product Victoza drove growth, but older modern insulin therapies like NovoLog and Levemir saw constant currency sales declines in the lucrative U.S. market, as formulary exclusions and increased pricing pressure weigh on sales. Management sees low to mid-single-digit pricing pressure on its U.S. diabetes franchise for 2017, as the firm was forced to offer Tresiba at pricing parity to Levemir and Lantus through some channels to maintain patient access.
In biopharmaceuticals, NovoSeven sales fell 13% in the quarter, driven by weakness in the U.S. market from marketed competitors (Shire's Feiba) and clinical trial recruitment (Roche's emicizumab and Alnylams fitu siran). While Novo continues to invest in longer-acting hemophilia therapy, we remain concerned that disruptive threats from Roche and Alnylam could lead to long-term sales erosion for NovoSeven.
Bulls Say
- The increased prevalence of obesity and patient conversion to pricier modern insulin offerings should expand the insulin market by more than 6% annually over the next five years, based largely on volume.
- 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
- Novo's Tresiba delays in the U.S. market have been costly, and Sanofi's insulin/GLP-1 combination product Lixilan could reach the market at the same time as Novo's Xultophy in 2016.
- 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 led to flat U.S. pricing for Novo in 2015.
- 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.
