Novo Nordisk (NVO) has continued to command a much higher P/E ratio than its peers in the pharmaceutical industry. Investors justify this because Novo is projected to have high revenue growth and they are a leader in the treatment of diabetes. To meet these growth projections and continue their dominance of the diabetes market Novo needs two drugs to perform exceptionally well.
The first is Liraglutide, also known under its brand name Victoza. Victoza is one of only two GLP-1 agonists currently on the market, the other being Exenatide (Byetta, Bydureon). GLP-1 agonists exert most of their effects by increasing insulin excreted by the pancreas and slowing down the digestion of food. The increase in insulin is glucose dependent therefore limiting the risk for hypoglycemia compared to other type 2 diabetic medications.
Exenatide also known under the brand name of Byetta was the first GLP-1 agonist to enter the market and was very profitable for Amylin. When Victoza first came out in early 2010 it quickly started cannibalizing market share from Byetta and now has almost 60% of the GLP-1 market. Also since 2010 the number of scripts for GLP-1 agonists has gone from just over 160,000 to now over 300,000 prescriptions. For the first nine months of 2012 Victoza has made up 45% of Novo Nordisk's growth. So it is obvious that Victoza's continued success is vital to Novo Nordisk.
However, there are a few things that could slow down Victoza accelerated growth. The first is the maturation of the GLP-1 agonist market. While I think the utilization rate of this drug class will continue to climb, the pace will most likely settle down a bit. The second is new competition from a longer acting version of Exenatide. When Victoza first came on the market Exenatide had to be taken twice daily while Victoza only had to be injected once a day which gave it a huge advantage. Earlier in the year, a reformulated version of Exenatide called Bydureon was released that only has to be injected once weekly. The good news for Novo is that since Bydureon's release it has mostly captured market share from Byetta and not Victoza.
Since the acquisition of Amylin by Bristol-Myers Squibb (BMY), Bydureon will have the benefit a large marketing budget, and a new version with a smaller needle could change things but for now Bydureon hasn't slowed Victoza down. The other catalysts that could slow down Victoza's growth is the approval of more GLP-1 agonist medications. The market could get crowded with GSK (albiglutide), Lilly (Dulaglutide), and Sanofi (lixisenatide) all working on their own GLP-1 agonist.
The second drug that is vital to Novo's growth is Degludec, which is an extremely long acting insulin. It is hard to state just how important this drug is to the future of Novo Nordisk. I think the best representation is that when the FDA advisory panel recommended the approval of Degludec Novo's stock shot up ten percent, increasing its market capitalization by ten billion dollars in one day. Novo Nordisk has also spent heavily on a number of drug studies showing that Degludec is not inferior to Lantus.
Degludec has already been approved in Japan and a similar committee recommended its approval for the European Union. Degludec is Novo's second attempt at a long acting insulin. Its first attempt, Levemir hasn't been a complete failure but it has failed to dominate the market like Sanofi's (SNY) Lantus. Currently Levemir has around 20% of the long acting insulin market while Lantus has 80%. Lantus has the advantage over Levemir of mostly being given once a day compared to Levemir, which while can be given once daily is mostly given twice daily. Degludec will change that. It can be given three times a week (not approved by the FDA) or once daily without regard to time of administration. This easier administration should allow it to capture market share from Lantus, the question is how much. That's going to depend on a number of factors.
In my view, there are two main concerns that could derail Degludec in its quest to topple Lantus. The first is the possibility of adverse cardiovascular side effects. The reason Degludec's release is being derailed in the United States is concerns over these possible side effects. Many doctors will probably choose to go with the drug they already know (Lantus) then a new drug that could have serious side effects. Most likely Degludec will be enrolled in a post marketing surveillance program. This will cost Novo Nordisk money and sales.
The second concern is how will patients and doctors view Degludec's dosing schedule. There are not many drugs that are given three times a week so its hard to determine how big of an advantage it will be over once daily.
There are a few things working in Degludec's favor as well. The first is that Novo Nordisk knows diabetes like no other company out there so it will be able to market the drug to doctors very effectively. Also Degludec is being paired up with their short acting insulin aspart and their GLP-1 agonist (Liraglutide), which will increase its utilization. The last big advantage of Degludec is that it can be given at any time of the day while Lantus has to be given at the same time every day. Also Novo Nordisk has showed through a number of studies that Degludec was non inferior to Lantus.
To conclude, Novo Nordisk is a great company that is a global leader in one of the fastest growing disease states in the world. To maintain its lofty P/E ratio it will be relying heavily on these two promising drugs. However as mentioned above there are a few issues that investors should be aware of as neither of these drugs' success (Degludec) or continued success (Victoza) is guaranteed.