Novo Nordisk Reports Stellar 3rd Quarter Earnings

| About: Novo Nordisk (NVO)

Danish pharmaceutical firm Novo Nordisk (NYSE:NVO) released a stellar third quarter earnings report on October 27, 2011. Here are some of the highlights from this report (all figures are YTD):

  • Sales increased by 11% in local currencies and 8% when converted into Danish krone (DKK), the company’s native currency.
  • Gross margin improved by 0.2 percentage points when measured in local currencies. The company’s gross margin did decline somewhat when measured in its native currency. This decline of 0.4% was due entirely to currency fluctuations and is not due to any internal company or external industry factors. The gross margin stood at 80.4% when measured in the company’s native currency.
  • Reported operating profit increased by 12% to DKK 16,293 million ($3,012.85 million). When measured in local currencies, the company saw even greater bottom line growth of 18%.
  • Net profit increased by 19% to DKK 12,408 million ($2,294 million).
  • Earnings per share increased by 22% to DKK 21.66 ($4.00).

This quarterly earnings report showcases the most recent of a string of very strong quarters for Novo Nordisk. As a result of the company’s very strong performance year to date, management offered improved guidance. This improved guidance should be helpful for investors in the company.

  • Sales growth measured in local currencies is now expected to be 10-11% for the full year 2011. This is an increase from the former guidance of 9-11%.
  • Operating profit growth measured in local currencies is now expected to be 17-19%. This is an increase from the former guidance of 15-19%.

The company’s GLP-1 analogue Victoza continued to provide a source of growth for Novo Nordisk. Total Victoza sales reached DKK 3,895 million ($720.3 million) year to date as of the end of September. This gives the drug a total market share of 54%. This breaks down to a 47% market share in the United States and a 64% market share in Europe. This compares favorably to the competing product Byetta from Amylin Pharmaceuticals (AMLN) and Eli Lilly (NYSE:LLY). Byetta sales 1% during the quarter and suffered from 4.5% decrease in prescription volumes while Victoza has been showing sales growth. The MAT value of the GLP-1 analogue market has grown 59% in the last twelve months. The decrease in Byetta sales despite the growing market could be a negative sign for both Amylin and Eli Lilly. Both Amylin and Eli Lilly are excited about their new product, Bydureon. Indeed, Bydureon could pose a competitive threat against Novo Nordisk in this growing market. It is worth noting though that Bydureon failed its non-inferiority test against Victoza so Novo Nordisk may be able to fend off this challenge.

Novo Nordisk submitted applications to the various regulatory agencies whose approval must be sought in order for the company to market next-generation insulins Degludec and DegludecPlus in the U.S. and Europe. I discussed the potential benefits of this new drug to investors in a previous article. Degludec and DegludecPlus have the potential to be another source of growth for Novo Nordisk over the coming years.

The company is not without risks though. The majority of healthcare costs in the developed world are paid for by governments. The austerity demands currently being imposed on many of the countries in the European periphery (collectively known as P.I.I.G.S.) could result in those countries making cuts to their vaunted universal healthcare programs. This could make it more difficult for diabetics to purchase medicines from Novo Nordisk. The budget crises faced by both the state and federal governments in the U.S. could have a similar effect. It is unlikely that these will have a significant effect on Novo Nordisk’s profits for a few reasons:

  1. There may be no cost-effective method to treat diabetes other than using medications such as those sold by Novo Nordisk. The usual treatment for diabetes is some form of insulin therapy. Novo Nordisk is the largest producer of insulin in the world and so receives revenues from this treatment.
  2. Large cuts to government healthcare programs are politically untenable and politicians will most likely look elsewhere in the public budgets to make cuts.
  3. Novo Nordisk’s products have inelastic demand so the company can raise prices to offset any demand decreases.

Novo Nordisk as a company has been faring incredibly well over the last year. The stock has not, however.

(Click to enlarge)

Source: Fidelity Investments

The ADR currently trades for 15% under its 52-week high. The stock has rallied in the last week or two but it could still be a good investment for someone with a mid- to long-term horizon. The stock would become a very strong buy if it falls below $100. The company doing very well and has substantial tailwinds behind it but the current market conditions cause even the best of the best to suffer from turbulence. This could make an already value-priced company even cheaper.

Disclosure: I am long NVO.