Does Novo Nordisk's Pipeline Justify Its Premium?

| About: Novo Nordisk (NVO)

Novo Nordisk (NVO) is a leading research pharmaceutical company based out of Denmark. It is the world leader in diabetes care with a variety of products including Victoza, Levemir, NovoLog, NovoLog 70/30, and Novolin R. Currently diabetes products make up over 75% of Novo Nordisk's revenue, however recently they have been trying to diversify their income stream by investing their R and D dollars in a variety of patient populations.







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A quick look at the table shows that Novo Nordisk really stands out when compared to its peers. Its dividend yield is substantially lower than other major pharmaceutical companies while having one of the lowest payout ratios as well. What stands out the most is Novo Nordisk's P/E ratio. It is substantially higher than its competitors and more than double that of Novartis and Sanofi. How does Novo Nordisk command this hefty premium? The answer is in its pipeline. Investors are betting that a few of these drugs will become huge sellers and pad Novo Nordisk's earnings for years. Here is a summary of the drugs they are betting on.

Short Term

Insulin Degludec (Filed)

With diabetes growing at a troubling rate, any new treatment that can change the standard of care can become an instant blockbuster. Novo Nordisk is hoping that Degludec is that just that. Degludec is Novo Nordisk's answer to Sanofi's Lantus. Both insulins are basal insulins used to control a patients blood glucose levels over long periods of time. Degludec is key for Novo Nordisk because of the failure of their first basal insulin, Levemir to overtake Lantus in sales. While Lantus has gone on to exceed $5 billion in sales yearly, Levemir is hovering around $1.5 billion in sales. Levemir has never been able to overtake Lantus mostly because it has a slightly shorter duration of action, which in most cases requires it to be given twice daily compared to Lantus' once daily.

Degludec changes that because it only needs to be given three times a week. It can also be given at varying times of the day, which will improve patient compliance. Novo Nordisk is also going to be selling a combination version called DegludecPlus, which will include a short acting insulin mixed in with the basal insulin. A study in Japan showed that DegludecPlus was superior to Lantus in reducing patient's A1C levels. Novo Nordisk will be going after new insulin patients which make up about 15% of the market, and they estimate it will overtake lantus with in 10 years. Another combination product called IDegLira will combine Degludec insulin with Liraglutide. This product will most likely be on the market before Sanofi releases its equivalent version, which is a combination of Lantus and Lixisenatide.

Liraglutide (Phase III)

Liraglutide, which you might recognize by its brand name, Victoza, has been in the news recently as Paula Deen's drug of choice to treat her diabetes. It belongs to the class of drugs known as GLP-1 agonist which also include Eli Lilly's Exenatide and Sanofi's soon to be approved Lixisenatide. Liraglutide is already available for the treatment of type 2 diabetes, but once again Novo Nordisk was late to the party, as Eli Lilly (LLY) and their partner Amylin have had Byetta (Exenatide) available a few years before Liraglutide.

As previously mentioned Novo Nordisk also plans a combination product with it new long acting insulin called IdegLira. While sales have been solid so far there are a few reasons why this drug has huge untapped potential. The first is that it could be approved for obese patients without diabetes for weight loss management. This is huge because currently their are limited options to treat obesity pharmacologically. A phase II study showed that Liraglutide helped patients lose more weight when compared to placebo and Orlistat. Another study showed that when compared to placebo Liraglutide helped patients keep off previously lost weight as well as lose more weight. The only problem is that many patients are weary of injections. No worries though as Novo Nordisk is already undergoing a trial of a oral version of Liraglutide.

Vatreptacog alfa (Phase III)

NovoSeven has been a success for Novo Nordisk in the treatment of Hemophilia and they look to build upon this success with Vatreptacog alfa. Essentially Vatreptacog alfa is a faster acting version of NovoSeven which works by mimicking factor VII. NovoSeven's patent has already run out but due to the complexity of the manufacturing process no generic is currently available. However this could change soon as many manufactures are investing in the biosimilar market. A phase II trial showed that Vatreptacog alfa was well tolerated and had a treatment failure rate of less than 3%. Vatreptacog alfa could be available in late 2013 if Phase III trials go well.

N8-GP (Phase III)

N8-Gp is a long acting Factor VIII product that will be used for the treatment of Hemophilia A. N8-Gp will look to distinguish its self from products already on the market such as Advate and Xyntha by requiring decreased administrations. Novo Nordisk accomplishes this by increasing the drugs half life therefore increasing the length of time the drug administers its effects in the body. In 2010 the market for Hemophilia A products was over 5 billion so they could have a potential blockbuster if successful.

N9-GP (Phase III)

N9-GP is being developed to treat Hemophilia B. As with N8-GP, N9-GP will have a longer half life than its competitor which will require less frequent administration. Currently the factor IX market is completely dominated by BeneFix which is made by Pfizer. However sales of N9-GP will most likely be limited due to the relatively few patients that suffer from Hemophilia B.

Long Term

NN8555 (Phase II)

NN8555 plays an important part of Novo Nordisk's plan to treat a larger patient base outside of diabetes. This drug could be used to treat a variety of inflammation disorders including Crohn's and Rheumatoid arthritis. NN8555 is a monoclonal antibody that targets T cells and natural killer cells. Novo Nordisk acquired this drug from Inate pharma in 2008.

NN1953 (Phase I)

While it only just successfully completed Phase I trials, NN1953 has the most potential of any of the drugs listed. NN1953 is a basal insulin that is taken orally. Novo Nordisk partnered with Merrion pharma and is using their technology to allow the insulin to be adsorbed orally. It is important to mention that this drug has only completed Phase I testing. Therefore it is many years from reaching the market, if it even gets there in the first place.

Disclosure: I am long PFE.