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Novo Nordisk: Actual Numbers Not As Good As Headlines But Still Quite Solid

About: Novo Nordisk A/S (NVO)
by: Power Hedge
Power Hedge
Macro, energy, alternative energy, contrarian

Novo Nordisk's growth was not quite as strong as the headline numbers would make you think, since a weakening Danish krone accounted for some of it.

The company saw its flagship GLP-1 analogue continue to make impressive market share gains in both North America and Europe.

The company now has another blockbuster drug on its hands.

It is not resting on its laurels and has just received FDA approval to market semaglutide as a tablet, a first for a GLP-1 analogue.

The company will likely continue to prosper as diabetes becomes an ever-greater health concern around the world.

On Friday, November 1, 2019, diabetes-focused pharmaceutical giant Novo Nordisk A/S (NVO) announced its third-quarter 2019 earnings results. At first glance, these results were certainly solid, as the company showed very strong revenue growth and very slightly increased its guidance. A closer look at its results, though, shows that while they were good, the growth was not as strong as the headline numbers would lead one to believe. We do see some of our investment thesis playing out here, in particular the company's flagship product Ozempic has now achieved blockbuster status. It also recently got approved for another product that has some very real potential for helping diabetic patients treat their condition. Overall, this pharmaceutical company looks to be firing on all cylinders.

As my long-time readers are no doubt well aware, it is my usual practice to share the highlights from a company's earnings report before delving into an analysis of its results. This is because these highlights provide a background for the remainder of the article, as well as serve as a framework for the resultant analysis. Therefore, here are the highlights from Novo Nordisk's third-quarter 2019 earnings results:

  • Novo Nordisk reported net sales of DKK 30.277 billion in the third quarter of 2019. This represents a 9.06% increase over the DKK 27.762 billion that the company brought in during the prior-year quarter.
  • The company reported an operating profit of DKK 12.919 billion during the most recent quarter. This represents a 9.36% increase over the DKK 11.813 billion that it reported in the year-ago period.
  • Novo Nordisk now sells Ozempic in 24 countries and had total sales of DKK 6.872 billion from this product in the third quarter. Ozempic now has a 37% market share in the United States.
  • The company received approval to sell Rybelsus (semaglutide tablets) in the United States in September. The product is designed to treat adults with type-2 diabetes.
  • Novo Nordisk reported a net income of DKK 10.194 billion in the third quarter of 2019. This represents a 12.80% increase over the DKK 9.037 billion that it reported in the third quarter of 2018.

It seems quite likely that the first thing that any reader reviewing these highlights is likely to notice is that Novo Nordisk managed to grow its top line sales and, indeed, most of its financial figures at a phenomenal rate over the past year. However, this was not quite as good as it first appears. That is because one of the biggest drivers of this growth was currency fluctuations. In short, the Danish krone, which the company reports its results in, declined against many of the other global currencies in which it conducts business. We can see this in the fact that during the first nine months of the year, the company reported net sales growth of 9% when measured in Danish kroner but only 5% when measured using the currencies that its customers actually paid with. By the same taken, Novo Nordisk's operating profit increased by 11% over the period when measured using Danish kroner but only 5% after adjusting for changes in the exchange rate. This difference comes about because the foreign currencies that it brings in convert to higher numbers of kroner than they did last year. The company still reported reasonably nice growth rates when measured in the currencies that its customers actually paid with, but do not be fooled into thinking that the reported growth rate represents true business growth.

Source: Novo Nordisk Results Presentation

One of Novo Nordisk's largest markets is North America, particularly the United States. This will probably not be a surprise to anyone who has been following the company for a while. After all, I have frequently written about the high and rising obesity rate in the United States, and obesity is a risk factor in the development of type-2 diabetes. As we can see here, this region was responsible for 48% of the company's total sales.

Source: Novo Nordisk

Unfortunately for Novo Nordisk, this was also the only region of the world that delivered a sales decline in the first nine months of the year:

Source: Novo Nordisk

The company did see 6% sales growth in North America when measured in Danish kroner, so this clearly points to a reduction in U.S. dollars coming through the front door. Novo Nordisk notes that this appears to be due to diabetic patients migrating away from insulins (which saw a 16% sales decline) and towards its other product lines, all of which reported higher sales when measured using U.S. dollars. In addition to this, all of the discounting that the company has been doing across its product lines in the United States is impacting its year-over-year financial performance. Fortunately though, it was more than able to make up for the weakness in North America with strong growth from elsewhere.

Over the past decade or so that I have spent researching and writing about (and sometimes investing in) Novo Nordisk, the primary driver of growth was always likely to be the rising prevalence of diabetes in both the United States and worldwide. We continued to see that play out in the most recent quarter, as the diabetes and obesity franchises are the only ones that have really been seeing any growth:

Source: Novo Nordisk

Indeed, as the diabetes and obesity unit has grown its sales at double the rate of any of the other businesses, it can sometimes be difficult to remember that Novo Nordisk is also active in the market for haemophilia and growth disorder treatments. This specialization need not be a problem though, as the treatment of diabetes is something that it does quite well. This is likely one reason why the company continues to dominate the market for GLP-1 analogues, one of the two primary methods for the treatment of diabetes (the other being insulins), in the United States. In fact, the company's flagship GLP-1 product, Ozempic, saw its market share increase to 37% during the quarter, which gives Novo Nordisk a commanding 54% share of the GLP-1 analogue market in the United States:

Source: Novo Nordisk

This product has also been grabbing market share across Europe, at least in the markets where it has been launched:

Source: Novo Nordisk

As long-time readers may recall, I expected Ozempic to do quite well in the market, and even discussed this in a few articles that were published around the time of its launch (early 2018 in the United States), which it has certainly accomplished. I will admit, I did not expect it to so quickly dominate the market in the way that it has. It is definitely something that was nice to see though, and the fact that Novo Nordisk now has another blockbuster drug on its hands is something that any investor in the company should enjoy.

Novo Nordisk is certainly not resting on its laurels with regard to GLP-1 analogues. In fact, as noted in the highlights, the Federal Food and Drug Administration granted approval to Novo Nordisk to market Rybelsus in the United States. Rybelsus is the product that I mentioned in a few previous articles as oral semaglutide, and it represents the first time a GLP-1 analogue has been available in tablet form. The product performed quite well in the PIONEER clinical trials, as it more effectively lowered blood sugar than either sitaliptin or empagliflozin across 9,543 adults with type-2 diabetes. The product also resulted in an average 4.4 kg weight reduction across the participants in the trial, which may be beneficial for those individual patients that are suffering from both diabetes and obesity. It is certainly far too early to tell how successful the product will be, but combining the effectiveness of Ozempic with the convenience of a tablet could prove to be a winner for the company.

In conclusion, Novo Nordisk certainly delivered very solid third-quarter results, although they were perhaps not as impressive as the headline numbers would lead one to believe. It continues to see the global diabetes epidemic drive its growth, which is good for the company but is still a public health crisis. Novo Nordisk has been continuing to provide treatments that the market appears to like though, and its new oral semaglutide may prove to be another growth driver for the firm going forward. Investors should overall be quite pleased here.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am invested in closed-end trusts that currently have long positions in Novo Nordisk. I do not have any direct holdings in the company.