Novo Nordisk Reports Strong 3Q

Novo Nordisk Reports Strong 3Q and 2015 Guidance Contains No Red Flags; Maintaining Fair Value

Karen Andersen, CFA 31.10.2014 | 9:51

Novo Nordisk reported strong third-quarter results that put it on track to meet our estimates for the year, and most important, management's preliminary guidance for high-single-digit revenue growth and similar operating profit growth in 2015 is also in line with our forecast. We don't expect to make any significant changes to our $46 fair value estimate, and the shares once again look fairly valued after a volatile week. We continue to think that Novo's scale and innovation contribute to its wide moat and a strong pipeline will keep this moat stable despite regulatory and pricing headwinds.

Novo's 2015 outlook reassures us about pricing in the long-acting insulin space, as it doesn't appear to incorporate extreme discounting for Levemir in the U.S. market. Management was quiet regarding specific pricing decisions for 2015, noting that U.S. pricing overall should still be flat to a slight positive for the firm's gross margin in 2015. Our long-term forecast points to gross margins approaching 85% (from 83% in 2013), due to manufacturing improvements and increased sales from higher-margin products like Victoza, Tresiba, and Xultophy. Novo's growth benefits from underlying demand for Levemir, as market share has steadily grown to almost one fourth of the basal market in the U.S. versus Sanofi's Lantus.

Tresiba's U.S. launch remains key to valuation, and we still expect a filing in the first half of 2015. For the first nine months, Novo saw 8% growth, with half of sales (and two thirds of growth) coming from North America. Given increased pricing pressure in the long-acting market as Lilly's biosimilar Lantus approaches the U.S. market (launch likely in the second half of 2016), Novo needs to be able to market Tresiba in the U.S. to hang on to its pricing power. While we won't see the interim data, we will find out whether Novo's designated team and the FDA have decided that data warrant a submission, or whether the final analysis (likely in 2017) will be needed.

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Karen Andersen, CFA  Karen Andersen, CFA, is a senior stock analyst with Morningstar.

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