Is Novo Nordisk (NYSE:NVO) a full-fledged pharmaceutical company, or does it fall into that "specialty pharmaceutical" niche? Will the company succeed in expanding beyond diabetes and very specialized hormone/protein therapies? Does anybody care so long as the company delivers double-digit revenue growth and returns on capital that approach 40%?
TUTORIAL: Stock Basics
The Strong Get Stronger in Q1
While some analysts seem to be fretting a bit about a "slowdown" in the insulin business for Novo Nordisk, the fact remains that this is one of the fastest-growing major pharmaceutical companies on the planet. Total revenue rose 15% this quarter, with the diabetes franchise growing 16% and the biopharmaceuticals business up 10%. Within diabetes, insulins grew 8% due to continued growth of the analog platform, while Victoza showed nearly 200% growth and delivered over $200 million in revenue on its way to blockbuster status.
Profitability also improved this quarter. Gross margin slid a bit as the company could not completely offset a drag from foreign currency, but the loss was limited to 20 basis points. Operating income grew 24%, though, as sales, administrative and R&D expenses all grew by mid-single-digit amounts. Although the R&D spend looked a bit light this quarter, it looks like more of a timing issue than any sort of philosophical change.
The Diabetes Fortress Still Strong
Novo Nordisk is demonstrating why diabetes is a great franchise for drug companies; the products have to be used over and over again and the reimbursement is strong. Although the company lost some insulin analog share in the United States because of a few managed care contracts that went to Lilly (NYSE:LLY), there is nothing going on in the market that suggests the company is really losing any meaningful ground to Lilly or Sanofi-Aventis (NYSE:SNY) in this market. Likewise, the company is clearly having no problems competing with Merck's (NYSE:MRK) Januvia or Bristol-Myers' (NYSE:BMY) Onglyza.
At the same time, the FDA and would-be competitor missteps are limiting competition. The FDA rejected new insulin formulations from Biodel (Nasdaq:BIOD) and MannKind (Nasdaq:MNKD), and it is unclear if either of these companies will succeed in securing approvals for their oral and inhaled insulin products. Elsewhere, the prospects for Victoza got a big boost from the FDA setback with Bydureon, an anti-diabetes medication that Lilly hopes to co-market as a follow-up to the successful GLP-1 drug Byetta.
An Interesting, but Mixed, Pipeline
As is often the case, Novo had a mix of good and disappointing news on its pipeline. The company is abandoning an oral rapid-acting insulin, while still working on a longer-acting formulation. Data on a would-be rival to Sanofi's Lantus appears to be viable for approval and competitive launch. The company advanced two compounds into Phase 2 studies for rheumatoid arthritis and Crohn's disease (and these are potentially valuable expansions into antibody therapy), but also reported that trials for new applications for Factor 7a and 13 failed.
The Bottom Line
Novo Nordisk clearly stands out from Astra Zeneca (NYSE:AZN), Novartis (NYSE:NVS) and Sanofi-Aventis as a great growth-oriented European pharmaceutical company. It also stands out in terms of its valuation. For investors who doubt just how much investors hate uncertainty and will reward reliable growth (with moderate competitive threats), Novo Nordisk is a great example.
Even allowing for strong ongoing growth in free cash flow and a generous discount rate, Novo Nordisk shares do not look cheap enough today. Though this would be a fantastic stock to buy on a pullback or market correction, it just seems too expensive today. (For related reading, also take a look at Pharmaceutical Sector: Does The FDA Help Or Harm?)
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