On Thursday, August 6, 2020, Danish pharmaceutical giant Novo Nordisk A/S (NVO) announced its second-quarter 2020 earnings results. The headline numbers were generally better than what analysts expected, as it managed to beat their estimates. Novo Nordisk focuses its efforts primarily on diabetes care products, and this is certainly a good place to be in the current environment because diabetes is a chronic disease that people still need care for even if there is a pandemic. It is also a disease that continues to become more and more prevalent as obesity rates continue to rise. We can continue to see evidence of the growing prevalence of diabetes in these results as the disease continues to impact more and more people.

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 second-quarter 2020 earnings report:

  • The company reported total net sales of DKK 30.006 billion in the second quarter of 2020. This represents a very slight decrease over the DKK 30.036 billion that it reported in the prior-year quarter.
  • It reported an operating profit of DKK 13.838 billion in the most recent quarter. This compares favorably to the DKK 13.352 billion that the company had in the year-ago quarter.
  • Novo Nordisk reported the successful completion of the phase 3 programme with semaglutide 2.4 mg obesity care product.
  • The company reported an operating cash flow of DKK 34.273 billion in the first half of the year. This is a substantial improvement over the DKK 24.929 billion that it had in the year-ago half.
  • Novo Nordisk reported a net profit of DKK 10.625 billion in the second quarter of 2020. This represents a 10.73% increase over the DKK 9.595 billion that it reported in the second quarter of 2019.

It seems certain that one of the first things that anyone reviewing these results will notice is that the company’s revenues were largely in line with what it saw in the prior-year quarter. They were, however, substantially lower than what we saw in the first quarter of the year. As I noted in a previous article, several nations around the world stockpiled diabetes care products out of fear that the COVID-19 pandemic would wreak havoc with the supply chain of these vital products. This was especially true in Europe. In the second quarter, nations began to reduce their stockpiles, so the company did not benefit from this boost. This caused its revenues to decline on a quarter-over-quarter basis, but still be relatively in line with the prior-year quarter. Hopefully, we will see a return to slow year-over-year revenue growth once these stockpiles are finally depleted.

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Normally, we would not expect the COVID-19-related economic lockdowns to have a huge effect on a pharmaceutical company. This is because these companies manufacture critical products that people depend on to live. However, one thing that we have seen is that fewer new patients have been seeking treatment and are instead choosing to temporarily live with their condition. Novo Nordisk notes that during the months that the lockdown was in place, it saw fewer new patients begin to use its products than usual.

Source: Novo Nordisk

Fortunately, as economies have begun to re-open, this problem has begun to rectify itself. However, social distancing measures are still very much in place in many areas, and this has prevented new patient uptake from reaching its previous levels. Hopefully, we will slowly see things continue to improve as more and more areas end up re-opening.

Ultimately, we will likely see Novo Nordisk return to growth. This is because the number of people with diabetes has been climbing at a very impressive rate. As we can see here, the global market for diabetes care products increased at a 14% rate over just the past year and at nearly a 29% compound annual growth rate over the past three years:

Source: Novo Nordisk

This is unlikely to be a surprise to anyone. As I have pointed out in various past articles, obesity rates in the United States and around the world have been increasing. According to the Centers for Disease Control, approximately 42.4% of Americans were obese in 2018. This is up substantially from the 30.5% obesity rate in 1999. This growing prevalence of obesity is largely a product of our modern sedentary lifestyles and poor diets. The agency also states that obesity is a risk factor in the development of type-2 diabetes. Thus, as the problem continues to get worse, we will likely see type-2 diabetes become more common. This means more customers for and growth for Novo Nordisk. Indeed, the company expects to see its sales grow at a 6-10% compound annual growth rate over the next ten years due to this:

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Source: Novo Nordisk

Admittedly, there are multiple companies producing medicines for diabetic patients. Thus, some may ask how we can be certain that Novo Nordisk will be the most significant beneficiary of this forward growth. One reason is that it is by far the market leader. As we can see, the company currently controls 31% of the market for diabetes care products in the United States:

Source: Novo Nordisk

The company has become the market share leader for a very good reason. This is a very clear indication that doctors have a significant amount of faith in the efficacy and quality of the company’s products and have been recommending them to their patients. We can see further evidence of this in the fact that Novo Nordisk has actually been able to grow its market share over the past three years. Thus, we can conclude that this obvious faith that doctors have will result in further recommendations by doctors for new patients that contract the disease. This should all be conducive to the company’s growth story.

While diabetes care products do account for the majority of Novo Nordisk’s revenues, this is not the only thing that the company sells. The company derives just over 5% of its revenues from products meant to help obese people better manage their condition. In the second quarter, it made further progress on this. As mentioned in the highlights, the company successfully completed the phase 3 programme with semaglutide 2.4 mg, the phase 2 trial with AM833, and the phase 1 combination trial with AM833 and semaglutide 2.4 mg. The fact that this trial was successful marks a major step in hopefully getting approval for Novo Nordisk to market this product for obesity care alongside Ozempic. This could help the company grab a larger part of this rapidly growing market.

Source: Novo Nordisk

This is far from the only product that Novo Nordisk is actively developing, although it is the furthest along. The company actually has a number of products in various stages of development intended for the treatment of diabetes, haemophilia, NASH, sickle cell anemia, growth disorders, cardiovascular disease, and obesity:

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Source: Novo Nordisk

People that have been following Novo Nordisk for a while may be surprised at the fact that the company has products for cardiovascular disease under development, as it never previously did. This is the result of a recent agreement to acquire Corvidia Therapeutics, a spin-off from AstraZeneca (AZN). The price of this transaction was $725 million. Corvidia Therapeutics develops and commercializes therapies for cardio-renal diseases. The company currently has a promising therapy for cardiovascular disease, ziltivekimab, in a phase 2b trial. As Novo Nordisk previously had no department focusing on cardiovascular disease, this acquisition gives the company a whole new line of therapy products to expand into and generate growth from. If one of these therapies proves to be successful, then this acquisition could prove to be quite cheap.

In conclusion, Novo Nordisk did suffer slightly from the COVID-19 pandemic, but it is not something that has been a real problem for this company. The company is growing its product line-up by expanding into new areas as well as expanding its current product lines, which is undoubtedly appealing and should prove good for future growth. The fact that diabetes itself is becoming more common globally is also good for the company’s forward growth prospects. Overall, this looks like a good pharmaceutical to be in.

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