On Friday, October 30, 2020, Danish diabetes-focused pharmaceutical giant Novo Nordisk A/S (NVO) announced its third quarter 2020 earnings results. Healthcare companies have certainly proven to be interesting investments in our pandemic-stricken world due both to the fact that they provide essential services to people with a variety of conditions and hopes that these companies will ultimately be able to solve the coronavirus problem. Novo Nordisk has also generally benefited from this even though it is not actually one of the companies working on a COVID-19 vaccine.

As I have explained in many previous articles though, the overall story here is quite good as diabetes will continue to be an epidemic long after the coronavirus is dealt with and this will benefit Novo Nordisk, which is by far the leader in this area. These earnings did overall reflect this as the company saw its revenues and income grow year-over-year, although the growth rate was fairly low, which is what we have largely come to expect from this company. Despite this, though, it is possible that the stock price has gotten ahead of itself so this is something that we should investigate.

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 2020 earnings results:

  • Novo Nordisk brought in total revenues of DKK 30.927 billion. This represents a 2.15% increase over the DKK 30.277 billion that the company brought in during the prior year quarter.
  • The company reported an operating profit of DKK 12.808 billion in the most recent quarter. This compares rather unfavorably to the DKK 12.919 billion operating profit that the company reported in the year-ago quarter.
  • Novo Nordisk completed the phase 2b trial of ziltivekimab during the reporting quarter. The company also requested priority review of semaglutide 2.4 mg for the treatment of obesity in the United States.
  • The company reported an operating cash flow of DKK 51.779 billion in the first nine months of the year. This represents a fairly substantial 24.42% increase over the DKK 41.617 billion that the company reported in the equivalent period of last year.
  • Novo Nordisk reported a net income of DKK 10.298 billion in the third quarter of 2020. This represents a 1.02% increase over the DKK 10.194 billion that the company reported in the third quarter of 2019.

It seems certain that the first thing anyone reviewing these results will notice is that Novo Nordisk’s revenues increased compared to the prior year quarter. One of the biggest reasons for this is that the company saw its sales of GLP-1 analogues surge, with reported sales of this product being up more than 25% year-over-year. Although the traditional method of treating diabetes is insulins, GLP-1 analogues have become something of a flagship product for Novo Nordisk over the past several years. Novo Nordisk currently markets a few of these products under the trade names Victoza, Ozempic, and Rybelsus. The company currently dominates the market for these products, currently having nearly half of the global market share for GLP-1 analogues compared to only 44.5% of the global insulin market:

Source: Novo Nordisk

This could give Novo Nordisk a very real advantage over some of its peers when it comes to attracting new customers for its products. One of the reasons for this is that because the company offers a very wide array of products in the GLP-1 analogue space, doctors have more options when it comes to determining which particular pharmaceutical regime would best suit their patients’ needs. Not all of Novo Nordisk’s competitors have this capability. In addition to this, the fact that Novo Nordisk is very clearly the market leader could mean that it will be the first company whose products the doctor will think of when they are presented with a new diabetic patient that needs care.

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As I have discussed in many previous articles on both Novo Nordisk and others, international companies are constantly exposed to the risk of exchange rate fluctuations. This makes sense because a company’s customers will pay for its products or services using whatever the national currency of their home nation is but the company then has to convert these revenues back to its home currency for reporting purposes. If the company’s home currency rises over a given period then it will have a negative impact on the company’s revenue growth and vice versa. This happened to Novo Nordisk in the quarter as the Danish krone appreciated against several other currencies over the past year. We can quantify the impact that this had on the company’s revenues by looking at a measure known as the constant exchange rate, which essentially measures the company’s revenue growth in terms of the currencies that its customers actually paid with. If we do this, the company’s GLP-1 revenues would have grown at a 31% rate year-over-year as opposed to the 25% that the company actually reported. Thus, the company truly saw greater growth than what it reported in its results.

Although Novo Nordisk’s largest market is North America, the biggest driver of the company’s growth was actually international markets. These markets delivered 9% year-over-year growth in the first nine months of the year, which is obviously quite a bit higher than the company’s overall sales growth rate. All regions contributed to this, although Europe, the Middle East, and Africa was the largest single contributing region:

Source: Novo Nordisk

Healthcare companies are generally considered to be resistant to the COVID-19 pandemic, particularly when compared to many other sectors. This is due to the fact that these companies are generally considered to be selling necessary products that people need in order to survive. It is rather unlikely that people dependent on a medication will stop using it just because there is a pandemic going on. With that said, Novo Nordisk has not been completely unaffected by the pandemic. This was most apparent in new patient acquisition as people that may have been showing the early signs of diabetes or other conditions did not seek out or were not able to obtain medical treatment during the most stringent lockdowns. Fortunately, those patients that were already under a treatment regimen did opt to continue it. This is a problem that will likely correct itself over time as the lockdowns are gradually eased.

This growth in international markets was actually greater than the broader growth in demand for diabetes-care products. We can clearly see this by looking at Novo Nordisk’s overall market share in these countries. We can see that here:

Source: Novo Nordisk

As we can see here, Novo Nordisk’s market share for diabetes-care products increased to 30.0% during the most recent quarter. This is not only an increase over both the previous and the prior year quarters but actually a substantial increase over the level that it had back in 2018. This is a testament to the power of the company’s reputation among doctors as well as the overall quality of its products in this market. After all, if its sales of diabetes-care products are growing faster than the market itself then it must mean that doctors are increasingly likely to recommend and prescribe its products for treating their diabetic patients. This is something that investors should appreciate because it should result in even further growth for the company as this trend continues.

International markets are not the only area that delivered growth for Novo Nordisk. The company also saw its sales grow in North America, albeit at a somewhat lower rate. The company saw its sales increase by 2% year-over-year but it was certainly not spread evenly throughout all of the company’s different lines of business. As was the case outside North America, Novo Nordisk saw its sales of GLP-1 analogues surge by 27% year-over-year largely driven by Ozempic and the company’s new Rybelsus product. Together, the success of these two products grew the company’s market share in the GLP-1 analogue market to the point where it now controls more than half of this market:

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Source: Novo Nordisk

This matches some of the predictions that I made in various past articles on Novo Nordisk that the convenience and relatively long duration of these products would prove popular with patients and doctors. As before, this dominant position in the market could prove to be an advantage as it could result in the company’s products being the first ones thought of when a doctor is presented with a new patient that needs a GLP-1 analogue treatment regime. Unfortunately though, this growth did not extend to all of the company’s product lines. Novo Nordisk saw its sales of insulins decline by 22% due largely to lower sales prices in the United States. Fortunately though, the company’s success in the GLP-1 analogue space overshadowed this weakness.

Although diabetes care is by far Novo Nordisk’s largest product line, it is not the only pharmaceutical segment that the company is active in. A few years ago, it was discovered that one of the side effects of the GLP-1 analogue Victoza was weight loss. Novo Nordisk saw an opportunity here and reformulated the product as Saxenda, which is intended to help chronically obese patients that have at least one other weight-related condition manage their weight. In some ways, this makes sense because obesity is a risk factor for type-2 diabetes (see the CDC’s site). This product proved very successful as it has generally seen a very high growth rate since it was introduced. That changed in this quarter though, due at least partially to the still ongoing COVID-19 pandemic. This pandemic resulted in fewer patients than normal seeking treatment for their obesity, which could be due to the perception that COVID-19 is more dangerous than obesity. It is also worth noting though that Novo Nordisk now has 63% of the global obesity-care prescription drug market so it might be difficult for the company to deliver the double-digit sales growth numbers that it did in the first year or two of launch. The company did still see Saxenda sales increase by 6% year-over-year after adjusting for currency fluctuations, which is not bad at all.

As pretty much any pharmaceutical investor could attest to, one of the most important things for a pharmaceutical company to do is perform research and development. This is partly because the patents that they are issued for their therapies only have a limited life but also because developing new treatments for various diseases is one of the best growth engines for these companies. Fortunately, this is an area in which Novo Nordisk excels. As noted in the highlights, Novo Nordisk completed the phase 2b trial of zilitivekimab for the treatment of chronic kidney disease. This trial was a success and the company intends to proceed with a cardiovascular outcomes trial early next year. This drug was perhaps the biggest reason why Novo Nordisk acquired Corvidia Therapeutics so the success of this trial is something that is very nice to see since otherwise this acquisition may have been deemed a mistake. This is not the only promising drug that Novo Nordisk has in its pipeline. As we can see here, the company has a variety of drugs that are scheduled to progress to a new stage in its pipeline between now and the end of 2021:

Source: Novo Nordisk

In particular, we note that there are currently three products that have completed their necessary trials and will be awarded regulatory approval within the next few months. This is certainly the sort of thing that those investors seeking growth (and what common stock investor is not?) would want to see. Novo Nordisk typically enjoys a great deal of success and very high growth rates in the first year or two after it releases a new product and if it manages to continue this trend with these products then we could see a rather attractive performance for the company in 2021. With that said though, Novo Nordisk’s size and already very dominant position in the market does mean that even a blockbuster new drug will not give us the kind of performance that a much smaller company enjoying the same level of success would see.

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As noted earlier, pharmaceutical companies have generally held up reasonably well over the past year as investor optimism about potential treatments for COVID-19 and the overall necessity of these products has driven a great deal of interest in them. Novo Nordisk is certainly no exception to this. As we can see here, the stock price is up 18.31% over the past year:

There are definite signs that the price has gotten ahead of itself though. Novo Nordisk has a significant amount of potential due simply to the fact that diabetes is a global problem that has truly reached epidemic status and it will likely continue to become more prevalent. As Novo Nordisk is the largest company in this space and has a dominant position in the market, it is likely that the company will benefit from growing demand for its products. Despite this though, Novo Nordisk’s size and dominance has made it very difficult for the company to grow its bottom line at an especially high rate so it is not deserving of a very high price-to-earnings multiple. We can see this by looking at the company’s price-to-earnings growth ratio, which is a way of adjusting the more traditional ratio to take a company’s forward earnings into account. According to Zacks Investment Research, Novo Nordisk will grow its earnings at a 10.87% rate over the next three to five years, which admittedly is very good for a company of this size. However, at the current stock price, the company has a price-to-earnings growth ratio of 2.26. As a general rule, anything over 1.0 is a sign that the stock could be overvalued relative to its forward growth prospects. Thus, it may make sense to wait a bit and see if this great company could be obtained at a bit more attractive price.

In conclusion, these were reasonably solid results for Novo Nordisk and certainly show the company’s strength and resilience in today’s pandemic-stricken world. Admittedly though, there were few that thought otherwise. The company is also well positioned to continue to deliver success over both the near- and long-terms due to its large research and development program and the fact that diabetes will be a growing problem long after the COVID-19 problem is solved. With that said though, the stock may have gotten ahead of itself so it might make sense to wait and see if it can be obtained at a more attractive price.

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