Novo Nordisk (NVO) Reports In-Line Q3 Earnings, Beats Sales

All growth rates mentioned below are on a year-over-year basis.

Quarter in Detail

Novo Nordisk operates through two segments: Diabetes and Obesity care, and Biopharmaceuticals.

Sales in the third quarter of 2018 increased 4% in Danish kroner and increased 2% in local currency compared with the same period in 2017. The growth was driven by Victoza, Ozempic, Tresiba, Xultophy and Saxenda sales, partly offset by Levemir, NovoRapid and NovoSeven.

The Diabetes and Obesity Care segment sales increased 6% in local currency. Sales of insulin decreased remained unchanged. Sales of long-acting insulin (Tresiba, Xultophy and Levemir) increased 4% in local currency to DKK 5,158 million.

Sales at the Biopharmaceuticals segment remained unchanged in local currency. Hemophilia sales were down 4%.

Research and development (R&D) expenses were up 9% year over year and 10% in local currency. The increase in research and development costs reflects severance-related costs. There was an underlying modest increase in development costs, driven by injectable semaglutide in obesity, partly offset by lower costs for oral semaglutide due to the finalization of the PIONEER trials.

Also, administrative costs were up 4% from the year-ago quarter and increased 6% in local currency, mainly due to higher spend across regions and severance costs related to layoffs.

Sales and distribution costs increased 10% year over year and 11% in local currency, mainly reflecting higher promotional activities in both International Operations and North America Operations, and severance costs related to layoffs across the commercial organizations. In North America Operations, the increase in costs reflected promotional activities for Tresiba and the launch of Ozempic.

Pipeline Update

Since August 2018, Novo Nordisk announced the phase IIIa results from three of the 10 clinical studies in the PIONEER program, evaluating oral semaglutide, a new once-daily GLP-1 tablet for people with type II diabetes. The trials confirmed statistically significant reductions in both blood glucose levels (HbA1c) and weight for oral semaglutide compared to placebo in people with renal impairment, add-on treatment to insulin and Lilly’s (NYSE:LLY) once-weekly subcutaneousTrulicity (dulaglutide) in Japanese people.

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Acquisition

In October 2018, Novo Nordisk announced the expansion of its biopharm business with an agreement to acquire the U.S. and Canadian rights to Macrilen (macimorelin), the first and only FDA-approved oral growth hormone receptor indicated for the diagnosis of Adult Growth Hormone Deficiency (AGHD), a rare endocrine disorder from Strongbridge Biopharma Plc.

In August 2018, Novo Nordisk acquired all the shares of Ziylo Ltd. Ziylo is a University of Bristol spin-out company, based at Unit DX science incubator in the United Kingdom.

The acquisition gives Novo Nordisk full rights to Ziylo's glucose binding molecule platform to develop glucose responsive insulins (GRIs). Novo Nordisk is focused on this technology to develop this next generation of insulin, which would lead to a safer and more effective insulin therapy.

Before the acquisition, parts of the research activities in Ziylo have been spun out to a new company, Carbometrics that has entered into a research collaboration with Novo Nordisk to optimize glucose binding molecules. Carbometrics has licensed rights to develop non-therapeutic applications of glucose binding molecules, with a focus on developing continuous glucose monitoring applications. It will remain on the Unit DX site in Bristol.

Restructuring

The company announced plans to restructure the R&D organization to speed up the expansion and diversification of its pipeline, and to enable increased investment in transformational biological and technological innovation. Thus, the total workforce is expected to be reduced by approximately 1,300 employees before the end of 2018. Majority of these reductions have been implemented as of Nov 1, 2018.

2018 Outlook

Novo Nordisk expects sales growth (in local currencies) to be 4-5%, changed from the previous expectation of 3-5%. This reflects strong performance for the portfolio of new-generation insulin and the GLP-1 portfolio, now comprising both Victoza and Ozempic as well as a solid contribution from Saxenda.

However, sales growth is expected to be partly offset by intensifying global competition within diabetes care and biopharmaceuticals, especially in the haemophilia inhibitor segment, as well as continued pricing pressure within diabetes care, especially in the United States. A negative currency impact of 4 percentage points is expected as well.

The company reiterated its operating profit guidance. Operating profit growth is anticipated to be 2-5%, reflecting the outlook for sales growth and an impact from continued focus on cost control. The outlook also reflects a planned increase in sales and distribution costs to support the commercialization of Ozempic. A negative currency impact of 7 percentage points is expected as well.

Our Take

Continued growth from Victoza and Tresiba as well as higher contributions from Saxenda and Xultophy are likely to be partly offset by the impact of lower realized prices in the Unites States, loss of exclusivity for products in hormone replacement therapy, and intensifying competition within the diabetes and biopharmaceuticals markets, besides macroeconomic conditions in many markets under International Operations. The company is optimistic about Ozempic and results for oral semaglutide. It is looking forward to making the first oral GLP-1 treatment available for people with type II diabetes.

Zacks Rank & Stocks to Consider

Novo Nordisk is a Zacks Rank #3 (Hold) stock.

Some better-ranked stocks from the same space worth considering are Bristol-Myers Squibb Co. (NYSE:BMY) and Merck & Co. Inc. (NYSE:MRK) . While Bristol-Myers carries a Zacks Rank #1 (Strong Buy), Merck carries a Zacks Rank #2 (Buy). You can see .

Bristol-Myers’ earnings per share estimates have increased from $3.59 to $3.81 for 2018 and from $3.83 to $4.03 for 2019 over the past 60 days. The company delivered a positive earnings surprise in all of the trailing four quarters with average beat of 11.99%.

Merck’s earnings per share estimates have increased from $4.26 to $4.34 for 2018 and from $4.58 to $4.71 for 2019 over the past 60 days. The company delivered a positive earnings surprise in all of the trailing four quarters with average beat of 3.96%. The stock has rallied 9.4% so far this year. The stock has rallied 30.8% year to date.

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Written By: Zacks Investment Research