EUR 850.00 For Business Accounts Only

Morningstar | Maintaining Our Novo Nordisk FVE After Solid 2018 Results; U.S. Pricing Reform Adds Uncertainty

Novo reported 2018 results that were in line with our estimates, with relatively strong guidance for 2019 (2%-5% top line growth and 2%-6% operating profit growth at constant currencies) given the increased discounts in Medicare Part D (an expected DKK 2 billion headwind from a greater donut hole responsibility in 2019) and continued headwinds with insulin pricing and hemophilia competition. We're maintaining our DKK 346 per B share/$53 per ADR fair value estimate for Novo, and we continue to think that the firm's innovative diabetes and obesity portfolio supports a wide moat.

The U.S. pricing environment continues to deteriorate in the insulin market, and a new HHS proposal to create a rebate pass-through directly to consumers in Medicaid and Medicare Part D plans does create some risk for Novo, in our view. While list prices for Novo's insulin therapies have soared over the years, this is largely driven by a flawed compensation system for the supply chain involving rebates; after discounts, Novo only recognizes 32% of its U.S. gross sales. Therefore, we expect that a more transparent system would not directly harm Novo's profitability. It could, however, make it more vulnerable to formulary exclusions in cases where generics or biosimilars are launching (see Sanofi's Admelog), as Novo uses rebates as leverage in negotiations with PBMs. Novo is also dealing with increased congressional scrutiny in the U.S., as it has received requests for information in January on pricing practices (from the Committee on Oversight and Reform) and specifically on insulin pricing (from the Committee on Energy and Commerce). However, we think hearings on drug pricing are unlikely to directly lead to significant legislation.

Novo's GLP-1 franchise was key to 2018 growth, which remains true in our long-term forecast. Novo's 2018 5% constant currency sales growth was heavily weighted toward the GLP-1 class, which accounted for 78% of growth (Insulin sales were flat globally but down 7% in North America due to pricing pressures, and the Biopharmaceutical division saw sales decline by 1% due to hemophilia competition). Novo's U.S. GLP-1 market share is 43%, and with roughly 48% share of new patients, we expect this share to increase as Ozempic's launch continues. We're particularly bullish on the launch of oral semaglutide, which should be filed by the end of the first quarter and approved in late 2019. Novo could also differentiate itself from Lilly's key GLP-1 competitor Trulicity by offering a once-weekly insulin/GLP-1 combo; once-weekly insulin is in a phase 2 trial and the combination with semaglutide is in a phase 1 trial. We also see GLP-1 as a significant growth opportunity in China, given Victoza's national reimbursement and the fact that the GLP-1 class is currently less than 2% of the overall China diabetes market. Finally, Novo's 4%-5% volume share of the global obesity market also offers opportunities, as Saxenda is growing rapidly and injectable semaglutide should have phase 3 data in obesity in 2020.