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Morningstar | Novo Nordisk Sees Solid Volume Growth in 1Q; Shares Slightly Undervalued Ahead of Rebate Reform. See Updated Analyst Note from 03 May 2019

We're maintaining our $53 per ADR fair value estimate for Novo Nordisk and slightly adjusting our local share fair value to DKK 353 per share from DKK 346 as Novo's 4% constant-currency top-line growth in the first quarter matched our expectations. Diving deeper, however, U.S. sales were weaker than we had anticipated as a result of inventory destocking, and international sales were stronger than we expected, partly due to the timing of orders in Latin America and other emerging markets. On a more fundamental level, Novo's long-acting insulin Tresiba is driving volume growth globally, despite continuing U.S. price concessions and a larger Medicare Part D donut hole obligation that began in 2019, and recent data showing Tresiba's efficacy and safety advantage over Sanofi's Toujeo should further support Tresiba's uptake. Novo's GLP-1 franchise market share in the U.S. has stabilized, while total GLP-1 market growth continues to expand into the high 20s, and we expect Novo to increase its share of this market as it launches oral semaglutide in 2020. In the smaller biopharmaceuticals segment (15% of sales), we think NovoSeven sales are holding up slightly better than we had anticipated in the face of competition from Roche's Hemlibra, although we remain concerned that the firm's newer hemophilia and growth hormone therapies won't be enough to drive long-term growth. We think Novo is on track to meet the high end of its guidance for 2019, with roughly 9% top-line growth and 11% operating profit growth as reported (boosted by favorable foreign exchange fluctuations). The firm's innovative record in diabetes and strong portfolio and pipeline continue to support a stable wide moat.

We think Novo's high dependence on rebates adds uncertainty to the firm's prospects following potential rebate reform. Novo's management team commented on potential reforms to Medicare and Medicaid that would eliminate back-end rebates in favor of upfront discounting, as Novo's U.S. business is more exposed to the effects of rebates than any of the other large-cap pharma or biotechs we cover (see our April report " No Drug Industry Moat Impact From Rebate Overhaul, but Firms With Lowest Reliance on Rebates Look Most Undervalued" for more details). Management offered a mixed view of the possible impact, acknowledging the potential for improved patient compliance (higher volumes) and less gross-to-net impact from the donut hole (as patients pass through the donut hole more slowly at a lower upfront price), but the potential for higher insurance premiums as well as a lower negotiated price (which could converge to the lowest negotiated price with improved transparency).

In the diabetes pipeline, we're intrigued by Novo's once-weekly treatment pipeline, with once-weekly insulin phase 2 data and once-weekly GLP-1/insulin combo phase 1 data both due in the fourth quarter. We think these programs will help defend Novo against further competition from Lilly, who is developing GIP/GLP-1 drug tirzepatide as a once-weekly treatment (phase 3 data versus Ozempic is due to 2021). In obesity, AM833 has moved into a phase 2 study as a once-weekly therapy pitted against Novo's own approved therapy Saxenda, and Novo also expects phase 1 data for tri-agonist and PYY-targeting obesity drugs by the end of the year. The most promising pipeline development in the biopharma segment is hemophilia drug concizumab, which is entering late-stage development in the second half of the year and could work for patients with hemophilia A or B, with or without inhibitors.