EUR 4635.28 For Business Accounts Only

Structural Upswing to Reverse - Initiation

Having had 5 years of unparalleled structural growth, we believe that those same structural benefits of price increases and a positive mix shift, are set to reverse. Expectations are that GLP-1s will remain immune from pricing pressure but we show that this is unlikely and that Victoza could end up being sold for $0 in Medicaid. We also show that buybacks form ~50% of our EPS growth and could be at risk due to investments in non-accretive M&A/pipeline.

Diabetes Pricing Outlook Poor – With 6 GLP-1s and 6 Basal insulins in the US by 2018, we build a case to show that US diabetes pricing will face years of negative pressure. We estimate 50% of Novo 2016 sales & ~60% of EBIT is in the US.

Victoza Medicaid Price Could Fall to $0 – Our Proprietary analysis of GLP-1s sold in Medicaid shows that if Victoza & Trulicity enter into a rebate war (possibly after Sema launches), Victoza could end up being sold for $0 in Medicaid. We do not include this outcome in our forecasts.

Consensus Dependent on GLP-1 Growth – 58% of cons. 2016-18 sales growth comes from Novo’s GLP-1 assets. Trulicity competition, risk of price cuts post-Sema launch and the negative Medicaid mix risk, are material risks to consensus.

Contribution Analysis Shows 300bps Negative Mix – Our unique Contribution Analysis shows Novo faces -300bps mix due to faster growing but low-margin, China & International.

Buybacks account for 2.6% of our 5.8% 2016-21 EPS CAGR. We believe that this could be at risk given Novo management have stated that they will look to diversify R&D to areas “adjacent” to diabetes. This could result in bolt-on M&A or in-licensing, leading to lower cash available for buybacks.

Valuation – Given the risks, we believe Novo should trade at a 5% discount to the sector in 2018, valuing Novo at DKK220.