Novo Nordisk outstrips rivals with 8% growth, but lower profits target spooks investors

Novo Nordisk's bad news: It's lowering its long-term forecast for profits. Good news? Those forecasts are still at 10% annual growth, on average, which beats its Big Pharma rivals, no contest.

The company posted 28.87 billion Danish kroner ($4.24 billion) in quarterly sales, beating analyst forecasts, but higher costs pulled earnings below expectations at 3.24 kroner per share. For the full year, sales were up 22%--8% accounting for currency effects--to 107.9 billion kroner.

The problem is that Novo's ($NVO) previous profits-growth outlook--its outlook since 1996, according to Bernstein analyst Ronny Gal--was 15%, on average. It hit that target for the 2012-2015 period. But not only did the company ratchet back that target, but it pinned most of that growth to sales increases. It's expecting expenses to rise as sales rise, executives said.

Novo Nordisk CEO Lars Rebien Sørensen

Investors didn't like that idea much; shares slid this morning on the announcement. But CFO Jesper Brandgaard said the company's new rollouts--including its next-gen basal insulin Tresiba, launched in the U.S. last month--will require new spending, not only on sales and marketing, but on manufacturing capacity. And CEO Lars Rebien Sørensen warned that R&D costs are on the rise as regulators demand more regionally based clinical studies, and payers look for outcomes evidence and real-world data to justify coverage.

The Denmark-based drugmaker came up against the same market pressures that its diabetes rivals did last year, including pricing pressure from payers and a slate of new competitors in the field. For instance, Victoza, its fast-growing and big-selling GLP-1 drug, suffered in the fourth quarter from an adjustment to rebates, which accounted for bigger-than-expected discounts in previous periods.

Overall, Novo saw U.S. rebates hit 56 % last year, Sørensen said during the quarterly earnings call. In Germany, the company's pricing negotiations on its next-gen basal insulin Tresiba fell through again, with authorities offering a price comparable to that on much older human insulins, and it's pulling the drug off the market there completely.

In the U.S., however, Novo is having some early success with payers on Tresiba. EVP and U.S. chief Jesper Høiland said the company is on track with payer negotiations, with the major insurers and PBMs signed up to cover the drug. That's not to say coverage is universal; the company has gone in with a pricing premium on Tresiba compared with the older med Levemir, "and as a consequence of course we have not been put on each and every formulary," Høiland said in an interview.

Medicare Part D deals for the most part won't take effect till 2017 because of the government's contracting schedule. A few Part D plans have already adopted Tresiba, but they're small.

As for anticipated increases in SG&A costs, Høiland pointed out that Novo could have four new products in the U.S. this year, if the FDA approves the Tresiba-Victoza combo Xultophy and fast-acting insulin aspart. Together with Tresiba and another combo drug, Ryzodeg, which is approved but not yet launched, supporting those meds will require spending.

Sørensen said the U.S. salesforce will likely need to expand, as well as sales forces in a few other geographic areas, to drive the newer meds. And then there's Victoza, which will need some support in anticipation of its long-acting follow-up med semaglutide, now in Phase III trials. "Victoza needs to grow to make a strong platform for semaglutide," Sørensen noted.

Overall, however, Novo remains optimistic, more so than its diabetes competitors. Sanofi ($SNY) has been warning of slowdowns in sales, to the point where it expects franchise sales to remain flat for 2016.

"[T]he message was that they still expect very solid top line growth (10%) and simply need to invest more to achieve it," Gal said in an investor note Wednesday morning. "This is obviously not as good as 15% operating profit growth, but we suspect the reason the stock is not down more is the reasonably solid sales."

- read the Novo release

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