Novo Nordisk - Q1 2024 Earnings review

Executive summary

• Revenue DKK 65349 billion, up 22% YoY (24% at CER).

• Sales within Diabetes and Obesity care increased by 25% in Danish kroner to DKK 61.0 billion (27% at CER). Rare disease sales decreased by 4% measured in Danish kroner (3% at CER).

• Operating profit DKK 31846 billion, up 27% YoY (30% at CER).

• Diluted EPS 5.68 DKK, up 29% YoY.

• FCF down 80% YoY due to higher taxes paid, CAPEX and Cardior Pharmaceuticals acquisition by 1.03 billion euros.

• Guidance raised. sales growth is now expected to be 19-27% at CER (vs 18-26% in January 2024), and operating profit growth is now expected to be 22-30% at CER (vs 21-29% in January 2024).

Income statement

Sales & segments

Reported revenue in the first three-months period of 2024 was 22% (24% at CER). Sales grow was driven by North America Operations (NAO) which grew 35% YoY while International Operations (IO) grew a modest 11%.

Breaking down the revenue by therapy area it can be observed that growth is fueled by GLP-1, both for diabetes and obesity treatment. See figure 1.

One thing you might notice is the huge difference in sales growth between NAO and IO in some therapy areas which are in decline such as insulin (23% YoY sales growth in NAO vs 5% YoY sales growth in IO) and rare diseases (20% YoY sales growth vs -18% YoY sales growth).

The company reported “gross-to-net sales adjustments related to prior years and the phasing of rebates in 2023” impacting sales in the USA positively. What does it mean? Basically Novo Nordisk spent less money than expected in rebates, discounts and price deductions which ended-up boosting the sales in that region.

Other highlights:

• Novo Nordisk GLP-1 market share keeps increasing (up to 55.3%) while insuline one is maintained over 43.5% (43.6% YTD).

• Long-acting insulin sales grow at a good pace, especially in the US (already mentioned gross-to-net sales adjustment) and China, where they grew 80% YoY. Human insulin sales decrease counter long-acting insulin sales growth impact in the P&L.

• Wegovy supply in the US has been increasing progressively since January 2024. Management recognized it “is key for growth acceleration in the remainder of the year”.

• Rare endocrine diseases drove growth in the United States driven by Sogroya (approved used for children back in Q2 2023). China rare disease sales decreased 77% YoY.

Operating income

In the 2023 annual report, the company guided that operational leverage will still allow for operating margin expansion which has been the case in Q1 2024. Q1 2024 operating margin reached 48.7% (up 180 bps YoY).

On the one hand, Sales & Distribution expenses and Administrations costs grew at a slower pace than sales, only 7% YoY and 8% YoY, respectively. Sales & distribution expenses reduction. On the other hand, R&D expenses grew at a faster pace than sales 28% YoY.

As emphasized during the call by the CFO, this is part of the strategy presented during CMD24. The company will increase expenses in ramping-up production and developing innovative treatments as the majority of the commercial and organization structure is already in place. It should also be noted that employees’ salary adjustments are done during Q1 so they will be reflected in the P&L from Q2 onwards (employee count up 16% YoY).

By segment, the ongoing manufacturing output problems in the Rare Diseases area is causing its operating margin to drop dramatically, being during Q1 2024 at 14.3% (down 410 bps YoY). Note that the operating margin in this segment has been historically larger than Diabetes and Obesity care.

Balance sheet

No large changes apart from the sell of DKK 14.13 billion marketable securities to obtain cash to finance the increase in the CAPEX and dividend payment (paid in March 2024).

Cash flow statement

Three things should be noticed:

1. CapEx amounted to DKK 9009 million (calculated as Purchase of intangibles + Purchase of PP&E) increased 87.5% YoY. In one quarter Novo Nordisk has spent half of the CapEx spent in 2023.

2. Income tax paid increased 81.5% YoY.

3. Non relevant “Other non-cash items” this quarter, compared with 20230 from Q1 2023. It was attributed to rebates during Q1 2024 results presentation.

Regarding the FCFF, it increased 58.7%. Higher CAPEX expenses were offset by operating income growth and an improved WC management.

Note: FCFF calculated as NOPAT*(1-tax rate)-CAPEX+D&A-SBC-Investment in working capital.

Capital allocation

Management has allocated capital as follows during the quarter:

• Acquisition of Cardior Pharmaceuticals by €1.025 billion (approximately DKK 7.63 billion). To be completed during Q4 2024.

• R&D expenses grow faster than sales. In line with the strategy outlined in CM24.

• Payment of DKK 28557 million and DKK 2836 million spent in shares repurchases. During Q1 2023, DKK 18337 million were paid in dividends and DKK 5199 million spent in shares repurchases. Hence, the amount of cash distributed to shareholders increased on a 33% YoY.

• Stock-based compensation (SBC) was DKK 368 million, down 8% YoY. Nice to follow if the trend continues considering the organization is growing and management is meeting all their performance objectives.

Guidance update & other developments

Guidance update

After Q1 2024 performance, sales and operating profit guidances were revised and raised reflecting a better than expected performance. During the call, CFO Karsten Munk Knudsen was asked about why the guidance was not narrowed after Q1 as it has been usually done during Lars Fruergaard tenure since 2017.

See reply below: