On Wednesday 2023.01.31 Novo Nordisk presented the Q4 2023 and FY 2023 results. The market reacted positively to them with a daily share price increase of ↑3.6%.

If you are as interested as I am in knowing how the company’s 2023 performance was and getting new insights in how the future looks, don’t miss today’s newsletter in which I will summarize the most remarkable aspects of the 2023 annual report.

DISCLAIMER: This article is not a recommendation to buy or sell any financial instrument, the content is educational and my personal opinion. Each person has to make his own analysis. Any action or decision you take as a result of viewing this article is your sole responsibility.

Executive summary

• Revenue YoY Growth equal to 31% in DKK (36% at CER, Constant Exchange Rate) impulsed by GLP-1 drugs. Net income: DKK 83.7 billion (+50.7% YoY).

• In the R&D pipeline, the fourth area name was changed from “Other serious chronic diseases” in 2022 annual report to “Cardiovascular & Emerging Therapies” confirming where the company’s focus is placed for the following years.

• Dividend of 6.40DKK per share announced (vs 4.08DKK in 2022, 39.2% YoY increase) plus an interim one - amount yet to be announced. Additionally, DKK 20.0 billion to be allocated to shares repurchase.

• 2024 guidance expected 18% to 26% revenue growth driven by GLP-1. The guidance mentions continuation of supply constraints and competition intensification plus pricing pressure.

Income statement

Novo Nordisk continued during 2023 with an exceptional sales development. Revenue grew 31% in DKK (36% at CER). See figure 1 below. Simultaneously, all margins improved slightly (figure 2).

Geographical revenue distribution

Geographically, North America Operations (NAO) but specifically the USA have been the fastest growing region driven by GLP-1 drugs, both in diabetes and obesity care. Insulin sales in NAO region have decreased 60% over the last 5-year period, which has been occupied by GLP-1 medications.

In EMEA the situation is different, year-over-year revenue grew 15% in 2023 while insulin sales remain flat. In fact, insulin sales have remained flat in the region since revenue peaked in 2021. This is due to the slow roll-out of GLP-1 treatments, for both diabetes and obesity care, in such an heterogeneous region.

In China, sales remained flat, showing the same pattern as the USA: insulin sales decrease while GLP-1 sale increase.

Product revenue distribution

Revenue by product type followed the expected pattern, GLP-1 sales boosted revenue growth while insulin sales slightly but constantly decreased.

However, insulin sales don’t necessarily decrease due to lower volume sales as GLP-1 drugs replace insulin. Revenue coming from insulin sales decreased driven by insulin pricing pressure. This pricing pressure comes from three main drivers: insulin biosimilars competition, insulin price cap regulation and rebates with Pharmacy Benefit Managers (PBM). GLP-1 product portfolio will not be impacted by the first two. Hence the company pricing power in that segment would be larger (see figure 5).

On the other hand, GLP-1 portfolio contribution to company’s revenue continues to grow at an explosive rate, 64.4% YoY and 40.6% CAGR during the last 5-year period.

If you have a look in figure 6 you will see how in 2018 more than 80% of GLP-1 segment revenue came from Victoza while Ozempic only accounted for 6%. Ryvelsus and Wegovy weren’t even commercial. In 2023, Rybelsus, Wegovy and Ozempic together were responsible of 88.5% of GLP-1 revenue while Victoza’s revenue share decreased to ≈5% caused by its patent expiration and Novo Nordisk’s decision to reduce its production and use that free capacity to produce the other GLP-1 blockbusters due to their current shortage.

Finally, Rare Diseases segment revenue suffered a -16% YoY revenue decrease driven by endocrine rare diseases subsegment (-46.3% YoY) supply chain disruption which the company expects to solve during 2023. Other subsegments revenue remained flat. See figure 7.

Novo Nordisk pointed to the decline in sales in the already established treatments while the new therapies demand is catching up and will drive sustainable demand in the future.

Operating income metrics

Operating income surpassed DKK 100 billion (DKK 102.6 billion) with a YoY growth of 37.1%. As mentioned before, all margins improved. Remarkable was the improvement of the operating margin, up to 44.8% (180 bpp increase vs 2023).

This operating margin improvement was caused by the cost control of Selling, General and Administrative (SGA) expenses in 2023. SGA expense was up to DKK 61.6 billion (23.44% YoY vs 31.3% YoY revenue growth). Employee headcount in the same period of time grew 16.6%, from 55185 to 64319 employees.

On the other hand, R&D expense increased to DKK 32.4 billion (34.9% YoY) driven by the strategic acquisitions of Forma Therapeutics Inc. and Inversago Pharma in 2022, which are still in clinical stages.

Balance sheet

No big changes have occurred in the balance sheet. Liabilities increased by DKK 50.2 billion being more than 60% of that amount due to provisioning for sales rebates. The company also reported a new legal litigation which might impact the financial position of the company.

Cash flow statement

Free cash flow (calculated as FCF= NOPAT + D&A - CAPEX - ΔWC) was DKK 44.6 billion (11.5% YoY growth) with a FCF margin of 19.2%, down from 22.6% in 2022 reflecting the larger CAPEX investment. Regarding the cash conversion, Novo Nordisk achieved the best value of this metric in the period of scope (from 2018).

Capital allocation

The company is currently ongoing under the largest expansion cycle of its history. The expenses in Purchased Plant & Equipment (Purchased PPE) have more than doubled from 2022, DKK 25.9 billion in 2023 vs DKK 12.1 billion in 2022. Consequently, CAPEX as a percentage of revenue has increased to 15% in 2023 when historically it has been around 10%.

The company will pay a dividend of 6.40DKK per share (vs 4.08DKK in 2022, 39.2% YoY increase) plus an interim one - amount yet to be announced - maintaining a payout ratio of around 50% in line with historical data. Additionally, DKK 20.0 billion to be allocated to shares repurchase (1/3 reduction from previous year).

The company also distributed in February 2023 the 3-year share based compensation issued in 2020 to its employees.

No acquisition were done during the year apart from ocedurenone acquisition for USD 1.3 billion (DKK ≈6.9 billion).

Capital efficiency

Novo Nordisk is a pharmaceutical company and as such it needs to invest in R&D to develop new drugs which might be the growth engine 20 years from the discovery in the research stage. Hence, as the benefit from the R&D activities will last longer than the reported period and they are not needed to run current operations (current operations are the result of the R&D of 15 - 20 years ago) I prefer to capitalize that R&D spending due to its investment characteristics.

Hence the metrics I show in figure 13 are adjusted by capitalizing the R&D spending and considering an average amortization of 10 years. Despite the adjustment, all ratios are outstanding showing the incredible performance of the company. Remarkable is the ROIIC (Returns over incremental invested capital) spike, showing that every additional DKK invested by Novo Nordisk during 2023 yielded 2 DKK.

ROE extended DuPont analysis

ROE has been flat for the previous four years. An extended DuPont analysis of this ratio revealed an unappreciated trend at first sight which is the decrease in assets turnover while the financial leverage increased.

In the pharma industry, regulatory compliance makes it more costly and slows the process of bringing into use new equipment and facilities. Novo Nordisk has embarked in the current CAPEX cycle and they estimate the impact will start to be observed yearly from 2025 onward according to what the CFO commented during the call.

Management

No major news in connection with management. According to the 2023 Remuneration Report, Lars Frueergard (CEO) met all established objectives for 2023 and his fixed remuneration was increased in line with regular employees (approximately 4%).

Revenue guidance provided has been wider than previous years due to a larger uncertainty on the supply chain and recognition of revenue provisioned for litigations and rebates.

Moreover, management has reduced the amount of cash flow dedicated to shares repurchases in favor of dividend payment, with an expected 2023 payout of 70%. Management commented during the call that they decided to reduce the cash flow dedicated to share repurchases due to potential capital deployment in the form of strategic acquisitions during 2024. However, I think that at the same time increasing the dividend payout shows that repurchasing shares at current prices would not yield the best return on investment.

Conclusion

Overall, Novo Nordisk showed another year of excellent execution driven by the GLP-1 drugs portfolio and maintaining an excellent capital efficiency. Business is developing as expected, revenue growth is moderating while larger CAPEX expenses might impact some of the metrics in the short term to then start contributing to company revenue in the mid-term and long-term.

The only concern the report left was the long response time it takes to re-establish endocrine rare diseases supply chain and if in case of a similar problem in the GLP-1 one what would be the impact on revenue and for how long.

Hope you enjoyed this earning review of Novo Nordisk. Maybe I have gone into very detail questions but I thought the annual report of the company I follow the closest deserved such a newsletter. So please leave a comment, give it a like and share!

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