Novo Nordisk - H1 2024 Earnings review

Executive summary

• Revenue DKK 133.4 billion, up 24% YoY (25% at CER).

• Sales within Diabetes and Obesity care increased by 26% in Danish kroner to DKK 125.0 billion (27% at CER). Rare disease sales decreased by 4% measured in Danish kroner (3% at CER).

• Operating profit DKK 57.8 billion, up 18% YoY (19% at CER).

• Diluted EPS 10.17 DKK, up 17% YoY.

• Reported FCFF up 117.3% YoY. Higher CapEx & working capital investment offset by revenue growth and D&A expense.

• Guidance updated: sales growth improved to 22 - 28% at CER (vs 19 - 27% after Q1 2024 guidance raise), and operating profit growth adjusted down to 20 - 28% at CER (vs 22 - 30% raised in May 2024) due to ocedurenone impairment adjustment.

• Interim dividend of 3.5 DKK per share to be paid in August 2024, 16.7% increase YoY.

Income statement

Sales & segments

Reported revenue growth in the first six-months period of 2024 was 24% (25% at CER). Sales growth was driven by North America Operations (NAO) which grew 36% YoY (same at CER) while International Operations (IO) grew a modest 9% (11% at CER).

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. Moreover, gross-to-net sales adjustments contributed to higher than expected sales in some geographies for another quarter.

IO are still lagging behind in growth compared to NAO in the same therapy areas as in previous quarters: insulin (36% YoY sales growth in NAO vs 3% YoY sales growth in IO) and rare diseases (13% YoY sales growth vs -14% YoY sales growth).

Other highlights:

• Novo Nordisk GLP-1 market share keeps increasing (up 70 bps QoQ to 56.0%) while insuline one is maintained at 43.5%.

• The trend of using long-acting insulin complemented by fast acting doses keeps boosting long-acting insulin sales growth, especially in the US and China, while premix & human insulin sales keep decreasing.

• Obesity treatments (Wegovy) supply in the US has been increasing progressively since January 2024 and Novo Nordisk semaglutide injections have been removed from FDA shortage list in almost all concentrations. See Figure 2

• All rare diseases categories sales decreased with the exception of haemophilia B as Sogroya is being launched in an increasing number of countries. Note that gross-to-net adjustments cushioned rare diseases sales decrease.

Operating income

The company has usually commented on the operational leverage they are achieving as they gain scale. However, the opposite has been observed for these 6 months. Reported operating profit has been DKK 57.8 billion, up 18% YoY (19% at CER). Operating profit has been lower for the period than the reported sales growth 24% YoY (25% at CER). Consequently, operating margin has decreased 210 bps YoY, having reported an operating margin of 43.3% for the period .

On the one hand, Sales & Distribution expenses and Administrations costs grew at a slower pace than sales, only 5% YoY and 8% YoY, respectively. It should also be noted that employees’ salary adjustments were done during Q1 so they are now reflected in the P&L.

On the other hand, R&D expenses grew 79% YoY, from DKK 13855 million in 2023 to DKK 24772 million in 2024. This expense increase has been caused by the impairment loss recording due to discontinuation of ocedurenone Phase III trial. This candidate molecule for hypertension and CKD was acquired from KBP Bioscience back in October 2023 for $1.3 billion (approximately DKK 9 billion). Novo Nordisk has decided to write-down an impairment loss of DKK 5.7 billion. Hence, normalized R&D expenses in H1 2024 amounted to DKK 19072 billion, resulting in a 37.7% YoY increase.

Finally, manufacturing output problems in the Rare Diseases segment are still ongoing and probably have rock bottom as the reported operating margin for the period has been -26.4% in Q2 2024 (28.7% in Q2 2023) and -5.0% in H1 2024 (23.3% in H1 2023). Note that before the operating margin of this segment was larger than diabetes and obesity ones (over 50%).

Balance sheet

The most remarkable change identified in the balance sheet has been the increase of non-current borrowings due to the issuance of a new Eurobond in May. Novo Nordisk has issued an Eurobond of €4.65 billion divided in four tranches at an average coupon of 3.29% and maturing every three years starting with the first tranche on the 21 of May in 2026.

Moreover, the cash & cash equivalents have increased to DKK 62654 million in June 2024 from DKK 30230 million in June 2023 which is enough to pay all borrowings reported by the company which amounted to DKK 57060 million.

Cash flow statement

Three things should be noticed:

1. CapEx amounted to DKK 18.9 billion, increased 79.2% YoY. Additionally, DKK 3.97 billion were spent in intangibles & other business acquisition.

2. “Other non-cash items” this semester amounted to DKK 11.3 billion vs DKK 30.9 billion reported in H1 2023. This section accounts for the effect of rebates in the USA.

Regarding the FCFF, it reached DKK 33.6 billion, an increase of 117.3% vs H1 2023 reported FCFF of DKK 17.3 billion. Higher CAPEX expenses were offset by operating income growth and a larger D&A due to ocedurenone impairment loss. Intangibles & other businesses acquisition has not been included in FCFF calculation, but as these operations become more common it will be recommended to do so to get a more accurate picture of the business.

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:

• No new business or portfolio assets acquired during Q2 2024.

• R&D expenses grew again faster than sales (excluding ocedurenone impact). In line with the strategy outlined in CM24.

• Payment of DKK 28557 million and DKK 10285 million spent in shares repurchases. During Q1 2023, DKK 18337 million were paid in dividends and DKK 14020 million spent in shares repurchases. Moreover, an additional interim dividend of DKK 3.5 per share to be paid in August 2024 has been approved.

Overall, I think current share price and low company debt makes it reasonable to distribute the cash in excess to shareholders through dividends.

Guidance update & other developments

Guidance update

After H1 2024 performance, sales guidance was revised and raised reflecting a better than expected performance, mainly boosted by rebates impact.

Guided operating profit growth range has been lowered by 2%, reflecting ocedurenone announced impairment loss (estimated negative impact of 6%) countered by positive sales growth impact (positive 4% impact estimated).

Moreover, during the call, a Citigroup analyst asked about 340B Drug Pricing Programme litigation in the US potential upside impact on recognized revenue, speculating it could boost revenue by 5%. However, Novo Nordisk management didn’t provide any further insight.

R&D pipeline development

Ocedurenone discontinuation has not been the only candidate molecule during the period. Novo Nordisk also reported the termination of the development of Phase I once-monthly GLP-1/GIP receptor agonist due to portfolio considerations. During the call, the Executive Vice President of Development informed that once monthly GLP-1/GIP conducted study was exploratory, focused on assessing the concept of a smarter technology than the actual GLP-1/GIP component.

During the call, CFO Karsten Knudsen confirmed CagriSema scale-up is at full speed and they are even experienced with a co-formulation. I think this implicitly shows management’s high confidence in CagriSema passing the remaining clinical phases and authorities granting its commercialization approval.

Other developments

One negative note during the call was North America Operations Vice President, Doug Landa, confirming the current short obesity treatment stay time with Wegovy of the average American patient. 6 months on average!

Finally, it should be mentioned that no emphasis on pricing pressure has been placed by management during the call and they are still focused on volume growth. I found surprising no analyst mentioned the political risk of

Closing remarks

Overall, I think the results are within expectations. No big surprise that will justify the sell-off on the reporting day in my opinion. I think concerns about the information about short patients stay time on Wegovy treatment and Novo Nordisk losing market share against Eli Lilly caused the sell-off.

However, Novo Nordisk market share in the GLP-1 space, both for type 2 diabetes and obesity, keeps growing according to reported IQVIA data. See figure 5 and figure 6, respectively.

Hence, the risks to keep an eye are the short patient stay time and the underperformance of rare diseases area.

In connection to patient stay time, I think demand will continue outpacing supply for a long time so further data can be obtained to evaluate if stay time increases towards 12 months observed during clinical trials.

I am starting to find rare diseases area underperformance concerning, not because of their impact on the long term thesis but because:

1. It shows lack of operational skills as the supply of rare endocrine diseases reestablishment is taking more than a year now.

2. No further information has been disclosed, what I would appreciate when the supply constraints are taking longer than what would be considered a temporary incumbent.

Finally, monitoring of acquisitions as they become a more common option to allocate capital should be carried. Ocedurenone acquisition and programme closure just 9 months after brings concerns regarding lower quality of the acquired businesses and assets. I think lack of experience on these operations and large excess of capital to allocate might lead to this phenomena.