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Company note

Equity Research
Investment Research
Post-results note 30 October 2015
Novo Nordisk
Pharmaceuticals, Denmark
Next stop: US Tresiba launch
Volume growth in the insulin market is still 5%+ and we expect Novo to gain
Target price, 12 mth (DKK) † market share through the launch of the Tresiba family. The pricing environment
Previous 12M target price (DKK) † for insulin is harsh, but we expect Novo to see an ASP increase from improved
Market cap (DKKm) mix. Add this to its strong GLP-1 franchise and we still look for 10%+ diabetes
Market cap (EURm) growth for Novo. We reiterate our Buy with a new 12M TP of DKK480.
Impact on the investment case. The Q3 release does not impact our positive
stance on Novo. We continue to believe that the likely launch of five diabetes No. of shares (m) Net debt (current Y/E) (m) products in US over the next four years will lead to higher sales and EBIT growth. The tough US price environment steals the headlines right now and it is naturally Avg. daily vol, 12M (000) understandable that Novo acts a bit cautious until it also sees the impact from its Price performance
own launches. The most effective way to mitigate price pressure is through innovation and we believe Novo's launches wil lead to an improved ASP for them.  Estimate changes. Our estimates for 2015 are slightly up due to a better Q3,
lifted 2015 EBIT guidance and a lower tax-rate. Our 2016-17 estimates are cut due to slightly lower insulin growth as well as the impact from patent expiry on its STOXX 600/Health Care rebased HRT product Vagifem. Our estimates suggest a CAGR in EPS of 19.7% from Rel. local market  Q3 release. Q3 sales were up 20% y/y or 8% in LC. Insulin growth in LC was 6%,
which is much better than competitors. The shining star is still its GLP-1 Victoza, Source: FactSet up 36% y/y or 20% in lc. EBIT was up 40% y/y or 9% underlying growth. This are Estimate changes
strong numbers, in our view, as Novo still depends on its old insulin portfolio. The US launch of Tresiba in January should accelerate growth, in our view. Valuation. Our DCF model suggests a 12m value of DKK 482/share.
Key financials
Source: Danske Bank Markets estimates Year-end Dec (DKK) Next event
* Price as at close on 29 October 2015 † Includes dividends Pre-tax profit (m) EBIT margin (adj.) Net debt/EBITDA (x) EV/EBIT (adj.) (x) +45 45 12 80 [email protected] Source: Company data, Danske Bank Markets estimates d certifications are contained from page 14 of this report.
Investment case
Key conclusions
We remain positive on Novo Nordisk, with a 12M target price of DKK480 per share and a Buy recommendation. We continue to believe that Novo will return to double-digit sales growth in local currencies driven by multiple product launches. We expect growth to be driven by the five potential launches of diabetes drugs in the US over the coming four years on top of the entrance into obesity through the Saxenda launch earlier this year. The impact is likely to become particularly strong from 2017, as the Tresiba US launch will be in the second year and that Xultophy also will be launched. No doubt the pricing environment for insulin products has become tougher, but we believe the best way to mitigate this is through innovation. Valuation
We estimate that over the period 2015-19 Novo will be able to deliver a CAGR in EPS of 19.7%. This is almost three times more than the average for the pharmaceutical sector. Novo currently trades at P/E of 22.9x for 2016E and 19.6x for 2017E. This is a premium versus the global pharmaceutical peer group of c.33% and c.27%. However, looking at PEG (price earnings to growth) ratios, then Novo actually trades at a discount of 44% on 2016E. Our DCF model for Novo Nordisk suggests a 12M value of DKK482 per share, which is the main basis for our 12-month target price of DKK480 per share. Our DCF model uses a WACC 6.05% and risk-free interest rate of 2.0% Share price catalysts
This year has been a very eventful one for Nordisk. Recent approval of Tresiba in the US was the most important event. Short-term news includes the capital markets day on 19 November as well as further phase 3 data on Semaglutide. However, newsflow in Q1 16 will also be very important. We expect a launch of Tresiba in January and we expect Novo Nordisk to update its long-term targets in connection with the FY 2015 release. In Q1 16, we also expect headline data from the CV outcome study (LEADER) on Victoza. We see a chance that this could show superiority versus the placebo. Furthermore, in Q1 we expect to see data from the two double-blinded studies, SWITCH 1 (type 1 diabetes) and SWITCH 2 (type 2 diabetes) comparing Tresiba with Lantus. We expect data from SWITCH 2 to be published first. Risks to our scenarios
Risks that could impede achievement of our DCF-based 12-month target price include tougher competition to Victoza than we assume, a poor launch of Tresiba, a setback to key pipeline products and further worsening of the US pricing environment for 2 Novo Nordisk Buy Next stop: US Tresiba launch
Q3 sales growth was 20% y/y and some 8% in local currencies. This was in line with EBIT came in some 4% above our estimate and some 3% above company-collected consensus. EBIT growth was 40% y/y, or some 17% if adjusted for FX. If we furthermore adjust for DKK600m in one-off costs in Q3 14 (closure of inflammatory activities), then underlying EBIT growth was 9%. EPS was 5% above our estimates driven by a much lower tax-rate than we had expected, while net financial expense was actually much higher than our forecast. Table 1. Novo Nordisk: Q3 15 deviation of actual from estimated results
Divisional sales breakdown
- where of NovoRapid/NovoLog - where of NovoMix - where of Levemir New generation insulins Victoza (Liraglutide) Other Diabetes care Total Diabetes and Obesity care
Total Biopharmaceuticals
Source: Company data, company-collected consensus, Danske Bank Markets estimates The 8% underlying sales growth in Q3 was at the mid-point of Novo's FY guidance of 3 Novo Nordisk Buy Below we show the underlying growth in key products on a global scale and specifically for North America. Table 2. Underlying y/y growth for key products - global and North America
Growth in local currencies for key products, Global

Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014
NovoRapid/NovoLog Victoza (Liraglutide) Total insulin growth Growth in local currencies for key products, North America

Q3 2015 Q2 2015 Q1 2015 Q4 2014 Q3 2014 Q2 2014 Q1 2014
NovoRapid/NovoLog Victoza (Liraglutide) Source: Company data, Danske Bank Markets As can be seen from the table above, Victoza continued its strong momentum despite increased competition from new once-weekly GLP-1s, notably Lilly's Trulicity. Novo has lost market share but this has been offset by increased market growth in the GLP- 1 class. Victoza sales were DKK4,680m in Q3, up 36% y/y or 20% in local currencies. Chart 1. Victoza quarterly sales (DKKm)
Source: Company data, Danske Bank Markets Victoza now accounts for 17.5% of Novo Nordisk's total sales and is the largest Table 3. Estimated US pricing effect in Q3
contributor to Novo Nordisk's growth. We note that comparison figures for Victoza will become tougher in Q4 than they were in the first 9m. Novo's insulin growth in Q3 was 6% y/y in local currencies. This was affected by the tougher pricing environment in the US. Underlying insulin growth in the US was also 6%. We also believe that, in Q3 isolated, Novo saw a negative impact from pricing in the US. In the table on the right we list prescription growth (TRx growth) for Novo's Source: Company data, Symphony Health, Danske three insulin analogues in the US and the growth reported by Novo Nordisk in the US. Bank Markets These indicate that Novo saw a negative pricing effect for Levemir and NovoLog, while there was a positive effect for NovoMix. 4 Novo Nordisk Buy The estimated pricing effect for Levemir has also fluctuated somewhat, as we have tried to illustrate in the chart below. The comparison should become much easier in Q4 15 as there was already in Q4 14 a negative pricing effect on Levemir. Chart 2. Difference between reported growth and volume growth in US for
Levemir
Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Source: Company data, Symphony Health, Danske Bank Markets Novo repeated in connection with Q3 that across all products the net pricing effect in 2015 will still be flat to slightly positive. In all the discussion on price pressure in the US, it seems that the market looks a bit passed the fact that pricing remains quite strong in the GLP-1 segment. Novo was 23% underlying sales growth in US for Victoza in Q3, which was based on 16% volume growth. That means a 7% positive impact from pricing. The GLP-1 market has also not been hurt by the same rebate pressure as in insulin. The risk of this happening is also quite low, as Lilly has the only product (Trulicity) that has a somewhat competitive clinical profile to Novo's Victoza and Lilly appears to have a sensible pricing strategy. 5 Novo Nordisk Buy Q3 performance vs competition
Lilly, Novo and Sanofi have now reported their Q3 numbers, so we now have a good overview of Novo's performance versus those of its peers. Below we show the Q3 performance for the three manufacturers of insulin. Table 4. Real insulin growth Q3 15
Q3 15 sales
Reported
In local currencies
Novo Nordisk (DKKm)
NovoRapid/NovoLog Novomix/NovoLog Mix Total insulin
Sanofi-Aventis (EURm)
Total insulin
Eli Lilly (USDm)
Total insulin
Total insulin market Q3 15
In local currencies*
Insulin analogues Total insulin market
* A weighted average based on local currency growth reported by the three companies Source: Company data, Danske Bank Markets As can be seen from the table above, Novo Nordisk was by far the best performer of the three large insulin manufacturers in Q3. It saw 6% underlying insulin growth, while Sanofi saw a fall of 7%. If we combine growth in local currencies for the three manufacturers, it was actually a round zero in Q3 (+0.1% in Q2). This is a significant setback versus previous years and driven by the changed pricing environment in the US. However, this means from a value perspective Novo has gained substantial market share so far this year as can be seen in the chart below. 6 Novo Nordisk Buy Chart 3. Market share development based on reported insulin sales
2012 2012 2013 2013 2013 2013 2014 2014 2014 2014 2015 2015 2015 Source: Novo Nordisk, Lilly, Sanofi-Aventis, Danske Bank Markets As can be seen, Sanofi was actually quite close to deriving similar insulin sales to Novo in Q4 14. However, since then, it has gone downhill for Sanofi due to a significant negative pricing effect on Lantus in the US. In Sanofi's Q3 announcement yesterday, it also downgraded its expectations for its diabetes franchise. It now expects to see a 6-7% decline in local currencies in 2015 and 4-8% annual decline in the years 2016 to 2018. Preview guidance (issued a year ago) was a flat to slight positive development in the years 2015 to 2018. Sanofi explains half of the change by lower sales of insulin glargine (Lantus, etc.). We believe there are three reasons for this change: 1) Novo will now launch Tresiba in the US in early 2016 and one year ago Sanofi probably had hoped the Tresiba launch would not be before mid-2017. Novo will also launch Xultophy in early 2017; 2) Biosimilar Lantus has now been launched in numerous markets and will arrive in US in December 2016; 3) Sanofi achieved a quite weak label for Toujeo, which will impact the potential for the compound. This has probably also led to a further rebating of Lantus to "buy" for formulary access for Toujeo. We believe the best tool for counteracting this negative pricing environment is to launch new products. Novo is set to replace its entire insulin portfolio in the US over the next three years. 2015 guidance
Novo made some modest changes to its guidance.  Sales: Novo still guides for sales growth in local currencies of 7-9% but now with a
positive FX effect of 13% (previously 14%). This means reported sales growth is now guided at 20-23% (previously 21-23%).  EBIT: Novo now guides for growth in local currencies of 20% (previously 19%).
Novo now guides the positive FX effect on EBIT at 22% (previously 23%). This means reported EBIT growth guidance is unchanged at 42%.  Tax-rate: This is lowered to 20% from 21%.
7 Novo Nordisk Buy Table 5. Development in 2015 guidance
Current expectations
Previous expectations
Previous expectations
Previous expectations
Previous expectations
Issued in Q3 15 report
Issued in Q2 15 report
Issued in Q1 15 report
Issued in Q4 14 report
Issued in Q3 14 report
Sales growth
- in local currencies 'High single-digit' Around 13%-points higher Around 14%-points higher Around 16%-points higher Around 12%-points higher Around 3%-points higher Operating profit growth
Including gain from NNIT etc. Around 22%-points higher Around 23%-points higher Around 25%-points higher Around 19%-points higher Around 5%-points higher Loss of DKK5.6bn Loss of DKK5.7bn Effective tax rate Capital expenditure Free cash flow
DKK 33-35m
DKK 33-35m
DKK 32-34m
DKK 29-31m
Source: Company data, Danske Bank Markets n
ot
defined.
8 Novo Nordisk Buy Preliminary 2016 guidance
As usual, Novo also in connection with its Q3 releases offered preliminary guidance for next year's sales and earnings. Novo guides for sales growth in local currencies of mid to high single-digits. This should be interpreted as 5-9% growth. Novo states that growth outlook for 2016 looks quite similar to 2015 (7-9%) with a few exceptions. 1) The weak macroeconomic environment in China and a few other markets is reducing group growth by 0.5pp, 2) the lost contract with United Health on NovoLog will also reduce sales growth by 0.5pp, 3) the patent expiry of Vagifem in Q4 16 will also impact sales growth by 0.5pp, 4) finally the new launches such as Tresiba and Saxenda are likely to have a net positive impact of 1% (net is after adjusting for the impact on Levemir). We believe the assumptions for the impact from new product launches seem very cautious. When adjusting for extra-ordinary gains in 2015 (NNIT and sale of inflammatory assets), Novo expects the sales growth in EBIT as in sales. This means no operational leverage is assumed due to increased costs for R&D and sales & We believe Novo's initial guidance is conservative as it always initially has been. There is also more uncertainty than normal, both on the upside and downside. On the downside, there is the whole pricing discussion and the macroeconomic environment and on the upside Novo is probably also conservative when guiding for the impact from new product launches. The Q4 15 report on 3 February 2016 will naturally be very interesting, as it will not only include detailed 2016 guidance, but also new long-term targets. Upcoming news flow:
Novo will host a CMD on 19 November, which potentially could be the next important event for the company. Topics at the CMD will be: 1) R&D update, 2) product supply update, 3) the diabetes market, 4) obesity, 5) the US market. Ahead of the CMD, we could actually also see further phase 3 data on Semaglutide. This includes data from Sustain-4 (Semaglutide in comparison with Lantus) and Sustain-2 (Semaglutide vs Januvia). We expect data from Sustain-4 to be released After this the news-flow in Q1 16 will be extremely intense and important. We expect an official launch of Tresiba in January and we expect Novo Nordisk to update its long-term targets in connection with the FY 15 release (3 Feb). In Q1, we also expect headline data from the CV outcome study (LEADER) on its once-daily GLP-1, Victoza. We see a chance that this could show superiority versus the placebo. Then we also expect CV outcome data from its once-weekly GLP-1, Semaglutide (Sustain- 6). Sustain-6 is less powered than LEADER, which means we do not expect superiority shown for Semaglutide. Finally, in Q1 we expect to see data from the two double-blinded studies, SWITCH 1 (type 1 diabetes) and SWITCH 2 (type 2 diabetes) comparing Tresiba with Lantus. These studies are designed to show a hypo benefit for Tresiba vs Lantus, which, if positive, could lead to a label update for Tresiba in the US. We expect data from SWITCH 2 to be published first. 9 Novo Nordisk Buy Below we show an event table for Novo Nordisk. Table 6. Novo Nordisk: event calendar
Comments
Importance*
Company-specific events
Further Phase 3 data on Semaglutide Capital markets day Data from SWITCH 1 and SWITCH 2 Double-blinded head to head between Tresiba and Lantus. Data on SWITCH 2 is likely to be published first. US launch of Tresiba Results from LEADER trial LEADER = CV outcome study on Victoza. Further Phase 3 data on Semaglutide Including SUSTAIN 6 = CV outcome study on Semaglutide. Completion of DEVOTE trial DEVOTE = CV outcome study on Tresiba. Novo Nordisk financial report
Will include updated long-term financial targets. Competitor news
Top-line phase 3 results for Insulin Lispro Sanofi's biosimilar version of Lilly's HumaLog (Insulin Lispro). Lixisenatide launch in US US launch of biosimilar Lantus LixiLan launch in US Industry events
World Diabetes Congress Source: Company data, Danske Bank Markets n
ot
defined.
10 Novo Nordisk Buy Company summary
Sales breakdown, geographical areas
Sales breakdown, divisions
Company description
Main shareholders
Novo Nordisk is a world leader in the insulin market (59% of total sales in 2014) Votes (%)
Capital (%)
and now also the leader in the GLP-1 market through Victoza (15%). It also holds strong positions in human growth hormone deficiency treatments (HGH, 7%) and haematology/NovoSeven (10%). The company claims a 47% global market share Institutional and private investors in insulin and 27% of the entire global diabetes market. Novo Nordisk employs more than 40,000 people worldwide.
Company information
Management
Lars Rebien Sørensen Novo Allé, 2880 Bagsværd Jesper Brandgaard Net sales and EBITDA margin (DKKm)
EBIT and EBIT margin (DKKm)
P/E - 12 months forward (x)
P/BV - 12 months forward (x)
Source: Company data, FactSet, Danske Bank Markets estimates [all charts and tables] 11 Novo Nordisk Buy Summary tables
Year end Dec, DKKm
Cost of sales & operating costs Impairment charges - of which non-recurring items EBIT before non-recurring items
Financial items, net Associated companies Discontinued operations Net profit
Net profit (adj.)
CASH FLOW
Change in working capital Net interest paid Other operating cash items Cash flow from operations
Free cash flow
Incr./(decr.) in equity Incr./(decr.) in debt Minorities and other financing CF Cash flow from financing
Disc. ops and other Incr./(decr.) in cash Cash and cash equivalents Other current assets Fixed tangible assets Intangible assets (incl. goodwill) Other non-current assets Total assets
Other current liabilities Other long-term liabilities Shareholders' equity (incl. min.) Total liabilities and equity
Source: Company data, Danske Bank Markets estimates 12 Novo Nordisk Buy Summary tables
PER SHARE DATA
No. of shares, fully diluted (y.e.) (m) No. of shares, fully diluted (avg.) (m) EPS (reported) (DKK) Book value/share (DKK) MARGINS AND GROWTH
EBIT margin (adj) EPS (adj.) growth ROIC (after tax, incl. GW, adj.) ROIC (after tax, excl. GW, adj.) ROIC (adj.) - WACC MARKET VALUE
Share price (DKK) Outstanding number of shares (m) Market capitalisation (m)
Net debt, year-end (m) MV of min. and ass. comp. (m) Enterprise value (m)
P/E (reported) (x) EV/invested capital (x) Total yield (incl. buybacks) Free cash flow yield Net debt/EBITDA (x) Net debt/equity (x), year-end Dividend payout ratio Interest coverage (x) Cash conversion (FCF/net profit) EBIT before non-recurring items (m) Net profit (adj.) (m) EBIT margin (adj.) Source: Company data, Danske Bank Markets estimates 13 Novo Nordisk Buy This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S (‘Danske Bank'). The author of the research report is Martin Parkhøi. Analyst certification
Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst's personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation
Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts' rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest
Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of high-quality research based on research objectivity and independence. These procedures are documented in of Danske Bank's research policies. Employees within Danske Bank's Research Departments have bee n instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank's Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Novo Nordisk and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to Novo Nordisk and have whatever rights as are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding Novo Nordisk that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. Danske Bank is a market maker and may hold positions in the financial instruments mentioned in this research report. As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Novo Nordisk in the next three months. Danske Bank has made no agreement with Novo Nordisk to write this research report. No parts of this research report have been disclosed to Novo Nordisk. No recommendations or opinions have been disclosed to Novo Nordisk and no amendments have accordingly been made to the same before dissemination of the research report. Financial models and/or methodology used in this research report
Recommendations and opinions in this research report are formed on the basis of a combination of discounted cash flow analysis, industry knowledge, peer group analysis and company-specific and market technical elements (events affecting both the financial and operational profile of the company). Forecasting of company sales and earnings is based on segmented bottom-up models using subjective views of relevant future market developments. In addition, the expected macroeconomic environment is taken into account. The output is aggregated into models for group profit and loss, balance sheets and cash flow estimates – all taking into account the recent development in historical research reports. Risk warning
Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates
We expect to update this research product on a regular basis (at least twice per year). See the front page of this research report for the date of first publication. Recommendation structure
The Danske Bank Markets recommendation system is absolute. It means that each stock is rated on the basis of a total return, measured by the upside potential (including dividends and capital reimbursement) over a 12-month time horizon. The Danske Bank Markets spectrum of recommendations (or ratings) for each stock comprises three categories: Buy, Hold, Sell (in short B, H, S). In specific cases and for a limited period of time, analysts may have to rate stocks as Rating Suspended (RS) or Not Rated (NR), as explained below. Meaning of each rating or recommendation: Buy: we expect the stock to generate a total return of more than 10% over the next 12 months. Hold: we expect the stock to generate a total return of 0% to 10% over the next 12 months. Sell: we expect the stock to generate a total return below 0% over the next 12 months. Rating Suspended: the rating is suspended due to a capital operation (e.g. takeover bid, share issue) where the issuer or a related party of the issuer is or could be involved or to a change of analyst covering the stock. Not Rated: Danske Bank Markets produces investment research on Danske Bank but does not have an investment recommendation to buy, hold or sell or any target price on the stock. 14 Novo Nordisk Buy As at 30 October 2015, Danske Bank Markets had investment recommendations on 255 The proportion of issuers corresponding to each of the recommendation categories securities. The distribution of recommendations is represented in the Securities ratings above to which Danske Bank provided investment banking services in the past breakdown diagram below. 12 months is shown below. Investment banking relationships
Changes to recommendation in the past 12 months:
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