Novo Nordisk's Earnings Rise on Solid Victoza, Levemir Sales

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Novo Nordisk (NVO) reported second-quarter 2014 earnings of 48 cents per American Depository Receipt (:ADR), higher than the year-ago earnings of 44 cents.

In the reported quarter, revenues increased 6% to $3.9 billion year over year. The top-line was mainly driven by strong sales of Victoza and Levemir.

All growth rates mentioned below are on a year-over-year and local currency basis.

The Quarter in Detail

Total revenue grew 7% in local currency driven by sales growth in North America (up 11%), international Operations (up 10%) and China (17%). Geographically, North America was the largest contributor to total revenue.

Novo Nordisk's diabetes care segment recorded sales growth of 8%. Modern insulin generated strong revenues (up 14%) driven by NovoRapid (up 4%), NovoMix (up 7%) and Levemir (33%). Novo Nordisk's key drug, Victoza, witnessed sales growth of 11%, primarily due to higher demand in North America, international operations and China.

Sales in the biopharmaceuticals segment increased 1%. Norditropin’s sales were up 7%, partially offset by fall in NovoSeven’s sales by 5%. Other products witnessed 8% sales growth.

Research and development (R&D) expenses increased 15% due to pipeline development. Administration costs were up 1%. Sales and distribution costs remained flat year over year.

Pipeline Update

Novo Nordisk is working on strengthening its pipeline. The cardiovascular outcomes study (:DEVOTE) on Tresiba is progressing ahead of plans and patient enrolment should be completed within the next six months. Novo Nordisk expects sufficient data from the study by the first half of 2015 to support an interim analysis and intends to file a new drug application (:NDA) in the U.S. during this period. The company expects to complete the study within three to four years from initiation.

Meanwhile, the company initiated the fourth study (SUSTAIN 4) under a phase IIIa program (:SUSTAIN) on semaglutide (one-weekly GLP-1 analog) for the treatment of type II diabetes. Novo Nordisk intends to initiate the last study (SUSTAIN 5) in the program, by year end.

We remind investors that Xultophy is under review in Europe for type II diabetes in combination with glucose-lowering oral drugs, when such drugs (alone or combined with basal insulin) fail to achieve adequate glycemic control. A response from the EC is expected by Oct 2014. On approval, Novo Nordisk intends to launch Xultophy in Europe in the first half of 2015.

Additionally, Victoza (liraglutide 3 mg) is under FDA review for the treatment of adults suffering from obesity (with or without comorbidities) and overweight adults with comorbidities such as hypertension, dyslipidemia, sleep apnea or type II diabetes. The FDA’s Advisory Committee will discuss the NDA for Victoza on Sep 11, 2014 (tentative date).

2014 Outlook Maintained

Novo Nordisk continues to expect sales growth in the range of 7%−10%. The outlook is based on expectations of strong performance by Victoza, modern insulin and modest Tresiba sales, to be partly offset by generic competition to Prandin in the U.S., increased competition for diabetes and biopharmaceuticals products in international operations and adverse effects of rebate and contracts in the U.S.

Novo Nordisk maintained its guidance for operating profit growth around 10% in local currencies.

Our Take

Although Victoza and Levemir performed satisfactorily, generic competition for Prandin, loss due to Medicare facilities and rebates in the U.S. made it a tough task for the company to sustain revenue growth. Novo Nordisk has a number of regulatory events lined up for 2014. We expect the latter half of 2014 to be catalyst rich for the company. We expect investor focus to remain on regulatory updates from the diabetes care segment of Novo Nordisk.

Novo Nordisk carries a Zacks Rank #4 (Sell). Some better-ranked stocks in the health care sector are Allergan Inc. (AGN), AstraZeneca plc (AZN) and Salix Pharmaceuticals Ltd. (SLXP). While Allergan carries a Zacks Rank #1 (Strong Buy), AstraZeneca and Salix Pharmaceuticals hold a Zacks Rank #2 (Buy).

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