Insulin maker disappoints investors

Novo Nordisk commands a high price on the market -- and finds itself up against high expectations as well.

By Jim J. Jubak Apr 30, 2012 4:11PM
Image: Medical doctor (© Creatas/SuperStock)Stocks that trade at a premium don't need to do much to disappoint. 

In the case of Novo Nordisk (NVO), the world's largest maker of insulin, the disappointment was sales growth of 13% year-to-year that missed Wall Street projections by a percentage point. Net profit climbed by 15% from the first quarter of 2011. 

The company raised its guidance for full-year 2012 sales growth to 8% to 11% in local currency. EBIT (earnings before interest and taxes) are now projected to grow by at least 10%. That's a very slight tweak from the earlier guidance for "about" 10%.

After the company reported on April 27, the stock fell 4.3% to close at $144.55 in New York. Shares were trading at $147.05 Monday afternoon.

Investors expect more from a stock priced at a big premium to its peers -- and that's exactly how Novo Nordisk is priced. The shares trade at 20.3 times projected 2013 earnings per share, according to Credit Suisse, versus a multiple of 11.2 times earnings for the company’s pharmaceutical peers.

That premium is based on Novo Nordisk's comparative shelter from the patent expirations and generic competition that threaten sales and earnings at peers such as Pfizer (PFE) or Merck (MRK). And on the growth prospects of the global diabetes market. 

What has been called, rightly I think, a global epidemic of diabetes has produced an increase in the incidence of diabetes in the United States of 90% between 1995-97 and 2005-2007. That increase, the Centers for Disease Control reported in its study of the growth of diabetes, was a result of an aging population -- since diabetes incidence increase with age -- and increasing obesity. Those trends aren't limited to the United States, and the World Health Organization estimates that there are now 350 million people in the world with diabetes.

Over the last five years earnings at Novo Nordisk have grown by an average of 24.9% a year. Wall Street now projects average annual growth of 17.5% over the next five years. My guess is that with the stock's current price-to-earnings ratio, investors are actually counting on even more.

Hence the sell off on the few signs of bumps on Novo Nordisk's growth path. Sales of Victoza, the company’s flagship GLP-1 diabetes drug, climbed 81% year to year, but that was still about 9% short of analyst projections. Which led to worries that competition from other GLP-1 drugs was slowing Victoza’s growth. (Novo Nordisk now owns 62% of the GLP-1 market by value. GLP-1 drugs now make up 6% of the global diabetes market, up from 4.8% in the first quarter of 2011.)

It didn't help the stock that investors in Novo Nordisk are very nervous this year because the company is in a high-stakes race to win approval of a new generation of weight-loss drugs. Novo Nordisk is racing with companies such as Vivus (VVUS), Orexigen Therapeutics (OREX), and Arena Pharmaceuticals (ARNA) to get the first U.S. Food & Drug Administration-approved weight loss drug to market in 13 years. 

The potential rewards are tremendous -- but that also makes it very difficult to tell what these shares are worth. The stock has been very volatile in the last six months or so, with shares selling at $95 in October 2011 and $115 in December. I'd watch and wait on this one to see how low the current retreat might take it. I'd love to get this stock at $130, but I certainly wouldn’t turn up my nose at $120. With this post I’m adding it to my watch list.

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Novo Nordisk as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
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