Strong Quarter at Novo Nordisk

Novo Nordisk (NVO - Analyst Report) reported second quarter 2012 earnings of $1.67 per American Depository Receipt (ADR), up 20.1% from the year-ago period. Earnings were boosted by strong revenues in the reported quarter.

Revenues, in the second quarter of 2012, increased by 22% on reported basis and by 13% in local currency basis compared to the same period in 2011.

On a half yearly basis, earnings were $3.14 per ADR, up 17% from the comparable period last year.

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

First Half Numbers

In the first half of 2012, total revenues grew 12% driven by strong sales in North America (up 19%) and International Operations (up 17%). Sales in China and Europe grew 13% and 2%, respectively. Geographically, North America was the largest contributor to total revenues, contributing 64% followed by International Operations (21%), China (9%) and Europe (6%). Japan and Korea's sales contribution were not significant. Healthcare reforms in the US, pricing pressure in Europe, China and other International markets negatively impacted revenues by 1.5%.

The Diabetes Care segment recorded a growth of 15% in local currencies. Modern insulins generated strong revenues (up 15%) driven by NovoRapid (up 15%), NovoMix (7%) and Levemir (22%). The company's most important drug, Victoza is a once-daily human glucagon-like peptide 1 (GLP-1) analogue approved for improving blood sugar (glucose) levels in adult type II diabetes patients. The drug witnessed a sales growth of 73% in the first half of 2012. Victoza sales witnessed growth across all regions. Protein-related products sales were up 2% while Human insulins, and Oral ant-diabetic products were down 1%, and 6% respectively.

Sales in the Biopharmaceuticals segment increased 1%. Strong sales of Norditropin (up 9%) were partially offset by weaker other product sales (down 8%) contributed to the increase. NovoSeven sales remained flat year over year.

Both research and development costs and sales and distribution costs increased 8% each. The company's efforts to develop its pipeline, primarily liraglutide and IDegLira, boosted the R&D expenses in the first half of 2012. Higher costs related to the marketing in the US, International markets and sales force expansion in China were primarily responsible for pushing the SG&A costs up.

2012 Guidance

Novo Nordisk increased its sales growth guidance for 2012 to 9%-12% in local currencies, up from the preliminary guidance of 8%-11%. The guidance includes the impact of potential generic competition and estimated headwinds from health care reform in the US, Europe and China.

In local currencies, guidance for operating profit growth is expected to be around 15% (prior guidance: at least 10%). The effective tax rate is pegged at around 23%.

Our Recommendation

We have an Underperform recommendation on Novo Nordisk. The stock carries a Zacks #4 Rank (Sell rating) in the short term.

Even though impressed by Victoza's performance since launch, we note that the drug operates in a highly competitive GLP-1 market. The market includes Bristol-Myers Squibb's (BMY - Analyst Report) Bydureon and Byetta. Moreover, GlaxoSmithKline (GSK - Analyst Report) and Sanofi (SNY - Analyst Report) are also developing candidates targeting this market. The absence of near-term catalysts at Novo Nordisk is also concerning.