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Strong Quarter at Novo Nordisk

BMY NVO

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Novo Nordisk (NVO - Analyst Report) reported third quarter 2012 earnings of $1.74 per American Depository Receipt (ADR), up 24.3% from the year-ago period. Earnings were boosted by strong revenues in the reported quarter.

Revenues, in the third quarter of 2012, increased 20% on a reported basis and 11% in local currency year over year.

For the first nine months of 2012, Novo Nordisk's earnings were $4.88 per ADR, up 19.3% from the comparable period last year.

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

Nine Months 2012 Numbers

In the first nine months of 2012, total revenues grew 11% driven by strong sales in North America (up 19%) and International Operations (up 16%). Sales in China and Europe grew 17% and 2%, respectively.

Geographically, North America was the largest contributor (64%) to total revenues followed by International Operations (20%) and China (11%). Healthcare reforms and pricing pressure in Europe, the US, China and other international markets negatively impacted revenues by 1.5%.

The Diabetes Care segment recorded growth of 15%. Modern insulins generated strong revenues (up 14%) driven by NovoRapid (up 15%), NovoMix (7%) and Levemir (21%). Novo Nordisk'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 sales growth of 64% in the first nine months of 2012. Victoza witnessed growth across all regions. Protein-related product and oral ant-diabetic products sales were up 2% and 1%, respectively, while Human insulins were down 2%.

Sales in the Biopharmaceuticals segment increased 1%. Strong sales of Norditropin (up 8%) contributed to the increase, though partially offset by weaker NovoSeven sales (down 1%) and other product sales (down 3%).

Research and development (R&D) costs and sales and distribution costs increased 9% and 7%, respectively. Novo Nordisk's efforts to develop its pipeline, primarily liraglutide and IDegLira, boosted the R&D expenses in the first nine months of 2012. Higher costs related to marketing in the US and overseas, along with sales force expansions in selected countries were primarily responsible for pushing up sales and distribution costs.

2012 Guidance

Novo Nordisk narrowed its sales growth guidance for 2012 to 10%–12% in local currencies, from the previous guidance of 9%–12%. The guidance is based on the recent performance of Novo Nordisk’s key products. The guidance also includes the impact of competition and estimated headwinds from health care and pricing reforms.

In local currencies, guidance for operating profit growth is expected in the range of 16– 18% (prior guidance: around 15%).

Our Recommendation

We have an Outperform recommendation on Novo Nordisk. The stock carries a Zacks #1 Rank (Strong Buy rating) in the short term.

We are impressed by Victoza's performance since its launch despite the highly competitive GLP-1 market, which includes products like Bristol-Myers Squibb's (BMY - Analyst Report) Bydureon and Byetta.

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