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‘Novo Nordisk and the “Value of Growth”’

Today one of the European market’s angels had its wings clipped and fell back to earth. Novo Nordisk, the Danish-listed pharmaceutical giant opened down 12% in early trade, as its most important new drug, Tresiba, was put on hold for at least three years.

Prior to today, Novo Nordisk had returned 240% in local currency from the end of 2009. The bull case is easy to understand.  The company is a world leader in diabetes care with an estimated 26% market share. Within this, it has nearly 50% of the global insulin market which is dominated by three players who collectively have a more than 90% global market share – Novo Nordisk, Sanofi and Eli Lilly. Primarily due to obesity, the underlying global market is structurally growing at an estimated 8% per annum. Of the three companies, Novo Nordisk is the purest play on the diabetes market. With such a backdrop, investors were happy to pay PE multiples of over 30x at stages during 2012 and are currently paying 20x for this year’s forecast earnings (which will now see downgrades).

At Argonaut we have been highlighting the value of growth within a low growth environment and how this ability to generate growth is being under-valued by the market. Within this context we have outlined how perceived premium multiples, do indeed still offer value. However Novo Nordisk was never one of our examples of such a stock, and the reason was quite straight forward – 33% of the company’s forecast total sales growth from 2012 to 2016 relied on one drug, Tresiba* – which hadn’t yet gained approval in the US (approximately 60% of global basal insulin sales), however sell-side analysts had collectively modelled it as a slam-dunk (aided by existing approvals for the drug in Japan and Europe). Additionally, consensus estimates had bizarrely also modelled that there would be no cannibalisation of Novo Nordisk’s existing insulin products (primarily Levemir ) by Tresiba, even though much of Tresiba’s growth was supposed to come from patients switching from Novo Nordisk’s existing drugs (as well as Sanofi’s Lantus)*.

On Sunday evening Novo Nordisk announced that they had received a Complete Response Letter (CRL) from the American Food and Drug Administration (FDA) for Tresiba. This followed on from an Ad Comm in October last year which voted 8-4 in favour of approval, while voting 12-0 that there was a CV (cardiovascular) signal in the data package. In Sunday’s CRL, the FDA requested additional CV data from a dedicated outcomes trial before it completes its review of the drug - essentially delaying the drug by at least three years and thus wiping out a third of the company’s near term expected revenue growth.

No doubt there will be analysts and investors calling this morning’s move a “buying opportunity”. We would caution against such enthusiasm. There is no doubt Novo Nordisk has a powerful franchise in a niche market, but its growth assumptions will need to be revised. Tresiba is off the table in the US for now, while in Japan and Europe the likelihood of Novo Nordisk being able to push through premium pricing on this drug now seems remote. A timely reminder of the “value of growth”.

*Druganalyst, December 2012

# The figures in this document have been obtained from external sources believed to be accurate at the time of writing however no representation or warranty, either express or implied, is guaranteed in relation to their accuracy, completeness or reliability. The Information is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. Argonaut Capital does not undertake to update or keep current the Information. Any opinions expressed in this document may change without notice.