European pharma has not had a great run recently, but we think we’ve found a diamond in the rough. Novo Nordisk (NYSE:NVO) is a Danish pharmaceuticals company that specializes in treatments for diabetes and haemostasis, the latter of which refers to the human body’s response to blood vessel injury and bleeding. We see long term trends and expanding markets for the indications that NVO focuses on. In particular, diabetes is a fast-growing epidemic in the US, and with NVO being the leading supplier of insulins NVO is our pick in European pharma.
Q1 was uneventful, with a slight revenue miss of 1%. Shares were initially down a few percentage points without a definitive earnings beat, but we view NVO long-term investment opportunity. We are not concerned that Victoza missed the Street’s target of $387 million by $52 million since it is still on track to hit sales of $1.6 billion for the year. Management reiterated that NVO can satisfy the FDA’s requirements for a cardiovascular event analysis in obesity using data from diabetes and obesity studies; we think management is correct based on the positive diabetes data. Meeting the FDA guidelines for efficacy will be an important catalyst in 2013.
The key to our NVO thesis is that we believe the company’s upside potential in hemophilia has not been recognized by the market. Consensus forecasts do not factor in its potential to become a world leader in this arena, and there is a huge opportunity with NVO’s Factor IX (N9-GP) and VIII (N8-GP). Data is expected to be released mid-2013. The major competitor to N9-GP is Biogen Idec’s (NASDAQ:BIIB) Rfixf. BIIB expects to report Phase III data in early 2013 and NVO expects to report Phase III data in mid-2013 as well. Admittedly BIIB has a head start to the tune of approximately six months, but NVO’s product is superior based on reduced-injection frequency and its strong franchise with NovoSeven. Additionally, NVO has a compelling organic growth profile from its GLP-1 analogues for diabetes treatment. NVO’s DegludecPlus has an edge over the current pre-mixed products and pre-mixed insulin. NVO should also benefit from economies of sale in insulin manufacturing, giving it a cost advantage over bio-similar competitors.
The major competitors in the diabetes space are Sanofi’s (NYSE:SNY) Lyxumia, GlaxoSmithKline’s (NYSE:GSK) albiglutide, and Amylin Pharmaceuticals’ (NASDAQ: AMLN) Bydureon and Byetta.
SNY is probably going to use the Lantus patients (cardiovascular) who are obese as an additive treatment since they would benefit from adding a GLP-1 to their existing treatment. Lyxumia has a smaller needle than Bydureon and is easier to titrate. SNY/Zealand has a combination fixed-dose in Phase IIb with Phase III trials set to start in early 2013. This is remarkably similar to NVO’s Degludec/Victoza strategy. We expect more Lyxumia/Lantus data to come at the American Diabetes Association event this year. GSK has made progress on the diabetes front with albiglutide, also a GLP-1 agonist, and showed positive results (it did not show non-inferiority to NVO’s Victoza). AMLN finally saw Bydureon’s approval—looks like third time is the charm. For the week April 20, JPMorgan released data that Bydureon recorded TRx of 3,967 (up 5% week/week) garnering 6.0% TRx share and 10.7% NRx share of the GLP-1 market. We think Victoza and Bydureon are in the best position to take market share.
We believe NVO will be able to generate high single digit sales growth over the new few years. The primary reasons are that Victoza will gain market share, that the new hemophilia projects will contribute significantly to the bottom line in outer years since, that the diabetes business will continue to see growth, and that the conversion to analogues will drive new product sales for Degludec, Degludec Plus and IDegLira. Fund managers Tom Gayner, Jim Simons (see more of Jim Simon’s Picks), Ken Fisher, and Israel Englander are similarly bullish on the stock’s potential. There are a number of catalysts coming up in the next 12 months such as Victoza/Degludec fixed ratio regime Phase III data end 2012, Degludec launch in Q3 after PDUFA on July 29, Victoza Phase III obesity data later this year, and the Qnexa (obesity) PDUFA on July 17 that will impact Victoza’s future opportunities for that indication. We understand that the market has high expectations of a ramp in Victoza sales and the development of the new insulin analogues Degludec and DegludecPlus. Any misses or disappointing data from the three drugs will not be received positively by the market.