Is Novo Nordisk's Dividend Safe?

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    23-Aug-2014
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Transcript of Is Novo Nordisk's Dividend Safe?

  • Is Novo Nordisks Dividend Safe?
  • Is Novo Nordisks dividend safe? Over 39,000 employees. Markets products in 180 countries. $3.7 billion in Q1 sales. Roughly $2.9 billion from diabetes treatments. 29% market share (in value) of total U.S. diabetes treatment. However, Novo faces risks from competitors and patent expiration. 1. Eli Lilly is awaiting an FDA decision on dulaglutide. 2. Novos Prandin patent expired last August. Sales slid 37% year-over-year in Q1. Novo Nordisk is one of the largest players in diabetes treatment.
  • Competition & Patent Risk First, lets consider the competitive threat. Lillys weekly GLP-1 drug dulaglutide could win FDA approval this year and so far it is the only long lasting GLP-1 drug to perform similarly to Novos daily Victoza in trials. Dulaglutides easier dosing schedule could win away share from Victoza, which posted sales of $2 billion last year. Victoza sales totaled $531 million in the first quarter, up 13% from a year ago, and the drug has been a big part of Novos recent sales success.
  • Patent expiration Now, lets consider the patent risk. Novos Prandin lost patent protection last August and sales slipped 37% to just $77 million in the first quarter. Despite that and rising R&D spending on next generation diabetes treatments like Tresiba and semaglutide (a once-weekly GLP-1 analogue), Novos grown net income steadily over the past five years. It remains to be seen if that can continue, particularly given patent expiration in the EU this year on NovoMix, which had $429 million in sales during the first quarter. However, NovoMix remains protected in the U.S. until 2017 and sales of Novos long-lasting insulin, Levemir, grew 22% last year.
  • Reasons for dividend optimism R&D spending grew 21% in the first quarter compared to a year ago as Novo advanced new products through trials. Xultophy: a Tresiba and Victoza combination drug awaiting EU approval. Ryzodeg: a long lasting once daily insulin that proved non-inferior to NovoMix in trials. Currently awaiting EU approval. Semaglutide a weekly GLP-1 analogue (compared to once-daily Victoza). Tresiba ongoing cardiovascular risk studies for U.S. re-filing. Tresiba is already approved in the EU. A data read out from the cardiovascular trial could come in mid 2015. Novo plans to invest $3.7 billion in programs to develop tablet alternatives to current injectable diabetes drugs, including both insulin and and GLP-1 agonists. Novo believes the market for tablet alternatives to injections could be worth $18 billion in the next decade. Novo is developing new products that could offset patent risk.
  • Cash dividend payout Novos cash dividend payout ratio, which measures how much of a companys operating cash minus capital expenses and preferred dividends is being spent to pay common dividends, is fairly high at 63%. That puts it significantly above Lilly, whose Humalog competes head-to-head with Novos NovoLog mealtime insulin. AstraZeneca, whose GLP-1 diabetes drugs Byetta and Bydureon compete against Novos Victoza has the highest payout ratio of the three.
  • Current yield Novos dividend yield is a scant 1.3%, far lower than AstraZeneca and Lillys 3.79% and 3.31% rates, respectively. Given its high payout ratio and low yield, investors will need Novo to continue growing its top and bottom line if they want to see the company boost its dividend in the future. The company faces challenges, but for now the yield appears safe.
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