Novo Nordisk Perks Up

We at The Motley Fool often caution investors not to overreact to an occasional bad quarter from an otherwise solid or promising company. I made such an advisement last quarter with Danish insulin company NovoNordisk (NYSE: NVO  ) , and sure enough, the second quarter was a fair bit better for this pharmaceutical company. Sales ticked up 16% as diabetes product revenue grew 15% and biopharmaceutical revenue rose 16%. Margins also improved notably, and profits rose by about 32%.

Insulin analogs continue to be a major source of growth for this company; sales were up 63% for the quarter. Analog insulins continue to gain share in the insulin market, and with the June approval of Levemir, Novo Nordisk now has a complete suite of analogs for the U.S. market. Judging by the data it provided, Novo Nordisk continues to gain market share largely at the expense of Eli Lilly (NYSE: LLY  ) while Sanofi-Aventis' (NYSE: SNY  ) insulin growth seems to be stalling out a bit.

With a second quarter helping to counterbalance a weak Q1, management is now expecting around 10% operating income growth for the full year. That's not spectacular growth, but Novo Nordisk should be able to do better in the future. What's more, the company has little debt, pays a dividend, and has a respectable return on equity.

Investors who only casually follow this sector might feel a bit confused by all of the news surrounding the care of diabetes. One day you read an article about how it's becoming an American epidemic; the next day you read how inhaled insulin or a new pill might reduce or postpone the need for injected insulin.

To some extent, they're all right. Diabetes is a U.S. epidemic that seems to get worse each year. It is also true that newer medicines have slowed the progression to required supplemental insulin, and medicines under development could be even better. That said, I don't believe that Novo Nordisk or any other insulin manufacturer really needs to worry about a drop-off in insulin demand for a long time.

Novo Nordisk isn't a dirt-cheap pharmaceutical stock by normal valuation standards. That said, this company has a pretty stable demand for its product and no real threat of generics. For investors willing to buy and hold a stock for years, Novo Nordisk could still be an interesting play on a serious and growing disease market.

For more Foolish Takes on diabetes care:

Fool contributor Stephen Simpson owns shares of Sanofi-Aventis. The Motley Fool has a disclosure policy.


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