Novo Nordisk A/S Taps the Growth Brakes

Novo Nordisk (NVO -0.03%) released fourth-quarter earnings on Wednesday. While sales weren't horrible -- increasing 8% year over year in local currencies -- the increase missed expectations and long-term guidance wasn't what investors had hoped for, sending shares lower.

Novo Nordisk results: The raw numbers

Note: Numbers in table are in Danish kroner that Novo Nordisk reports in.

What happened with Novo Nordisk this quarter?

• Revenue increased 8% in local currencies, which is what investors should be focused on. Unlike many other companies that report in U.S. dollars and are therefore hurt by the stronger dollar, Novo Nordisk is helped when U.S. sales in the stronger dollar are converted back to the Danish kroner.
• Modern insulin Levemir was the top growth driver, increasing 22% year over year in local currencies in the fourth quarter.
• Growth of Victoza, which had been the darling of Novo Nordisk's portfolio, has begun to slow. Sales grew 10% year over year in local currencies in the fourth quarter. By comparison, Victoza's full-year growth was 18% in local currencies.
• Victoza, which binds to the GLP-1 receptor to increase insulin production, is in a crowded class, and it appears Novo Nordisk is losing U.S. market share to Eli Lilly's (LLY -2.63%) Trulicity, which was approved in 2014. Eli Lilly now has 11% of the market, cutting into Novo Nordisk's lead that now sits at 56%.
• Novo Nordisk's newest insulin, Tresiba, has now launched in 39 countries, including the U.S. last month. As the company has found in other countries, getting reimbursement is key to how much of the basal insulin market Tresiba can take. Novo Nordisk stopped selling the drug in Germany last month because it couldn't get an acceptable price for the drug.

What management had to say
Novo Nordisk isn't going to give up on Victoza, especially since it has a once-weekly follow-on GLP-1 drug called semaglutide. "We would like to continue to push Victoza in the U.S. to create the strongest possible platform for when we launch semaglutide," said Novo Nordisk's CEO Lars Rebien Sorensen.

"Levemir growth rates in Europe as well as Japan and Korea was affected by the launch of Tresiba in these markets," Sorensen said. With Tresiba launching in the U.S., investors should keep an eye on how the growth impacts Levemir. Capturing patients away from Sanofi's Toujeo or Lantus is better than having them switch from one Novo Nordisk drug to another. On the plus side, at least Novo Nordisk won't have to compete with Eli Lilly's basal insulin peglispro; the company terminated development of the drug in December.

Looking forward
Novo Nordisk will see a variety of data readouts this year, including more data on semaglutide to support its potential approval and data from a clinical trial in type 1 diabetes patients that will hopefully show Tresiba is safer than its rivals.

An FDA decision on Xultophy, which is a combination of Tresiba and Victoza, is expected in the third quarter. Since there hasn't been an insulin/GLP-1 drug combination approved in the U.S., Novo Nordisk expects the FDA to convene an advisory committee to discuss the product.

In conjunction with the earnings release, management laid out long-term guidance that implies a substantial slowdown compared to previous growth. From 2012 to 2015, Novo Nordisk managed a 15% growth in operating profit in local currencies, but the new guidance has dialed that back to 10%. Most of the growth in profits will come from sales growth because management doesn't want to cut back on R&D to increase near-term profits.

Even with the expected slowdown in growth, management made it clear that there's still plenty of cash to reinvest and hand back to investors. The board recommended a 28% increase in the dividend, which will be voted on at the company's annual meeting in March.