Is Novo Nordisk’s 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. Novo’s 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, let’s consider the competitive threat.
Lilly’s 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 Novo’s daily Victoza in trials. Dulaglutide’s 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
Novo’s recent sales success.
Now, let’s consider the patent risk.
Novo’s 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), Novo’s 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 Novo’s 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
Novo’s cash dividend payout ratio, which measures how much of a company’s 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 Novo’s NovoLog
mealtime insulin. AstraZeneca, whose GLP-1 diabetes drugs Byetta and Bydureon compete against
Novo’s Victoza has the highest payout ratio of the three.
Novo’s dividend yield is a scant 1.3%, far lower than AstraZeneca and Lilly’s 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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