Novo reported yet another quarter of double-digit top-line expansion and even stronger earnings growth, which met our already optimistic expectations. We have raised our fair value estimate following the approval of the firm’s next generation insulins (Tresiba and Ryzodeg) in Europe and to account for rolling our assumptions forward by one year. Fourth-quarter sales increased 16% in Danish kroner and 12% in local currencies compared to the same period in 2011.
Victoza and modern insulins remain the primary drivers behind double-digit revenue growth, with strong performance from NovoSeven also boosting sales this quarter. Victoza brought in DKK 2,709 million during the quarter, thus contributing around $1.7 billion for the full year. Novo’s gross margin increased to 85.0% in fourth quarter, up from 82.8% in the prior year, thanks to improved production efficiency, positive pricing dynamics in the U.S., and favorable mix shift as an increased portion of sales go to higher-margin products like modern insulin and Victoza.
Despite high costs to support pre-launch activities for Tresiba, sales and distribution cost growth of 15% in Danish kroner and 11% in constant currencies still fell below topline expansion. However, research and development costs increased 17% and 15%, respectively, in order to support the firm’s extensive pipeline development. Overall, reported operating profit grew 25% (17% in local currencies), and share repurchases allowed adjusted earnings per share/ ADR to grow at the higher rate of 26% over fourth quarter 2011.
In 2013, we expect continued strong performance from the firm’s modern insulin portfolio and Victoza to be further accelerated by the launch of Tresiba in the EU, Japan, and (assuming it receives regulatory approval) the U.S. Novo remains the global leader in the insulin market, with 49% share of the total market and 46% share of the modern insulin market worldwide. Victoza also holds the global market leadership spot, with a 68% value share of the GLP-1 segment (compared to 58% the year prior), which has increased to 6.0% of the total diabetes market (compared to 4.5% in 2011).
In addition to Tresiba’s pending regulatory decision by the FDA, Novo has resubmitted its application for biopharmaceutical drug NovoThirteen in the U.S. and plans to submit IDegLira, a combination treatment of Tresiba and Victoza, this year. We project constant currency growth in the 12% range, ahead of the firm’s 8% to 11% guidance, with earnings growing around 20%.
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