Novo Nordisk (NVO) reported earnings of $1.29 per American Depository Receipt (ADR), in the first quarter 2011, up 25 cents over the prior-year earnings of $1.04 per ADR. Earnings growth was driven by higher revenues.  Earnings were also 2 cents above the Zacks Consensus Estimate of $1.27.

Quarter in Detail

Total revenues grew 11% (in local currencies) over the prior-year quarter, driven by strong sales of modern insulins (up 11%) and Victoza (up 191%). However, health care reforms in the US, Europe and Turkey pulled down revenues by 3 percentage points in the reported quarter.

All geographic regions witnessed growth in the quarter with North America contributing 45%, international operations clocking 20% and China adding 18% to the local currency growth.

Both the Diabetes Care and Biopharmaceuticals segments did well in the quarter recording growth of 13% and 7%, respectively.

Novo Nordisk’s most important drug, Victoza, for the treatment of type II diabetes, did well in both the US and EU, contributing 45% to the overall local currency growth. Novo Nordisk estimates that around 200,000 patients in the US and around 120,000 patients in the EU are being treated with Victoza currently. Victoza has been approved in China and is expected to be launched there in the second half of 2011.

Pipeline Update

Novo Nordisk conducted a meta analysis based on the completed late stage clinical program (consisting of 17 separate trials) with diabetes pipeline candidates Degludec and DegludecPlus. The analysis confirmed that Degludec led to statistically significant improvement in both overall and nocturnal hypoglycemia versus Sanofi Aventis’ (SNY) Lantus. Novo Nordisk expects to file applications for marketing authorization of the candidates in both the US and EU in the second half of 2011.

Novo Nordisk also announced updated data from a late stage trial which investigated the effect of adding Levemir to the existing treatment regimen of Victoza plus metformin. The trial hit the primary endpoint showing statistically significant improvement in glycemic control in the Levemir supplement group compared to the group receiving only metformin and Victoza. Six-month data from the trial had been previously announced.

The company filed regulatory applications for recombinant factor XIII (NN1841) for the treatment of congenital deficiency in the US in February 2011 and plans to file in the EU in the second quarter of 2011.

Novo Nordisk has discontinued an early stage trial of rapid acting oral insulin as food intake impacted predictability in the current formulation.

2011 Guidance

Novo Nordisk made a few changes to its outlook for 2011. Novo Nordisk continues to expect sales growth of 8–10% in local currencies. The guidance includes the impact of potential generic competition to NovoNorm/Prandin and an impact from the implementation of the health care reform in the US and Europe. The reported sales growth outlook was, however, changed from the prior expectation of 6-5%–8.5% to a range of 4.0%–6.0% due to a weaker US dollar. Health care reforms are expected to hurt revenues by 2–3 percentage points in 2011.

Expectation for reported operating profit was reduced to around 7.5% from the previous figure of 12.5%. However, measured in local currencies, expectations for operating profit continues to be around 15%.

Our Recommendation

We currently have an Outperform recommendation on Novo Nordisk, which is supported by a Zacks #2 Rank (short-term “Buy” recommendation). Novo Nordisk holds an impressive 51% market share of the global insulin market by volume. We are impressed by Novo Nordisk’s biggest drug Victoza’s performance thus far. Victoza is doing well both in the US and Europe. Moreover, we believe that the diabetes pipeline candidates, Degludec and DegludecPlus, also hold key significant importance for long-term growth at Novo Nordisk. We are encouraged by data from Degludec trials which will help in the approvability of the candidates.

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