Novo Nordisk shocked investors by slashing its growth forecasts. The new CEO faces a tough start, says Ben Judge.
Danish pharmaceutical firm Novo Nordisk the world leader for diabetes treatments has seen its shares tumble after issuing its second profit warning of the year. Despite a 4% increase in third-quarter sales, Novo halved its long-term profits forecast, spooking investors and driving shares down by 14%.
At one point it lost $20bn of its value in a single day, marking its worst sell off in 14 years, notes Bloomberg's Christian Wienberg. The decline in Novo's shares pulled down the wider Danish market: the all-share index fell by 5.2%, "setting it up to underperform most global indexes this year".
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The problem is the US market, where Novo makes half its profits. It has become "significantly more challenging", according to outgoing chief executive Lars Rebien Srensen, with Novo under pressure from health insurers, middlemen prescription managers and politicians to lower its prices, while facing intense competition from rivals. "We're only just getting into the storm now," said Jesper Brandgaard, the company's chief financial officer. "We can't in any way say that the worst is behind us."
Until recently, the company was one of the biotech sector's darlings. "The investment case for Novo Nordisk is simple," said the Financial Times' Lex column just last month. The number of people in the world diagnosed with diabetes is growing by 4%-5% a year, and all of those people need either generic insulin or newer analogues. Novo produces both, plus other products for managing the condition. In the ten years to 2015, Novo shares returned more than 1,200%, says Wienberg, compared with 66% from the Stoxx Europe 600 index.
But it is this strength that is the company's biggest weakness. Novo Nordisk is the world's largest supplier of insulin, and generates 80% of its sales from its diabetes business. By contrast, Sanofi, the world's second biggest, generates just 20% of its sales from treating diabetes. Sanofi's more diversified product portfolio drove its share price up by 5% after it reported "solid sales momentum" for the third quarter.
The latest fall caps a bad year for Novo. In August its shares fell by 20% after it cut its forecast for profits growth due to intensifying price competition, and the company failed to win new contracts. It is now worth 40% less than it was at its peak in August 2015.
It's a sorry end to Srensen's 16-year reign after being named the world's "best-performing CEO" by Harvard Business Review for two years in a row, partly due to the "fortuitous decision years ago to focus almost exclusively on diabetes treatment". His successor, Lars Fruergaard Jrgensen, "will inherit a bunch of challenges" when he takes over in the new year, says Nathalie Thomas in the FT.
Ben studied modern languages at London University's Queen Mary College. After dabbling unhappily in local government finance for a while, he went to work for The Scotsman newspaper in Edinburgh. The launch of the paper's website, scotsman.com, in the early years of the dotcom craze, saw Ben move online to manage the Business and Motors channels before becoming deputy editor with responsibility for all aspects of online production for The Scotsman, Scotland on Sunday and the Edinburgh Evening News websites, along with the papers' Edinburgh Festivals website.
Ben joined MoneyWeek as website editor in 2008, just as the Great Financial Crisis was brewing. He has written extensively for the website and magazine, with a particular emphasis on alternative finance and fintech, including blockchain and bitcoin. As an early adopter of bitcoin, Ben bought when the price was under $200, but went on to spend it all on foolish fripperies.
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