Novo Nordisk disappoints ever so little and takes a big hit–I’d wait to buy

Stocks that trade at a premium don’t need to do much to disappoint. In the case of Novo Nordisk (NVO in New York and NOVOB.DC in Copenhagen), the world’s largest maker of insulin, the disappointment was sales growth of 13% year-to-year that missed Wall Street projections by a percentage point. Net profit climbed by 15% from the first quarter of 2011. In its guidance the company raised its guidance for full-year 2012 sales growth to 8% to 11% in local currency. EBIT (earnings before interest and taxes) are now projected to grow by at least 10%. That’s a very slight tweak from the earlier guidance for “about” 10%.

After the company reported on April 27 the stock fell 4.3% to close at $144.55 in New York. Aas of 3 p.m. New York time on April 30 the shares were trading at $147.01.

Investors expect more from a stock priced at a big premium to its peers—and that’s exactly how Novo Nordisk is priced. The shares trade at 20.3 times projected 2013 earnings per share, according to Credit Suisse, versus a multiple of 11.2 times earnings for the company’s pharmaceutical peers.

That premium is based on Novo Nordisk’s comparative shelter from the patent expirations and generic competition that threaten sales and earnings at peers such as Pfizer (PFE) or Merck (MRK). And on the growth prospects of the global diabetes market. What has been called, rightly I think, a global epidemic of diabetes has produced an increase in the incidence of diabetes in the United States of 90% between 1995-97 and 2005-2007. That increase, the Centers for Disease Control reported in its study of the growth of diabetes, was a result of an aging population—since diabetes incidence increase with age—and increasing obesity. Those trends aren’t limited to the United States and the World Health Organization estimates that there are now 350 million people in the world with diabetes.

Over the last five years earnings at Novo Nordisk have grown by an average of 24.9% a year. Wall Street now projects average annual growth of 17.5% over the next five years. My guess is that with the stock’s current price-to-earnings ratio investors are actually counting on even more.

Hence the sell off on the few signs of bumps on Novo Nordisk’s growth path. Read more

Nothing wrong with the first quarter earnings numbers from Abbott Laboratories (ABT). In fact, I’d call them “strong” and “above expectations.”

In fact the only disappointment has been the market’s failure to put the higher price on the shares that I think they deserve. The company did report 13% earnings growth this morning and still the stock trades at a price to earnings ratio of just 12.4 on trailing 12-month earnings or 12.1 on projected 2012 earnings per share. The shares are up 9.23% in 2012. Not shabby but the gain does trails the 11.27% on the Standard & Poor’s 500. (Abbott Laboratories is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ That’s correct. But the stock is still listed as a member of my Dividend Income portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ and that’s incorrect. I sold it out of that portfolio on February 3, 2012. I will fix this piece of bookkeeping later this week.)

My suspicion, as I’ve noted before, is that at least part of this lag is related to the breakup of Abbott Laboratories into two companies that’s scheduled for completion by the end of 2012. That move is intended to release the market value of some of Abbott’s real but overlooked strengths in nutritionals and diagnostics, for example. I think the split will indeed do that in, say, 2013, but in the meantime it seems to be damping gains in the stock. Could be that investors who would like to own the faster growing new drug company, post split up, or the medical devices/generics/nutritionals company would rather wait until they can buy exactly the piece that they want rather than having to sell off shares in the piece they don’t wish to keep. Read more

It’s been a long time coming, that’s for sure. For what seems like a geologic epoch investing in drug stocks has been about finding an attractive dividend and avoiding getting killed when the patent on a best selling drug expired.

Growth? Forget about it.

But that looks like it’s changing–for some parts of the sector, anyway. For some drug companies, these are actually exciting times. And given the problems that some of the sectors that led the market upward in the first quarter look they might have in the second quarter, the excitement couldn’t be coming at a more welcome time for investors.

Exciting? Drug stocks?

Absolutely.

Sector leader Novo Nordisk (NOVOB.DC in Copenhagen and NVO in New York) and upstart Amylin Pharmaceuticals (AMLN) are in a pitched battle to see who will take the biggest share of growth in the market for diabetes drugs.

At the very end of February a panel of advisers at the U.S. Food and Drug Administration voted 20-2 that the benefits of  Qnexa, a weight-loss drug from Vivus (VVUS) outweigh the risks. An approval of Qnexa or competing drugs from Orexigen Therapeutics (OREX) and Arena Pharmaceuticals (ARNA) could put the first weight-loss drug on the market in 13 years.

A new class of drugs to fight hepatitis introduced by Merck (MRK) and Vertex Pharmaceuticals (VRTX) only last year is already looking at a challenge from a new group of therapies from Bristol-Myers Squibb (BMY), Gilead Sciences (GILD), and Johnson & Johnson (JNJ).

You might notice that the three potential drug opportunities that I’ve just mentioned have three things in common. Read more

Update Abbott Laboratories (ABT)

Got any place better to park your money for 14 months?

That’s the question that Abbott Laboratories’ (ABT) plan to split into two companies poses for investors who own the stock. (Abbott Laboratories is a member of my Jubak’s Picks portfolio http://jubakpicks.com/the-jubak-picks/ )

The plan, announced on October 19, envisions splitting Abbott into two companies with the split up to be complete by December 2012.

One, with $18 billion in sales, would be a focused drug company with ownership of the current Abbott blockbuster Humira. That drug for rheumatoid arthritis is projected to account for $8 billion in sales in 2011. That would be more than 40% of the sales of the new drug company after the split up.

The second, with $22 billion in sales, has been described in most stories as a medical device and diagnostics company. That’s rather misleading. This post split-up company would actually get the biggest part of its sales from nutritionals—28% to the 27% of sales from medical devices. Nutritionals for infants and adults is, I argued when I added the stock to Jubak’s Picks in September 2010, the jewel among Abbott’s units. The business is growing at double-digit rates and expanding margins at the same time—Abbott projects that operating margins for nutritionals will expand by a full 7 percentage points from current levels by 2015.

Not that the rest of the device/diagnostics/nutritionals company is made up of dogs, either. Read more

You can certainly find stocks with a higher dividend yield than the 3.4% that Abbott Laboratories (ABT) paid when I added it to my dividend income portfolio http://jubakam.com/portfolios/ on May 6. (It closed that day at $52.52) But I think you’ll be hard pressed to find a stock paying that much that has the same potential for very safe and steady growth. (See my post http://jubakpicks.com/2011/05/06/do-dividends-suddenly-seem-attractive-as-the-market-tumbles-where-ya-been-all-my-life-check-out-the-latest-update-to-my-dividend-income-portfolio/ for my latest update of that portfolio.)

Abbott Laboratories is among the most balanced of the big U.S. drug companies. Read more