Novo Nordisk continues to succeed in the GLP-1 space with semaglutide (Ozempic®, Rybelsus® and Wegovy®).
Highlights of the quarter include initiation of phase 3a trials with oral semaglutide in obesity and ziltivekimab in cardiovascular disease. Novo Nordisk now has late stage clinical trials in all of their therapy areas.
Ozempic® continues to be one of the fastest growing drugs in the world. It was approved in China in May 2021, but is still outsold by Victoza® there, whereas it is the best selling GLP-1 for Novo Nordisk in all other markets.
Rybelsus® was approved in the EU in April 2020, but it is yet to pick up momentum there. Sales in the US have reached DKK 1,199 (USD 189M).
Wegovy® has experienced an excellent launch with ~17k prescriptions 19 weeks after launch. There are currently production bottlenecks. The CEO hopes for supply to catch up with demand by early 2022. The CEO encourages competition to grow the obesity category. Reported sales are currently lumped together with Saxenda®, but a sales breakdown will be made in 2022 according to the CEO. The STEP5 clinical trial results were released, in which Wegovy® demonstrated significant and sustained weight loss in two-year study in adults with obesity.
Tresiba® is growing in all markets except the US. The growth is happening at the expense of Levemir®. Looking at the US implosion of insulin sales this might lead one to question, whether there is a particularly bright future for glucose sensitive insulin (phase 1) and once-weekly insulin icodec (phase 3a).
With initiation of two phase 3 programs within obesity and other serious chronic diseases, Novo Nordisk now has ongoing late-stage clinical trials within all of its therapy areas. The new phase 3 trials are the OASIS I trial (NCT05035095) for oral semaglutide in obesity and the ZEUS trial (NCT05021835) for Ziltivekimab.
Novo Nordisk acquired Ziltivekimab from Corvidia Therapeutics in 2020 to expand their presence in cardiovascular disease.
The ZEUS clinical trial (NCT05021835) is a research study to look at how Ziltivekimab works compared to placebo in people with cardiovascular disease, chronic kidney disease and inflammation.The study is conducted to see if ziltivekimab reduces the risk of having cardiovascular events (for example heart attack and stroke) in people with cardiovascular disease (CVD), chronic kidney disease (CKD) and inflammation.
It follows the completion of the phase 2 RESCUE trial. The aim is to have at least one CVD product approved and launched between 2024 and 2028.
Oral semaglutide in obesity
The OASIS I trial (NCT05035095) investigates oral semaglutide in terms of weight loss in overweight individuals. The trial has an estimated completion date in H1 2023 just like the SURMOUNT-4 study (NCT04660643) of Tirzepatide in obesity from Eli Lilly. Semaglutide would be the first oral GLP1 in obesity.
Jardiance® from Boehringer Ingelheim and Eli Lilly is the best selling SGLT2 drug and has recently shown consistent cardio-renal benefits in adults with heart failure.
Tirzepatide from Eli Lilly was shown in March in the SURPASS-2 study (NCT03987919) to achieve superior A1C and body weight reductions compared to injectable semaglutide in adults with type 2 diabetes. FDA and EMA approval and launch is expected in 2022. A priority review is expected 8 months after submissions.
Danuglipron (PF-06882961) in type 2 diabetes is a small molecule drug (SMD) and GLP1 receptor agonist. It is being developed by Pfizer and phase 1 results have been published.
Novo Nordisk sales and operating profit grew at 12% and 9%, respectively, at constant exchange rates. The FDA approved the once-weekly injectable anti-obesity drug Wegovy® (semaglutide) on June 4th.
The figures below summarize the global sales for Novo Nordisk by geography, by drug and by drug class. All geographic markets have experienced growth, but Victoza® and Levemir® have curbed growth in the US.
Within the injectable GLP1 class Ozempic® sales continue to grow at the expense of Victoza®. Within the insulin class Tresiba® sales continue to grow at the expense of Levemir®, although it is less pronounced than within the GLP1 class.
Novo Nordisk can attribute the majority of its growth to the GLP1 class.
The global GLP1 market share has increased from 49.1% to 51.5% led by Ozempic® in all markets, whereas the insulin market share has decreased from 44.6% to 43.9%.
Novo Nordisk and Eli Lilly continue to see growth thanks to the GLP1 class (Ozempic® and Trulicity®), whereas sales of Januvia® at Merck and Lantus® at Sanofi is deteriorating.
The FDA approved Wegovy® – once-weekly injectable semaglutide – on June 4th. Wegovy added more than 8,000 prescriptions within the first five weeks; it took Saxenda® (once-daily injectable liraglutide) 4 years to achieve the same. The STEP trials showed semaglutide to be superior to liraglutide in terms of weight loss. Wegovy® might cannibalize Saxenda®. However, 50% of Wegovy® prescriptions (TRx) are new to the anti obesity medication class in the US.
Novo Nordisk is not cheap at a forward P/E of 30. And the current share price does probably not offer the best entry point, but it’s worth remembering that Novo Nordisk has various moats and advantages. It is protected by high barriers to entry for biosimilars, has a long history of organic growth, has a focused approach with diabetes, obesity and cardiovascular diseases, has low costs and has little debt to name just a few.
Novo Nordisk has gained market share in diabetes (29.2%), GLP-1 (49.9%) and insulin (44.5%).
The gain in market share has happened with a change in market value in the US as a backdrop; i.e. GLP-1 up and insulin down. As a consequence approximately 70% of sales in the US did not exist 5 years ago.
Diabetes and GLP-1
In the US Novo Nordisk GLP1s command a 60.2% NBRx and 49.6% TRx market share, which is driven by Ozempic® (once weekly injected semaglutide) and Rybelsus® (oral semaglutide).
The uptake of Rybelsus® has however been curbed by COVID-19, but market access in the US is now approximately 85%.
In a similar fashion sales of Trulicity® have increased by 9% but it has lost market share as a proportion of both prescriptions and market value.
Ozempic® might face competition from Tirzepatide in the future.
Diabetes and insulin
As already mentioned insulin is deteriorating rapidly in the US, which is thanks to biosimilars such as Basaglar® and Admelog®.
Insulin icodec phase 3 clinical trial results might be available in the second half of 2021.
The glucose sensitive insulin NN1845 has been added to phase 1.
The uptake of Saxenda® has been put on hold by COVID-19 as demonstrated by the reduction in new prescriptions and sales.
A decision on injected semaglutide for obesity is expected in Q4 or Q1. Getting oral semaglutide approved for obesity would be the next logical step. Eli Lilly is expecting their phase 3 primary endpoint results on Tirzepatide for obesity in June 2022.
The first and second quarter of 2020 were unusual in many ways. More than a third of S&P500 companies temporarily or permanently withdrew guidance for the full year due to uncertainty surrounding impacts from COVID-19 according to FactSet. This article seeks to visualize the growth in each of the two quarters by sector and industry.
The bubble plot below shows the growth in Q1 on the x-axis and Q2 on the y-axis for selected sectors, industries and companies of the S&P 500 and the Russell 3000. The marker sizes represent market capitalization. The colors represent sectors.
Some companies are outliers and are not displayed in the bubble charts. Instead a time series of their revenue is plotted below. Zillow ($ZG) is one of these outliers. In Q1 revenue increased by 148% due to Zillow Offers growing 499%. Vertex ($VRTX) had Trikafta® approved in October 2019 and it is currently one of the fastest growing drugs. Beyond Meat ($BYND) grew by triple digits in Q1. Beyond Meat ($BYND) grew by triple digits in Q1 and is an outlier.
In Basic Materials the copper miner Freeport McMoran ($FCX) experienced a slump. The copper price has since rebounded by 50% from $2 to $3 per pound.
COVID-19 did not affect all entertainment companies. The concerts of Live Nation ($LYV), the Grands Prix of Formula One ($FWONA) and the theme parks of Disney ($DIS) were affected, whereas streaming services such as Netflix ($NFLX) and Spotify ($SPOT) and gaming thrived. The real estate service Zillow ($ZG) grew by triple digits in Q1 and is an outlier.
The Consumer Cyclical sector saw some big shifts within and between industries in Q1 and Q2.
Some of the industries most impacted by COVID-19 were Casinos & Resorts – e.g. Las Vegas Sands ($LVS), Wynn Resorts ($WYNN), MGM Resorts ($MGM), Caesars Entertainment ($CZR) – Travel Services – e.g. Booking ($BKNG), Expedia ($EXPE), TripAdvisor ($TRIP) – Cruise Lines – e.g. Royal Caribbean ($RCL), Norwegian Cruise Line ($NCLH), Carnival ($CCL) – Hotels – e.g. Hilton ($HLT), Hyatt ($H), Marriott ($MAR).
The internet retailer Overstock ($OSTK) experienced triple digit growth in Q2. Amazon ($AMZN) continued its growth trajectory in Q1 and Q2.
The retailer Dick’s Sporting Goods ($DKS) is predominantly brick and mortar, but it saw triple digit online growth in Q2. Other retailers that saw growth in Q2 include Tractor Supply Company ($TSCO) and the home improvement retailers Lowe’s ($LOW) and Home Depot ($HD).
Residential Construction such as Pulte Homes ($PHM) has done well in the previous two quarters, which is probably attributable to the low interest environment and the low mortgage rates. PennyMac Financial Services ($PFSI) and other mortgage finance companies also experienced growth in Q2.
Restaurants not doing deliveries lost revenue. Starbucks ($SBUX) and McDonald’s ($MCD) revenue fell by 38% and 30% respectively in the quarter ended June, whereas Domino’s Pizza ($DPZ) did much better with 16% growth in Q2.
Auto and RV manufacturers
The auto manufacturer Tesla ($TSLA) experienced a halted revenue growth in Q2. The US, German and Japanese auto manufacturers such as Ford ($F), GM ($GM), Fiat Chrysler ($FCAU), Toyota ($7203.T), Volkswagen ($VOW.DE), Daimler ($DAI.DE) and BMW ($BMW.DE) have experienced a slump in Q2, which quickly manifested itself in railroad volumes, which are again returning to normal.
EV registrations in Europe were up 131% YoY in July, but Tesla unit sales imploded by 76% YoY in Europe in July.
RV manufacturers such as Winnebago ($WGO) and Thor Industries ($THO) did not see a contraction of revenue like the auto manufacturers.
In Consumer Defensive the bleach boom lifted sales at Clorox ($CLX). The companies Chegg and 2U operating in the industry Education & Training Services outpaced all other companies.
Lockdowns of on-site premises have affected the breweries. Despite this the brewer Boston Beer ($SAM) saw its sales increasing in Q2 and not only due to the acquisition of Dogfish Head.
In retail grocery stores such as Kroger ($KR) and discount stores such as Walmart ($WMT) experienced growth in both Q1 and Q2. The discount store Dollar General ($DG) grew the fastest and experienced comparable sales growth of 21.5% in May, 17.9% in June and 17.2% in July.
The plunge in oil prices affected Oil & Gas that coincided with the outbreak of COVID-19 and the oil price war between Russia and Saudi Arabia. In Energy most Oil & Gas companies took a severe beating, when oil futures briefly went to single digits in mid April. Q2 revenue at Exxon Mobil and Chevron dropped by more than 50%. Exxon Mobil leaves the Dow Jones Industrial Average at the end of August. Exploration & Production and Refining & Marketing was in general more affected than Midstream and Equipment & Services.
Financial Services was a mixed bag. COVID-19 affected credit card companies such as Visa ($V), Mastercard ($MA) and American Express ($AXP). On the contrary PayPal ($PYPL) continued its growth trajectory. The increased trading had a positive effect on exchanges ($CBOE, $NDAQ, $ICE). Morgan Stanley ($MS) and Goldman Sachs ($GS) both experienced negative growth in Q1 but positive growth in Q2 as did the low cost broker Interactive Brokers ($IBKR) and JP Morgan ($JPM).
Increased commission fees drove the growth at Interactive Brokers.
In Healthcare the companies Moderna ($MRNA), Translate Bio ($TBIO), Novavax ($NVAX) doing COVID-19 vaccine research saw triple- and quadruple-digit growth in Q2 due to government grants and collaborations with big pharma and they have thus been excluded. Due to new collaborative agreements the outliers Assembly Biosciences ($ASMB) and ChemoCentryx ($CCXI) have also been excluded. Qiagen ($QGEN), which nixed their merger agreement with ThermoFisher ($TMO), experienced growth due to COVID-19 testing. No healthcare company experienced as much revenue growth in Q2 as Teladoc Health ($TDOC), which was already growing at a steady rate just like Dexcom ($DXCM) and Tandem Diabetes Care ($TNDM), which both operate in the diabetes field. Other fast growers are Twist Bioscience ($TWST), NovoCure ($NVCR), CareDx ($CDNA) and Veeva Systems ($VEEV).
Lots of industrial companies have been affected by COVID-19, but none as much as the airlines ($LUV, $AAL, $UAL, $DAL, $JBLU, etc.) and the aviation industry; e.g. Boeing ($BA), General Electric ($GE), Spirit AeroSystems ($SPR), etc.
The railroads experienced a steep decline in traffic in Q2, but weekly volumes have recovered significantly since then.
Railroad revenue shrank due to auto volumes.
In Real Estate the Hotel & Motel REITs ($APLE, $HST, $RHP, $PK) have seen revenue declines of nearly 100% in Q2. The retail REITs have seen their revenue decline in Q2 due to some tenants being unwilling to pay the rent and others going bankrupt. The merger between the retail REITs Simon Property Group ($SPG) and Taubman Centers ($TCO) was cancelled.
In Technology Microsoft ($MSFT) was one of many software companies growing in Q1 and Q2. The semiconductor companies Intel ($INTC), KLA Corp ($KLAC), AMD ($AMD), Teradyne ($TER) all experienced positive revenue growth in Q1 and Q2 despite some of them having murky clouds ahead of them. The ride sharing services Uber ($UBER) and ($LYFT) saw their revenue plummeting in Q1 and Q2. Uber experienced less of a decline due to deliveries with Uber Eats.
In Utilities the water utilities ($AWK, $AWR, $CWT) have been less affected than the gas utilities.
More than 90% of all Russell 3000 companies have now reported a full quarter impacted by COVID-19; whether it’s from March to May – e.g. General Mills ($GIS) and Adobe ($ADBE) – April to June (i.e. most companies) or May to July – e.g. Walmart ($WMT) that reported on August 18th. Broadcom ($AVGO), Campbell Soup ($CPB) and Cooper Companies ($COO) will report for the fiscal quarter ended at the end of July on September 3rd. The figures will be updated accordingly.
Some companies such as industrials might have had large backlogs and will only have their revenue affected in upcoming quarters. It’s more relevant to look at guidance and outlook for the future in these cases.
Acquisitions and divestitures
The displayed growth is the non-organic GAAP growth. Significant acquisitions and divestitures within the past six quarters disqualified companies from inclusion. Some of these are Bristol-Myers ($BMY) acquiring Celgene ($CELG), AbbVie ($ABBV) acquiring Allergan ($AGN), Occidential ($OXY) acquiring Anadarko ($APC), FIS ($FIS) acquiring Worldpay ($WP), Fiserv ($FISV) acquiring First Data ($FDC), Wabtec $(WAB) acquiring GE Transportation, Transdigm ($TDG) acquiring Esterline ($ESL), Walt Disney ($DIS) acquiring 21st Century Fox by Disney, Truist ($TFC) after merger between BB&T ($BBT) and SunTrust Banks ($STI), ViacomCBS ($VIAC) after merger between Viacom and CBS. The gold miner Newmont Mining ($NEM) is excluded, because it acquired the Peñasquito gold mine in Mexico from Goldcorp in April 2009. DowDuPont ($DWDP) spun of Corteva ($CTVA) and DuPont ($DD) in 2019 and was renamed Dow Chemical ($DOW) and neither of these companies are displayed. NortonLifeLock ($NLOK) sold Symantec to Broadcom. VF Corp ($VFC) divested Kantoor Brands ($KTB).
Not all growth creates value and in some cases growth is actually negative when adjusted for shareholder dilution. The table below summarizes the shareholder dilution and revenue growth YoY for Q2.
Once more Humira® from AbbVie is the best selling drug of the quarter ($4,837M) despite headwinds in Europe from biosimilars Amgevita®, Amsparity®, Halimatoz®, Hefiya®, Hulio®, Hyrimoz®, Idacio® and Imraldi®. In the US Humira® will in 2023 lose market exclusivity to the biosimilars Amjevita®, Cyltezo®, Hyrimoz®, Hadlima®, Abrilada® and Hulio®. AbbVie upon acquisition of Allergan has become less dependent on the patent expiration of Humira®.
Keytruda® from Merck continues to receive FDA approvals and could perhaps be the best selling drug in the world before the end of next year.
The best selling antidiabetic and antiviral drug is still the GLP1 receptor agonist Trulicity® (dulaglutide) from Eli Lilly and Biktarvy® from Gilead Sciences, respectively. The combined sales of the GLP1 receptor agonists Ozempic® (once weekly subcutaneous semaglutide) and Victoza® (once daily subcutaneous liraglutide) from Novo Nordisk however exceed that of Trulicity®.
Biktarvy® is currently the best selling oral drug ($1604M). In the future it could perhaps be the antidiabetic drug Rybelsus® (semaglutide) from Novo Nordisk. The antidiabetic drugs Januvia® and Janumet® from Merck reached combined annual peak sales of approximately $6B. The GLP1 receptor agonist semaglutide is a peptide, but it is available as a tablet (Rybelsus®) thanks to advances in oral peptide therapeutics.
Below the best selling drugs are visualized by company and by therapeutic area and vice versa.
Fastest growing drugs
The fastest growing drug value wise is the triple combination drug Trikafta®/Kaftrio® (ivacaftor+tezacaftor+elexacaftor) from Vertex Pharmaceuticals for the treatment of cystic fibrosis, which was approved by the FDA less than a year ago and by the EMA less than three months ago, followed by Keytruda® from Merck, Biktarvy® from Gilead Sciences, Dupixent® from Sanofi and Ozempic® from Novo Nordisk.
Ozempic® is the fastest growing drug percentage wise (~108%) followed by Venclexta® from AbbVie (~79%) and Dupixent® (~71%).
The details on semaglutide as a subcutaneous (Ozempic®) and oral (Rybelus®) antidiabetic drug and the clinical trials as an antiobesity drug are covered in different blog posts on Novo Nordisk.
For the 2nd quarter sales were DKKm 30,006 (-0%), gross profit was DKKm 25,234 and operating income was DKKm 13,838 (+3%).
In the US GLP1 for diabetes increased by 19%, whereas insulin decreased by 34%.
CEO Lars Fruergaard Jørgensen
“The U.S. sales decline was driven by lower realized prices due to an unfavorable channel mix, rebate enhancements, the launch of additional affordability programs and changes in coverage gap legislation.”
Sales of Ozempic® increased in the US and EMEA, whereas sales of Levemir® and Victoza® decreased in the US.
Diabetes – GLP1s – Ozempic® and Victoza®
In the US once-weekly injected GLP-1 Ozempic® grew (93%) at the expense of once-daily Victoza® (-34%). In EMEA sales of Ozempic® increased by more than 200% to DKKm 604. Sales of Ozempic® were registered for the first time in China, where Victoza® currently has more than of 90% of the GLP-1 market share by value.
Insulins – Levemir® and Tresiba®
In the US the insulins Levemir® (-57%) and Tresiba® experienced negative growth of -57% and -37%, respectively. Sales of Levemir® decreased by approximately 20% in EMEA.
Novo Nordisk thanks to Saxenda® has a market share of 60.5% of the global obesity prescription drug market. Saxenda® was impacted by fewer patients initiating treatment due to COVID-19. New guidelines in Canada are the first to recognize obesity as a chronic illness, which if followed by the US and others could grow the market value significantly; a market which Novo Nordisk expects to at least double.
CEO Lars Fruergaard Jørgensen
Sales growth was negatively impacted by fewer patients initiating treatment due to COVID-19. Our strategic aspiration is to move to more than is to more than double sales in obesity by 2025. In support of that, Saxenda has been launched in 48 countries globally, and we continue to invest in market development activities.
Hemophilia – NovoSeven® and NovoEight®
The market share in hemophilia is mostly decreasing due to the growth of Hemlibra® from Roche rather than the decline of NovoSeven® and NovoEight®.
CEO Lars Fruergaard Jørgensen
For hemophilia, the declining sales of 1% were driven by lower NovoSeven sales, partly reflecting reduced elective surgeries and bleedings due to lockdowns, but partly offset by the continued global rollout of the new products, Refixia and Esperoct.
Obesity – Semaglutide
In May and June the weight loss results from the previously discussed STEP1, STEP2, STEP3 and STEP4 phase 3 trials on injected semaglutide for obesity were released. Injected semaglutide for obesity could happen in 2021. The SELECT trial (NCT03574597) regarding cardiovascular outcomes is estimated to be completed by 2023.
The SUSTAIN FORTE study (NCT03989232) compares the effect of two doses of semaglutide (1.0 mg and 2.0 mg) in people with type 2 diabetes (T2D) and results are expected in Q4.
CSO Mads Krogsgaard Thomsen
So I can say with the confidence that the SUSTAIN FORTE trial, in my mind, will show a very powerful lowering both of glucose and body weight.
Obesity – AM833 and AM833+semaglutide
On June 18th Novo Nordisk reported on the completion of the AM833 phase 2 trial and the AM833+semaglutide phase 1 trial. The weight loss with the peptide AM833 exceeds that of liraglutide. The weight loss with AM833+semaglutide exceeds that of semaglutide alone.
Novo Nordisk has discontinued trials on their co-agonist and tri-agonist.
Novo Nordisk CSO Mads Krogsgaard Thomsen
Regarding some other GLP-1-related clinical obesity projects we’ve been pursuing, namely, the coagonist and tri-agonist projects, we’ve decided to terminate both projects. This decision is based on the strong obesity data obtained for semaglutide and AM833 that, in aggregate, have raised the innovation bar for future Novo Nordisk obesity care and we’ve, therefore, prioritized our resources accordingly to achieve the best possible patient outcomes and product benefit risk profile.
This follows the discontinuation of the oral GLP-1 analogue OG2023SC in 2019Q3 because of better oral formulations of semaglutide. At Eli Lilly the dual GIP/GLP1 agonist Tirzepatide is in phase 3 (diabetes and obesity) and phase 2 (NASH). The phase 3 tirzepatide cardiovascular outcome study SURPASS-CVOT has been initiated.
Tirzepatide was mentioned on both the Novo Nordisk and Eli Lilly earnings calls.
Eli Lilly SVP Michael B. Mason
For tirzepatide, we’re glad to see that you were wowed by our type our Phase II data in for patients living with type two diabetes. I think the best thing really to do is to go back and take a look at the Phase II clinical studies. I mean we saw at the 15-milligram dose up to 2.4% A1c reduction and weight loss up to 12.7% versus placebo in just six months of study. So we’re excited to see how tirzepatide can perform in this patient population and longer studies in Phase III. There’s nothing to tell us that we won’t see exciting data coming out of the Phase III. We don’t have any new information that suggests otherwise. So we are incredibly confident about tirzepatide, not only in type two diabetes, but also we’re excited to see its potential in NASH and obesity. So our enthusiasm remains very, very high.
Novo Nordisk CSO Mads Krogsgaard Thomsen
Obviously, tirzepatide being a GLP-1/GIP agonist will, in my mind, based on data we’ve seen so far, unlike the combination of AM833 and sema, which is an amylin analogue and a GLP-1 analogue, there will probably be additivity of the GI side effect profiles of the GIP and the GLP-1 components. At least this is what we have seen both in a trial we’ve conducted ourselves years back with MAR709, our dual-agonist, but also so far in the trial in Phase II and the escalation trials that our colleagues at Eli Lilly have done. But we will see the data late this year and I guess during the course of next year.
Hemophilia A – Mim8 and gene editing
Growth hormone deficiency – Somapacitan
Novo Nordisk thanks to Norditropin® remains the leader in the human growth hormone disorder market with a value market share of 34.2%. Somapacitan has entered phase 3 (REAL4 and REAL5 trials).
Diabetes – Insulin Icodec
The phase 3 trial on once-weekly insulin icodec is expected to start before the end of the year. On June 14th Novo Nordisk reported that once-weekly insulin icodec showed comparable efficacy and safety to once-daily insulin glargine U100 in phase 2 trial.
On June 11th Novo Nordisk announced the $2.1B acquisition of Corvidia Therapeutics and their lead candidate ziltivekimab, which is a monocloncal antibody targeting IL-6 and reducing cardiovascular events.
This follows the agreements in Q4 of 2019 with Dicerna to discover and develop RNAi therapies for liver-related cardio-metabolic diseases and with bluebird bio to develop in vivo genome editing candidates for hemophilia and other severe genetic diseases.
The largest sectors and companies of the S&P 500 by market capitalization have changed over time. Prior to the dot-com bubble bursting in March 2000 the technology sector made up a third of the S&P 500 thanks to companies such as Microsoft, Cisco, Intel, Lucent Technologies, IBM, America Online and Oracle.
2007-2008 financial crisis
Leading up to the 2007-2008 financial crisis the most valuable sector was the financial sector and some of the most valuable companies were ExxonMobil, General Electric, Citigroup and AIG.
The two figures below show the composition of the S&P 500 at the peak of October 9th 2007 and the bottom on March 9th 2009.
Amazon was added to the S&P 500 on November 18th 2005. and Google was added on April 3rd 2006 after going public in August 2004. However, Berkshire Hathaway was not added until 2010 after a split into A and B shares, and Visa and Facebook did not go public until March 2008 and May 2012, respectively.
The Global Industry Classification Standard (GICS) was changed by MSCI and S&P in 2018. The Telecommunication Services sector was renamed to Communication Services and contains the two industry groups Telecommunication Services and Media & Entertainment. Alphabet and Facebook are two companies in this sector.
2020 stock market crash
Approximately 200 net additions have been made to the S&P 500 since the 2007-2008 financial crisis.
Today (July 2020 following the 2020 crash) the top five (Apple, Microsoft, Amazon, Alphabet and Facebook) make up a quarter of the S&P 500, which is almost unprecedented. The technology sector is the largest and the healthcare sector in 2nd (J&J, UnitedHealth, Amgen, etc.) is larger than the financial sector in 3rd (Berkshire Hathaway, Visa, JP Morgan, etc.). The sectors Communication Services (Alphabet, Facebook, Comcast, Disney, Netflix, etc.) and Consumer Cyclical (Amazon, Home Depot, McDonald’s, etc.) are 4th and 5th. The energy sector is only the 10th largest sector following the 2020 oil price war and ExxonMobil is still the most valuable company in the sector.
The three figures below show the sector composition of the S&P 500 at the February 19th peak, the March 23rd bottom and today (July 10th).
Companies that disappeared
Some companies that were in the S&P 500 before september 2008 have since disappeared not only from the index but entirely. Some merged, some went bankrupt, some were split up and some went private.
Chesapeake Energy ($CHK) filed for bankruptcy in June 2020. Diamond Offshore Drilling ($DO) filed for bankruptcy in April 2020. Frontier Communications ($FTR) filed for bankruptcy in April 2020. J. C. Penney ($JCP) filed for bankruptcy in May 2020.
Allergan ($AGN) was acquired by AbbVie ($ABBV) in May 2020. AbbVie itself was spun off from Abbott in 2013. United Technologies ($UTX) merged with Raytheon ($RTN) in april 2020 after spinning off Otis ($OTIS) and Carrier ($CARR). Spring Corporation ($S) merged with T-Mobile US ($TMUS) in April 2020.
AK Steel Holding ($AKS) was acquired by Cleveland-Cliffs Inc. ($CLF) in 2020. Altera ($ALTR) was acquired by Intel ($INTC). Fortune Brands was split up in 2011 and Beam ($BEAM) was acquired by Suntory in 2014. Compuware ($CPWR) was acquired by BMC Software in 2020. DELL ($DELL) Dell went public in 1988, private in 2013 and public again in 2018. Dow Chemical ($DOW) merged with DuPont (now $DD) in 2017 and was spun off from DowDuPoint ($DWDP) in 2019. Gannett ($GCI) in 2019 merged with New Media Investment Group, parent of GateHouse Media, which itself went bankrupt in 2013, and continued as Gannett. Ingersoll Rand ($IR) merged with Gardner-Denver in 2020 to form Trane Technologies. Jacobs Engineering Group changed its ticker from $JEC to $J in 2019. Life Technologies ($LIFE) was acquired by Thermo Fisher in 2014. Motorola Mobility ($MMI) was acquired by Google ($GOOG) in 2012. News Corp ($NWSA) spun off 21st Century Fox (FOXA) in 2013. BB&T acquired SunTrust ($STI) to form Truist Financial ($TFC). Sunoco ($SUN) was acquired by Energy Transfer Partners ($ETP) in 2012.
Novo Nordisk is with the exception of the postponement of new clinical trials mostly unaffected by COVID-19. Sales in Q1 were however positively affected by stock piling of insulin. Growth continues to be spearheaded by Ozempic®, whereas Victoza® and Levemir® in the US continue to lead the decline. Rybelsus® revenue totaled DKKb 229 in the US in Q1. Rybelsus® was approved for the treatment of adults with type 2 diabetes in the EU on April 4th.
Novo Nordisk is experiencing positive GLP1R growth in the US due to Ozempic® and despite of Victoza®. Negative growth for insulin is led by Levemir®.
Novo Nordisk and Eli Lilly are both experiencing GLP1R growth in the US thanks to Ozempic® and Trulicity®, whereas Victoza® is declining.
Saxenda® for the treatment of obesity is also growing within and outside the US.
Eli Lilly has the dual GIP/GLP1 receptor agonist Tirzepatide (LY3298176) in phase 3 for diabetes (SURPASS) and obesity (SURMOUNT1 / NCT04184622), but it has gastrointestinal issues such as nausea, diarrhea and vomiting. The cardiovascular risk outcome trial (NCT04255433) is set to start this year.
Insulin is declining in the US led by Levemir® from Novo and Lantus® from Sanofi. Tresiba® (daily injection) is holding its ground in the US. Novo Nordisk has long acting Insulin Icodec (weekly injection / LAI287) in phase 2. The initiation of phase 3 could be affected by COVID-19.
Bloomberg – Novo Nordisk Joins Other Drugmakers With Gains on Virus Stockpiling
Reuters – Novo Nordisk’s drug sales boosted by virus-related stockpiling
Bloomberg – Novo Nordisk CEO on Earnings, 2020 Outlook, Coronavirus
Early Rybelsus® uptake further supports GLP-1 NBRx and TRx market leadership in the US
Novo Nordisk experiences growth among the GLP1R class of drugs, but this is offset by the decline of insulin in the US.
The diabetes world market as a whole across companies and across drugs is growing outside the US.
Growth of the sale of anti-diabetic drugs is experienced by Eli Lilly within and outside the US and by Novo Nordisk outside the US, whereas Merck, Sanofi and AstraZeneca are all declining in the US.
The GLP1R drug class (e.g. Ozempic® from Novo) is growing in the US, whereas insulin (e.g. Lantus® from Sanofi), DPP4 (e.g. Januvia® from Merck) and SGLT2 (e.g. Invokana® from J&J) are all declining in the US.
Organic net sales down 2% due to volume/mix declines in response to higher pricing in the US and to a lesser extent lower pricing in Canada
Further impairments of goodwill (453 USDm) and intangible assets (224 USDm)
Strategy presentation will be in early May and not in March. No guidance or outlook for 2020 has been presented.
Bonds downgraded to junk by S&P and Fitch.
Despite headwinds Kraft Heinz can maintain its dividend and still pay down the debt.
Kraft Heinz issued a press release on their Q4 earnings on February 13th. Kraft Heinz pays an annual dividend of approximately $500M and has debt of approximately $29B. Is Kraft Heinz able to maintain the current dividend while paying down the debt? CFO Paulo Basilio had the following comments on the earnings call regarding the dividend.
Finally, earlier today, we, together with our Board of Directors, announced that we are maintaining our current dividend. We believe our cash generation will remain at healthy levels, fully fund our plans and initiatives and allow us to continue meeting all our obligations as we transform the business and return Kraft Heinz to sustainable growth.
For instance, we will meet all of our 2020 debt maturities from cash already on hand. At the same time, we will not sacrifice necessary investments in the business because we are even more confident in our long-term prospects behind our new enterprise strategy, portfolio prioritization and the growth initiatives we will unveil in May. After meeting our obligations and invest in the business, maintaining a strong dividend to shareholders is a priority of the company, especially during this important period of transformation.
Investment-grade status also remains important to us, but we understand that the decline of our leverage may not come as rapidly as desired. We will utilize excess cash generation as well as potential divestiture proceeds to reduce leverage below 4x as soon as practical. And regarding the prospect of divestitures, we will continue to evaluate opportunities that are consistent with our strategy, in no rush and with price discipline as always.
With just over $6 billion in adjusted EBITDA and considering cash interest expense, taxes, patient contributions, working capital and capital expenditures, we generated roughly $2.8 billion of cash in 2019 that was available for dividend and debt reduction. This was closer to $3 billion, excluding tax repaid on divestitures. As a result, and together with divestiture proceeds, we reduced net debt by $3 billion in 2019, closing the year with nearly $2.3 billion of cash on balance sheet. These are critical variables to consider as we think about our ability to meet our commitments as we undertake our turnaround and business transformation, which brings me to our financial outlook.
To begin, I think it’s important to recognize that 2020 will be the first full year of what we expect will be a multiyear turnaround. For our first phase in 2020, specifically, we have set three priorities: one, establish a strong base of sales and earnings; two, rebuild the underlying business momentum; and three, continue to reduce debt, while maintaining our current dividend.
CFO Paulo Basilio on the Q4 earnings call.
Due to asset sales and continued strong cash flow from operations debt has been reduced, but EBITDA is also lower than two years ago, and thus the ratio between the two has remained somewhat constant above 4x.
The US is by far the biggest and most important geographic segment. Adjusted EBITDA and the adjusted EBITDA margin have stabilized in the US segment.
Maturity dates on long-term debt have been pushed forward in time. 2 USDb of 3.950% US senior notes are due July 2025 (US50077LAK26). Other than that little refinancing is necessary in the short term.
Kraft Heinz spends a bit more than $300M on interest payments each quarter.
Kraft Heinz will be paying an overall interest rate on its long-term debt of approximately 4.7% in 2020, which is more than both European peers (Danone 2.4%, Unilever 2.5%, Nestlé 3.3%) and US peers (Campbell’s 4.2%, Conagra 3.7%, General Mills 3.6%, PepsiCo 3.5%, Kellogg’s 3.2%, Mondelez 2.6%). Interest payments are expected to make up approximately 5.4% of revenue in 2020 (Unilever 1.2%), which is a lot compared to the fact that operating margins are approximately 20%.
Despite the debt maturing in 2025 carrying lower interest rates, the interest expenses are likely to remain constant due to the continued deleveraging.
Can the share price fall further? Absolutely, but the multiples are approaching record lows for the industry, and Kraft Heinz is a better company than many of its peers in terms of multiple metrics. Kraft Heinz has better margins in terms of operating income and operating costs.
EBITDA adjusted for impairment losses was 6,064 USDm in 2019 (7,024 in 2018). Depreciation and amortization was 994 USDm. Net property, plant and equipment was 7,055 USDm at year-end. Thus pre-tax income on non-cash net tangible assets was 72%. This compares favorably to other US food companies ($GIS 67%, $CPB 52%, $K 42%).
If EBIT is 5 USDb going forward and the effective tax rate is 21%, then net income after payment of interest and taxes is approximately 3 USDb. Taking into consideration capital expenditures and depreciation and amortization there should still be more than 500 USDm available each year for deleveraging after payment of the dividend of 2 USDb. Without divestments the deleveraging to 2x EBITDA will not happen within the next five years. That is anything but the end of the world though.
At current multiples that are at historic lows in absolute terms and relative to its peers Kraft Heinz offers a good investment despite the currently meager growth prospects. COVID19 and the delay of the strategy plan from March to May offers a small perfect storm and a buying opportunity.
“I think Kraft Heinz should pay down its debt. Under present circumstances, it appears that it can pay the dividend and pay down debt at a reasonable rate,” Buffett said. “And it has too much debt, but it doesn’t have debt it can’t pay down. The debt holders are going to get the interest and the debt should come down by year-end. I think it will, and I think it can with the present dividend.”
Operating income has declined by $1B in the span of two years due to negative top line growth (US and elsewhere) and divestments (Canada).
Cheese and dairy is a low margin business facing fierce generic competition. Hence it makes sense to divest parts of this product segment.
Organic growth was -2.7% in the US for the quarter, which was attributable to volume/mix (-5.8%) rather than price (+3.1%).
Kraft Heinz earns 5 USDb on net tangible assets of approximately 7 USDb, which is superior in the industry.
There were further impairments in the 4th quarter of goodwill (453 USDm) and intangible assets (224 USDm), but of a much smaller magnitude than a year ago.
The long-term debt has been reduced to $28B.
Current dividend payments amount to nearly $2B each year.
2020-02-25 Bloomberg – Kraft Heinz, Macy’s, Renault Add to Fallen Angel Fear
2020-02-14 Reuters – Kraft Heinz’s credit rating cut to ‘junk’ by Fitch
AB InBev ($BUD, $ABI.BR) issued a press release on their Q4 earnings on February 27th.
The company has maintained its dividend while continuing to deleverage.
Accounting for the proceeds expected to be received from the divestment of the Australian operations (while excluding the last 12 months EBITDA from the Australian operations), the net debt to EBITDA ratio would be 4.0x for the 12-month period ending 31 December 2019.
Q4 press release
Since closing the SAB combination the debt has been reduced and maturities extended to eliminate near term refinancing risks.
AB InBev is by far the largest brewery in the world after the merger of Belgian Interbrew and Brazilian AmBev in 2004 and acquisitions of Anheuscher-Busch in 2008 and SABMiller in 2016.
AB InBev continues to have the strongest margin in the industry. EBIT margins are greater than 30%, which is unrivaled in the industry.
Cash flow generation is also better than those of rivals Heineken ($HEIA.AS) and Carlsberg ($CARL-B.CO).
Likewise the return on capital and net tangible assets is unparalleled within the brewing industry.
The best-in-class margins and cash flow generation and return on assets is due their strong brands and their economies of scale.
Interbrands released their report on the 100 top ranked brands in the world on the 17th of October. AB InBev is featured on the list with two of their brands; Budweiser (#32) and the rapidly growing Corona (#79).
The AB InBev brands command a higher price per hectolitre than those of its competitors; Heineken and Carlsberg.
In terms of economies of scale, cost synergies of USD3.2B have been realized three years after the acquisition of SABMiller.
AB InBev has a large presence in the Asian markets, which experienced negative organic volume growth in Q3 (-6.5%) and Q4 (-5.2%). The business in Asia is seeing a further decline due COVID19.
In the light of the temporary decline in on-premise channels it is interesting to not that the DTC business is now a billion dollar business growing by double digits.
AB InBev has better margins and cash flow generation than those of its competitors and it is deleveraging. Yet it trades at low multiples in absolute and historical terms and has reached the lows of December 2018. AB InBev is too good an investment to pass at current prices.
2020-02-27 Reuters – AB InBev sees 10% hit to first-quarter profit from coronavirus
2020-02-27 Bloomberg – AB InBev Cuts CEO Bonus as Brewer Sees Worst Quarter in a Decade
2020-02-06 Bloomberg Opinion – Beer Drinkers Want More Than a Typical Lager These Days