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
Anti-diabetic oral GLP1 drug Rybelsus® (semaglutide) received FDA approval on September 20th and 70%-80% of patients are not coming from other injectables.
GLP1 drug segment is growing led by the weekly injectable anti-diabetic drug Ozempic® (semaglutide) approved for CV risk reduction in the US.
Revenue in US diabetes segment is flat due to declining revenue of the daily injectable GLP1 drug Victoza® (liraglutide) and insulins such as Levemir®.
Growth of sales and operating profit expected to be 3-6% and 1-5%, respectively.
Shares fairly valued for now.
The revenue from anti-diabetic drugs in the US is flat across companies such as Novo Nordisk, Eli Lilly, Merck and Sanofi despite the growth of Ozempic® due to declining sales of Lantus® (insulin glargine from Sanofi), Victoza® (GLP1 liraglutide from Novo Nordisk), Levemir® (insulin detemir from Novo Nordisk), Januvia® (DPP4 sitagliptin from Merck) and others.
Novo Nordisk still has the leading position in diabetes, but Eli Lilly has gained ground within and outside the US thanks to its GLP1 drug Trulicity®, SGLT2 drug Jardiance® and generic insulin glargine Basaglar®.
The GLP1 class of drugs in particular are showing strong growth within and outside the US.
The GLP1 class of drugs (diabetes and obesity) generate more revenue in the US for Novo Nordisk than insulin.
Novo Nordisk leads the GLP1 class within and outside the US.
The GLP1 leadership position is due to the anti-diabetic drugs Ozempic® (weekly injectable semaglutide) and Rybelsus® (oral semaglutide) as well as anti-obesity drug Saxenda® (liraglutide). Ozempic® is partly cannibalizing Victoza® (daily injectable liraglutide).
Rybelsus® received FDA approval for the treatment of type 2 diabetes in the US and positive EU CHMP opinion. Ozempic® was approved in the US for CV risk reduction.
In January, the U.S. FDA approved an Ozempic label expansion to include its use in reducing the risk of major adverse cardiovascular events so-called MACE including cardiovascular death, nonfatal heart attacks, nonfatal strokes in adults with type 2 diabetes and established cardiovascular disease.
The approval was based on the SUSTAIN 6 cardiovascular outcomes trial in which Ozempic reduced the MACE risk by 26% versus placebo, in both cases as addition to standard of care in people with type 2 diabetes and increased cardiovascular risk.
The FDA also updated the Rybelsus label to include additional information from the PIONEER 6 outcomes trial in which Rybelsus demonstrated CV safety with MACE occurring in 3.8% of people on Rybelsus versus 4.8% on placebo treatment.
Last week, the European regulatory authority, CHMP, issued a positive opinion for Rybelsus the first all oral biological treatment for adults with insufficiently controlled type 2 diabetes. The recommendation is for Rybelsus to be indicated as monotherapy when metformin is considered inappropriate as well as in combination with other type 2 diabetes medications.
CSO Mads Krogsgaard Thomsen on Q4 earnings call
Very interestingly it was revealed that the first few Rybelsus® patients are mostly switching from tablets rather than injectables. This could be an indication, that the oral Rybelsus® will not be cannibalizing the injectable Ozempic® the same way the weekly-injectable Ozempic® has and is cannibalizing the daily-injectable Victoza®.
What we see with Rybelsus® is that the primary number of this are coming from patients that are not previously on injectable medication. So that means to the tune of between 70% and 80% of the patients sourcing a source from either the naive patients, metformin patients, SGLT-2 or DPP-4. So that is a relatively big change compared to what we saw with Ozempic® by the time of launch where was exactly the opposite initially. So that confirms the expected positioning of Rybelsus® in the market so far, but it’s still early days of course.
Camilla Sylvest – EVP and Head, Commercial Strategy and Corporate Affairs on the 2019Q4 earnings call
Japan could become the 2nd best market behind the US for Rybelsus®, because of the low penetration of injectables in Japan.
Japan I think is the second largest single-country opportunity for us in Rybelsus® if we can get it right after U.S. It’s predominantly an oral market as you know. Injectables are only I think 14% of the market. So of course, we are very excited about the introduction of Rybelsus® there.
Maziar Doustdar – EVP, Head of International Operations on the 2019Q4 earnings call
Ozempic® was one of the fastest growing drugs in the US and in the world in 2019. Its sales are on pace to exceed those of Victoza® in 2020.
Victoza® biosimilars might put some pricing pressure on Ozempic®, but they will not hit the market until 2023 following the settlement of the US patent litigation case on Victoza® (liraglutide) with Teva in March 2019.
Novo Nordisk still has a leadership position in insulin within and outside the US despite declining revenue in the US.
The decline in insulin revenue is led by the once- or twice-daily Levemir® (insulin detemir) in the US, which is facing competition from insulin glargine (Basaglar® from Eli Lilly and Lantus® from Sanofi) and insulin lispro (Admelog® from Sanofi and Humalog® from Eli Lilly). Sales of the once-daily long-lasting insulin Tresiba® (insulin degludec) on the other hand is not deteriorating.
The phase 2 trial of the weekly-injection long acting insulin Icodec (LAI287) was successfully completed. Phase 3 is set to be initiated in the second half of 2020.
How icodec achieves its very smooth profile hinges upon the enhanced albumin binding in the circulation.
CSO Mads Krogsgaard Thomsen on the 2019Q4 earnings call
Saxenda® (liraglutide) has developed into a best-selling anti-obesity drug.
Novo Nordisk looks set to dominate the obesity space in the first half of the decade following pipeline abandonment by Sanofi (GLP1R/GIPR/GCGR agonist SAR441255) and Novartis (ACVR2B targeting mAB BYM338/Bimagrumab). Results from the phase 2 trial on the once-weekly amylin analogue AM833 is expected this year. So are results from a GDF15 analog in phase 1. Most importantly semaglutide obesity phase 3 results are due mid-2020. A phase 2 obesity trial has already shown weight loss for semaglutide exceeding that of liraglutide (Saxenda®). The diabetes trials SUSTAIN and PIONEER also showed weight loss for semaglutide.
NovoSeven® is the best selling drug in the biopharma portfolio with annual sales exceeding a billion US dollars.
Revenue from NovoSeven® is not declining despite rejuvenated competition in the space.
On NovoSeven®, years back we guided that we would expect to lose maybe potentially 50% of the business. Consistently, we’ve seen since the launch of Hemlibra® that that erosion is slower than what we had expected.
CEO Lars Fruergaard Joergensen on the 2019Q4 earnings call
Novo Nordisk has two phase 3 trials (NCT04083781 and NCT04082429) on the antibody Concizumab (NN7417) of the tissue factor pathway inhibitor (TFPI).
Another anti-TFPI is Marstacimab (PF-06741086) from Pfizer ($PFE), which has two ongoing trials (NCT03363321 and NCT03938792).
Furthermore bluebird bio in October 2019 entered into a research agreement with Novo Nordisk to develop in vivo genome editing candidates for haemophilia.
Biomarin ($BMRN) is also working on a gene therapy for the treatment of haemophilia (BMN270); e.g. NCT03370913.
Valuation and comparison with peers
Novo Nordisk has better operating margins than its peers due to better gross margins and lower R&D spending.
Novo Nordisk was trading at attractive multiples during the winter 2017/2018 due to uncertainty about future growth rates. Now the stock seems more fairly valued given the expected single digit growth rates going forward.
AB InBev issued a press release on their quarterly results before the market opened.
The two most important headlines of the quarter were probably the listing of Budweiser APAC on the HKEx and implementation of price increases in South Korea and Brazil that drove volume declines.
Whereas revenue and revenue per hectolitre were up, volume was down and EBITDA margins contracted.
The proceeds from the listing of Budweiser APAC was used to reduce debt and AB InBev is on track to reduce the debt to 4 times normalized EBITDA before the end of the year; one year earlier than the prior guidance. Deleveraging to approximately 2 times EBITDA still remains the commitment.
Comparison of breweries
AB InBev continues to have the strongest operating margins in the industry because of their strong brands and their economies of scale. For example cost synergies of USD3.2B have been realised three years after the acquisition of SABMiller.
Interbrands 2019 report
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).
Reuters – AB InBev loses $13 billion in value as beer drinking slows in Brazil and South Korea
Bloomberg – Beer Giant AB InBev Loses $20 Billion in Market Value
CNN – Budweiser brewer hit by slumping sales in China
Financial Times – AB InBev scales back annual profit target after quarterly miss