Is it time to short Netflix?

Streaming giant Netflix just reported annual earnings for 2018.

Reuters 2019Jan18: Netflix shares fall as weak forecast dampens investor optimism

Bloomberg 2018Jan18: Netflix’s International Expansion Dominates Growth

The net margins at Netflix are single digit and the P/S multiple is well above 10, which means the P/E multiple is a triple digit. Does that mean it’s time to short Netflix?

I don’t think it’s time to short Netflix, until the exponential growth outside the US begins to decelerate (new memberships 2016: 13.7M, 2017: 16.6M, 2018: 22.9M) and/or the more linear growth within the US comes to a halt (new memberships 2016: 4.5M, 2017: 4.9M, 2018: 5.7M). So far that hasn’t happened yet; see the figures below. I think the market will stay irrational, until that happens. The multiples might even expand further in the meantime. Does that mean I’m buying Netflix? No, I think the future cash flows for the foreseeable future are mostly priced in.

Netflix has had lots of tailwind and if they are able to raise prices without the growth slowing, then that will blow them further and faster ahead of the rest of the pack. But Disney pulling their content from Netflix will be a massive headwind and could very well act as a speed bump on the road.

CNBC 2018Nov08: Disney’s new Netflix rival will be called Disney+ and launch late 2019
CNBC 2019Jan18: Disney is already losing over $1 billion in streaming, and its Netflix competitor has yet to launch

Brexit bombshell

Brexit is being decided by the members of parliament in the House of Commons tomorrow. Westminster could decide to go ahead with the deal negotiated by prime minister Theresa May, but “no deal” as opposed to a people’s vote (or general election or extension of article 50) cannot be ruled out completely.

Below the PM giving her final statement at 16:21:39 the day before the vote:

What will the consequences of withdrawal from the EU on WTO terms be for UK businesses? One would expect just-in-time manufacturing to be most severely affected by the UK leaving with no deal. Here I look at a) the exports of the UK and b) the risk assessment and the exports for a selected set of UK companies.

The UK economy

Below some interesting figures and articles regarding British exports and imports and GDP growth for the UK.

What would Brexit mean for the global balance of power? via
Net exports:

This is how Brexit would affect British trade via
Exports of goods between Britain and EU, 2014, % of national totals: EU withdrawal scenarios and monetary and financial stability

At Last, Something About Brexit Everyone Can Agree On via
UK and EU goods and services trade volume relative to Remain:

GDP growth:

Brexit has already created more than 4,500 jobs in Ireland via

Brexit has prompted 55 firms to invest in Republic, IDA Ireland says via

The Economic Effects of the GovernmentÔÇÖs proposed Brexit Deal via
Modelling assumptions underlying different Brexit scenarios:

UK exports and imports:

UK services trade volumes by sector:

GDP per capita:

Treemaps of UK gross imports and exports in 2016 from The Atlas of Economic Complexity at
Export by partner:

Import by partner:

Export by product:

Import by product:

The economy of an independent Scotland?

Export statistics of Scotland via

The UK and Scotland’s current international trade flows via
Scottish international exports (£24bn) by region:

UK international exports (£291bn) by region:

Relative importance of sectoral exports to the EU for both Scotland and the UK

UK companies

Below revenue and market capitalisation during the past 10 years for a selected set of UK companies.


Market cap:

Revenue for geographic segments of various UK companies:

Company UK EU* Neither Total
Britvic £891.3m (59.3%) £443.2m (29.5%) £1,503.6m
Unilever ÔéČ3,022m (23.2%) ÔéČ13,050m
Ted Baker £141.4m (32.0%) £442.5
AstraZeneca £8,258m (36.8%) £8,419m (37.5%) £5,788 (25.8%) £22,465m
GSK £940m (5.3%) £17,983
Rolls Royce £1,881 (11.5%) £3,741 (22.9%) £10,685m (65.5%) £16,307m
Diageo £1,630m (8.8%) £3,355m (18.2%)* £18,432
Smith & Nephew £244m (5.1%) £4,765m

* In some cases “EU” also includes Turkey and the Middle East. The numbers are not always broken down by the – for this purpose – appropriate segments.

Below are the Brexit risk assessments by selected UK companies in part or in full:

[expand title=”AstraZeneca plc”]
On 23 June 2016, the UK held a referendum on the UKÔÇÖs continuing membership of the EU, the outcome of which was a decision for the UK to leave the EU (Brexit). The progress of current negotiations between the UK Government and the EU will likely determine the future terms of the UKÔÇÖs relationship with the EU, as well as to what extent the UK will be able to continue to benefit from the EUÔÇÖs single market and other arrangements. Until the Brexit negotiation process is completed, it is difficult to anticipate the potential impact on AstraZenecaÔÇÖs market share, sales, profitability and results of operations. The Group operates from a global footprint and retains flexibility to adapt to changing circumstances. The uncertainty during and after the period of negotiation is also expected to increase volatility and may have an economic impact, particularly in the UK and Eurozone. The Group has responded by engaging proactively with key external stakeholders and establishing a cross-functional internal steering committee to understand, assess, plan and implement operational actions that may be required. Some of these actions are being implemented based on assumptions rather than defined positions so that the Company is able to mitigate the risks arising from variable external outcomes. Currently, a number of areas for action have been identified including duplication of release testing and procedures for products based in the EU27 and the UK, transfer of regulatory licences, customs and duties set up for introduction or amendment of existing tariffs or processes and associated IT systems upgrades. The Board reviews the potential impact of Brexit as an integral part of its Principal Risks (as outlined overleaf) rather than as a stand-alone risk. As the process of Brexit evolves, the Board will continue to assess its impact.

[expand title=”Britvic plc”]
Unlike some other businesses, leaving the European Union of itself, does not present specific challenges to the company as we manufacture the vast majority of finished goods in the same market as our selling market. Nonetheless, Brexit could result in higher cost of goods for the company, as a result of the introduction of trade tariffs for imports to the UK from the EU which would impact the raw materials that we purchase from the EU. Additionally, in the event of a ÔÇśno-dealÔÇÖ Brexit, there is a risk of disruption at borders, which could impact the supply of some raw materials sourced from the EU. We are working closely with suppliers to understand their plans, reviewing all supply alternatives and increasing the level of raw materials that we hold in the run-up to 29 March 2019.

[expand title=”Diageo plc”]
We continue to prepare for all scenarios around the United Kingdom’s exit from the European Union in 2019 and are taking Brexit in our stride. We look forward to agreement on a final deal that will provide stability for our workforce and business operations in the United Kingdom and the European Union, as well as clarity on existing and future trade deals between countries. As one of the United Kingdom’s most important manufacturing export companies, we are working with the UK government to ensure our priorities are well understood.

Ongoing risk identification and mitigation planning to respond to the risks associated with Brexit and the potential impact of any trade wars. We have particular focus on identifying critical decision points to ensure potential operational disruption is effectively mitigated.

Diageo is headquartered in the United Kingdom and has significant production and investment in Scotland. In June 2016, the United Kingdom voted by referendum to withdraw from membership in the European Union (commonly referred to as ÔÇťBrexitÔÇŁ). The prime minister of the United Kingdom formally invoked Article 50 of the Treaty of the European Union in March 2017, thus officially initiating the negotiation process for the departure of the United Kingdom from the European Union. Although the potential impact of Brexit on DiageoÔÇÖs business cannot be fully assessed until the detailed terms of the United KingdomÔÇÖs withdrawal from the European Union are finalised and the United Kingdom negotiates, concludes and implements successor trading arrangements with other countries, it is likely that this withdrawal process will continue to result in a sustained period of economic and political uncertainty and complexity. The United KingdomÔÇÖs withdrawal from the European Union could also negatively impact economic conditions in Europe more generally and have adverse effects on DiageoÔÇÖs business and financial results. For instance, the negotiating process surrounding the terms of the departure of the United Kingdom from the European Union may continue to contribute to significant volatility in exchange rates and risks to supply chains across the European Union and ultimately lead to changes in market access or trading terms, including to customs duties, tariffs and/or industry-specific requirements and regulations, restrictions on the mobility of employees and generally increased legal and regulatory complexity and costs.

The withdrawal of the United Kingdom from the European Union could also have further implications for the constitutional makeup of the United Kingdom as a result of renewed discussions surrounding independence for Scotland and/or further devolved governments in Scotland and Northern Ireland following the outcome of the Brexit referendum. This could result in a further period of political uncertainty in the United Kingdom and otherwise adversely affect DiageoÔÇÖs business and financial results, particularly since Diageo has substantial operations and inventory located in Scotland.

[expand title=”GlaxoSmithKline plc”]
We have evaluated the impact of Brexit on our business operations, including our supply chain and quality oversight. Our priority is to maintain continuity of GSKÔÇÖs supply of medicines, vaccines and health products to our patients and consumers in the UK and the EU.Uncertainty remains about the future relationship between the UK and the EU. As a result, we have agreed a risk-based approach to mitigation across the organisation. Implementation of our contingency plan has been underway since January 2018, with an immediate focus on our supply chains. This includes expanding our ability in the EU and the UK to conduct re-testing and certification of medicines; transferring Marketing Authorisations registered in the UK to an EU entity; updating packaging and packaging leaflets; amending manufacturing and importation licences, and securing additional warehousing.We currently anticipate that the cost to implement these and other necessary changes could be up to ┬ú70 million over the next two to three years, with subsequent ongoing additional costs of approximately ┬ú50 million per year, including additional customs duties and transaction or administration costs. These charges represent our estimates of the impact of Brexit based on the information currently available. As more information on the changes to our business that will be required after Brexit becomes available, the assumptions underlying these estimates could change, with consequent adjustments, either up or down, to the additional costs we expect to incur. We will continue to adjust our plans and their expected financial impact as negotiations and regulations develop.Delivering these necessary but complex changes by March 2019 will be ambitious and potentially disruptive in the short term and we support efforts to secure a status quo transition period to minimise disruption. Over the longer term, we continue to believe that Brexit will not have a material impact on our business.

[expand title=”Next plc”]
Nature of risk and Risk level

Direct risks:
(i) Increases in tariffs and duty on goods imported into the UK from the EU and other countries – Medium
(ii) Administrative workload and costs in submitting necessary data on EU goods when they enter the UK from the EU – Low
(iii) Increases in tariffs and duty on goods exported to the EU – Low
(iv) Regulatory risks relating to the acceptability of product standards to UK and EU authorities – Very low

Indirect risks:
(i) Reduction in the value of Sterling along with associated increase in cost of goods from overseas – Medium
(ii) Queues and delays at UK and EU ports as a result of increased customs declarations for other companies – High

[expand title=”Rolls-Royce Holdings plc”]
Political risk
Our Brexit steering group has continued to assess potential impacts of leaving the EU, including uncertainties related to our principal risks. We have briefed the UK Government and other governments on our Brexit-related issues and have made representations through our trade association memberships. While we wait for political certainty from the Brexit negotiations and details of the final Brexit deal, we have assessed potential additional operational impacts to understand what action Rolls-Royce might need to take before Brexit occurs in 2019. We could be impacted through a number of routes. For example: our regulatory relationship with the EU (European Aviation Safety Agency; REACH chemical certification programme); our operational relationship (customs union and movement of people); our tax and treasury strategy; our EU R&T funding relationship and other interfaces. We are managing these risks through our operational assessment and applying our business continuity risk management process to Brexit.

[expand title=”Smith & Nephew plc”]
In June 2016 the UK voted to leave the European Union. The UKÔÇÖs withdrawal will be effective from 29 March 2019 at 11pm GMT. As negotiations regarding the terms of the withdrawal continue, the nature of the trade agreements and the closeness of the economic ties between the UK and the EU beyond the withdrawal date remains uncertain. We continue to monitor the situation. Among the potential impacts of Brexit, the regulatory framework for medical devices could be affected, as it is unclear whether the UK will ascribe to the new Medical Devices Regulation which will become applicable in May 2020.

[expand title=”Ted Baker plc”]
Potential Impact: The UKÔÇÖs decision to leave the European Union has increased the level of economic and consumer uncertainty.
Mitigation: The Group has established a Brexit Committee which, together with its external advisers, continues to carefully monitor the potential impact of Brexit. Scenario planning includes the impact of additional customs duties, VAT and customs duty declarations; and the restriction on the free movement of people.In addition to this ongoing monitoring and mitigation, our presence in a range of international markets helps mitigate the impact of this risk.
Treasury Risk Management: In June 2016, ahead of the UK referendum on Brexit, the Group extended its hedging arrangements for US Dollars to April 2018. At the balance sheet date, the Group has hedged its projected commitments in respect of the period ending 26 January 2019 as well as a proportion of its requirements for the following period.

Eli Lilly & Novo Nordisk – Episode 2018Q3 – The ongoing battle for GLP1 market share

Diabetes rivals Eli Lilly and Novo Nordisk and their smaller diabetes competitors such as Sanofi, Merck, AstraZeneca and Johnson & Johnson have all released their Q3 results. Below is a summary of Novo and Lilly and their shared therapeutic area diabetes and their shared drug class GLP1.

GLP1 receptor agonists come with the HbA1c advantages of insulin as shown by the SUSTAIN studies, but without the risk of hypoglycemia and without the side effects of SGLT2 inhibitors and DPP4 inhibitors, and with the added benefit of weight loss and weekly injection (Ozempic® from Novo) or no injection at all (oral semaglutide from Novo).
[expand title=”Click for the results of the Novo SUSTAIN studies”]


GLP1 is now recommended as the first injectable medication by the American Diabetes Association (ADA) and the European Association for the Study of Diabetes (EASD). Subcutaenous GLP1 is the superior drug class and is the reason both companies experienced growth as per the quarterly earnings releases:
Novo: Novo Nordisk’s operating profit decreased by 6% in Danish kroner and increased by 2% in local currencies in the first nine months of 2018
Lilly: Lilly Delivers Solid Third-Quarter 2018 Results, Revises EPS Guidance

The earnings releases from the two companies created a few headlines:
Novo Reuters: Upbeat sales lift Novo Nordisk as drugmaker weathers U.S. pricing pressure
Novo Bloomberg: Novo Nordisk Winning in Rivalry With Lilly, CEO Says
Lilly Reuters: Trulicity leads mixed third quarter for Lilly; shares sink
Lilly Bloomberg: Eli LillyÔÇÖs Big Picture Justifies Its Lofty Valuation

Both companies and the FDA also sent out some notable press releases during the 3rd quarter and prior to their Q3 earnings releases:
[expand title=”Click for the press releases in chronological order”]
Lilly 05nov2018: Trulicity® (dulaglutide) demonstrates superiority in reduction of cardiovascular events for broad range of people with type 2 diabetes

Lilly 05nov2018: Initial results from EMPRISE real-world evidence study show Jardiance® was associated with reduced risk for hospitalization for heart failure compared with DPP-4 inhibitors in people with type 2 diabetes with and without cardiovascular disease

Novo 26oct2018: Oral semaglutide demonstrates statistically significant reductions in HbA1c and body weight in people with long duration of type 2 diabetes treated with insulin [PIONEER 8]

Lilly 2018oct04: Lilly’s Investigational Dual GIP and GLP-1 Receptor Agonist Shows Significant Reduction in HbA1c and Body Weight in People With Type 2 Diabetes

Novo 2018oct02: People with diabetes may achieve improved glycaemic control with Tresiba® versus glargine U100, without an increase in hypoglycaemia

Lilly 2018sep26: Chugai and Lilly Enter into a License Agreement for Oral GLP-1 Agonist, OWL833

FDA: FDA warns of serious genital infection linked to certain diabetes drugs

Novo 2018aug20: Oral semaglutide provides superior HbA1c and weight reductions versus placebo in people with type 2 diabetes and renal impairment in the PIONEER 5 trial

Novo 2018aug17: Novo Nordisk acquires Ziylo Ltd to accelerate its development of glucose responsive insulins

Both companies are seeing growth in the US in their GLP1 receptor agonist class of drugs; i.e. Trulicity® from Lilly and Victoza® and Ozempic® from Novo. Insulin sales in the US are declining led by Lantus® from Sanofi, which is facing competition from generic insulin glargine (Basaglar®) from Lilly.

Lilly is the only company seeing growth in the US due to their GLP1 receptor agonist Trulicity®, their analog of insulin glargine Basaglar® and their SGLT2 inhibitor Jardiance®. Lantus® from Sanofi is losing market share to Lilly and their insulin glargine analog (Basaglar®). Novo is experiencing a sales decline in insulin in the US, but this is offset by GLP1s Victoza® and Ozempic®.


Insulin sales in the US are down; especially Lantus® from Sanofi in the US after Lilly launched their generic version of insulin glargine (Basaglar®), but Novo is also taking a beating.


GLP1 sales are up in the US led by Trulicity (weekly injection) from Lilly and Victoza® (daily injection) and the newly launched Ozempic® (weekly injection) from Novo.


Sales of DPP4 inhibitors such as Januvia® and Janumet® from Merck are flat and have been overtaken by GLP1 receptor agonists Merck still holds the vast majority of the DPP4 market share in the US.


Sales of the SGLT2 inhibitor Invokana® from J&J continues to deteriorate, whereas Farxiga® from Astra and Jardiance® from Lilly displays growth within and outside the US. Unlike GLP1 receptor agonists the combined sale of SGLT2 inhibitors are mostly flat.


Novo Nordisk continues to see insulin sales slide (Levemir® being overtaken by Tresiba® in the US), but Victoza® continues to grow despite a loss of market share in terms of prescriptions to Ozempic®. The patent on insulin aspart (NovoRapid® and NovoMix®) has expired and that on insulin detemir (Levemir®) will expire in 2019, so Novo will have to rely on subcutaneous and oral GLP1 for growth going forward.


Eli Lilly is seeing continued growth for their GLP1 Trulicity® within and outside the US. Sales of Humalog® were down in the US, which management tried to explain. Humalog® (insulin lispro) will probably face competition from Sanofi and Admelog® going forward. Basaglar® (insulin glargine) continues to grab market share from Sanofi and their Lantus® in the US. The SGLT2 inhibitor Jardiance® is also showing continued growth unlike Invokana® from J&J.

[expand title=”Click for an excerpt from the Lilly Q3 transcript regarding Humalog sales”]

Related to Humalog and Basaglar on the overall diabetes portfolio, first, I think we’re very pleased with the overall volume growth when it comes to the diabetes portfolio.

Clearly when it comes to Humalog, we did see a 14% price decline vis-a-vis Q3 of 2017. Just to provide maybe a little more color on this, we are seeing in a favorable segment mix about 8 points of that 14. Patient affordability is impacted in the insulin portfolio. That’s another 4 points. And then we had a unfavorable property (22:24) adjustment as a comparator to last year’s quarter.

Maybe to provide and try to be a little more instructed, yes, we do see a lot of volatility with Humalog. It is better to look at this product on a year-to-date basis. And when we look at it on a year-to-date basis, I think the trend that we basically see is mid-single digit erosion on price.


The future

Some of the interesting drugs in the pipelines of the two companies are the dual GLP1/GIP agonist LY3298176 (tirzepatide) from Lilly and the oral GLP1 NN9023 from Novo.

The CSO of Novo Nordisk (Mads Krogsgaard Thomsen) did shine a bit of light on the oral GLP1 NN9023 during the earnings call:
[expand title=”Click for an excerpt from the Novo Q3 transcript regarding NN9023″]

Yes. So the analogue 2023 is based on the original research on the series of compounds that led to semaglutide not supposed to exhibit greater efficacy per se than Sema, because itÔÇÖs not really been possible to identify any GLP-1s that do so. However, itÔÇÖs been optimized for oral exposure, that basically means that you can deliver lower oral dosing level achieve the same degree of exposure of the body or alternatively, you can go to the same doses with oral Sema and achieve a higher degree of exposure and hence a higher degree of efficacy.

So what analogue 2023 enables is one of two things: either higher efficacy, implying that it could be developed for obesity, could be developed for NASH, could be developed for high efficacy in type two diabetes; or you can match oral Sema as we know today and that would lead to a reduction in the cost of goods sold. And all of that weÔÇÖll know a lot more about next spring when we report the data both from this trial and from the second-generation oral semaglutide tablet formulation. TheyÔÇÖre reporting approximately at the same time.

Vis-a-vis, the FDA and the CV discussions, we are essentially have had very constructive dialog with the agency, where basically they are confirming that we have promising data with the SUSTAIN 6, however they need some kind of confirmation before we can have a CV indication for Ozempic and that confirmation can actually come in the form of either a bridging study even with an oral route of administration of semaglutide such as the so-called oral trial.

Or in the best of all worlds, if the PIONEER 6 trial designed only to show safety were to in the upside scenario, provides signs of efficacy i.e., improved cardiovascular performance, then of course, that dialog will be held with the FDA. So thatÔÇÖs where we stand today, planning for ORALSO trial, but eagerly awaiting PIONEER 6 data. Thank you very much.


The president of Lilly Diabetes (Enrique A. Conterno) revealed just a small amount of details regarding the dual GLP1/GIP agonist tirzepatide (LY3298176) and the upcoming SURPASS studies:
[expand title=”Click for an excerpt from the Lilly Q3 transcript regarding tirzepatide”]

Yeah. So as we’ve shared as part of tirzepatide’s Phase 3 program, we are planning to study three maintenance doses at 5, 10 and 15 mg.

I think what we’ve learned is that we should titrate in smaller increments and over time. As we’ve shared, we have a titration study that we intend to share the details next year. But clearly we’ve learned a lot from the study in terms of what are the optimal titration schedules.

We are planning aggressively when it comes to starting this trial and starting enrollment. So you’ll be hearing more when it comes to our trial for Type 2 diabetes soon.

As far as REWIND, I don’t want to speculate on the particular indication that we will get. But clearly, this is important for the class in that it confirms what other GLP-1s have shown when it comes to seeing benefit.

And, I’m sorry, I cannot resist, but I heard Novo Nordisk’s call. And they also mentioned that GLP-1s were not all the same, and I think we agree with them.


Final comments

Based on valuation Novo Nordisk currently seems to be a better option than Eli Lilly.

The best years of both companies are probably ahead of them given the current and future prevalence of diabetes and obesity around the world.

Pandora lowers full year guidance

The jewelry maker Pandora, which is still without a CEO, sent out a press release on their Q3 results today. Expected revenue growth for 2018 was revised from 4-7% to 2-4%.

Bloomberg: Pandora Plans `Reset’ in Bid to Shore Up Investor Confidence
Reuters: Charm-bracelet maker Pandora warns again on sales
euronews: Jeweller Pandora cuts 2018 sales outlook, reviews long-term profit target
Financial Times: Pandora cuts growth forecast as profits and sales miss in third quarter
B├Şrsen: Derfor vendte Pandora-aktien rundt fra et to-cifret kurshug til et lille fald

Below are 4 slides from the earnings call and and 1 page from the earnings release summarising the key metrics, financial highlights and revised outlook.

Revenue was down YoY by 3% in local currency and all margins were down as well. Operating cash flow was up due to fluctuations in operating working capital.

The ROIC dropped to an all time low of 51.7%.

Revenue from charms was down YoY along with rings and earrings.

The number of stores was up QoQ and YoY, but the strategy of aggressive store expansion might come to an end in 2019, and the focus will be switched to same store sales growth. The diagnosis is ongoing.

Revenue in China was up and held revenue in APAC up, which would otherwise have been down like EMEA and Americas.

Likewise the EBITDA margin was down in all three regions.

Only three of the seven largest markets experienced positive growth in same store sales.

In summary it was a terrible quarter. Is it all bad then? No, online sales are improving, it is the best recognised jewelry brand in the world, they have a loyal customer base and the global jewelry market will not stop growing. But the days of rapid expansion and reliable double digit growth are probably permanently over.

Pandora remains attractively valued in absolute terms and relative to its peers. Their margins are still impressive in comparison with other manufacturers of luxury goods. And their cash flow still supports a generous buyback programme of DKK4b at somewhat depressed prices. But another negative earnings surprise in Q4 could easily send the share price further tumbling. Poor Q4 results in February and the arrival of a new CEO wanting to throw in the kitchen sink might prove to provide the perfect buying opportunity at further depressed price levels.

VF raises dividend and full year outlook, but growth is slowing down

VF released their earnings today and raised outlook for the full year.

Since the previous quarter VF has announced the sale of the Reef® brand to The Rockport Group on October 4th. And on August 13th VF announced the intention to create two independent publicly traded companies; one apparel and footwear and the other jeans and outlet businesses.

The multiples have expanded quite a bit over the past few years and growth is slowing down. Despite raising the full year outlook and Vans® displaying double digit growth across geographic segments the share price took an 11% tumble. The figures below summarises the revenue, profit and margins by each product segment, the expansion of multiples in 2017 and 2018 and the organic growth by product segment, geography, sales channel and by the top 5 brands.

Reuters: Lee, Wrangler owner’s shares fall 9 percent on fading jeans business
Bloomberg: Athleisure Growth Entices VF to Split Off Its Jeans Business
Bloomberg: VF Sheds Its Wrangler Jeans. But for What?

Johnson & Johnson Reports 2018 Third-Quarter Results

J&J released their Q3 results today:
– 2018 Third-Quarter Sales of $20.3 Billion Increased 3.6% versus 2017
– 2018 Third-Quarter EPS was $1.44
– 2018 Adjusted Third-Quarter EPS of $2.05 increased 7.9%*
– Strong Operational Sales and Adjusted EPS Growth*
– Company Increased Sales and EPS Guidance

The Q3 results spawned the following headlines.
Reuters: Johnson & Johnson edges past profit estimates, lifts outlook
CNBC: Johnson & Johnson beats expectations as cancer drugs, new baby care products help boost sales
Bloomberg: J&J’s Growing Pharma Unit Helps Company Overcome Currency Woes
Bloomberg: J&J Tops 3Q Estimates, Boosts Full-Year Profit Guidance

The growth was largely driven by the pharmaceutical segment and in particular oncology drugs (Zytiga®, Imbruvica® and Darzalex®). Other of the drugs driving the growth are Tremfya®, Trinza®, Simponi®, Opsumit® and Uptravi®.

The figures below summarise the Q3 results for each geographic segment, each product segment and for selected pharmaceutical drugs in a historical context.

Eli Lilly and phase results 2 on their dual GIP/GLP1 receptor agonist LY3298176

Today Ely Lilly (LLY) announced the positive results on a phase 2 diabetes drug of theirs (LY3298176) via a publication in The Lancet, a presentation at the annual meeting of the European Association for the Study of Diabetes (EASD) and the press release below:
Lilly’s Investigational Dual GIP and GLP-1 Receptor Agonist Shows Significant Reduction in HbA1c and Body Weight in People With Type 2 Diabetes

The press release created a few headlines:
Bloomberg: Diabetes Drug’s Results Push Lilly to Look at Obesity Too
Reuters: Lilly’s diabetes drug data impresses, hurts rival Novo’s shares

The share price of Eli Lilly went up by 4% in an otherwise sour market and that of Danish rival Novo Nordisk (NOVO-B.CO) plummeted some 7-8%. The multiples and market capitalizations of the two companies were sent further in opposite directions.

The market movements were caused by the positive results on the phase 2 drug candidate LY3298176. It is a peptide and an incretin and a dual GIP/GLP1 receptor agonist.

Incretins such as GLP1 receptor agonists work by stimulating insulin and inhibiting glucagon release.

The GLP1 class of antidiabetic drugs is growing at a fast pace (green line in the figure below).

And Lilly and Novo have the vast majority of the market share as evidenced by the Q2 sales figures and Q3 prescription numbers below.

It is never appropriate to compare across studies due to different doses, different study designs, different patient groups and other confounding factors, but in the table and figures below are comparisons of the dual agonist LY3298176, Trulicity® (dulaglutide), Ozempic® (semaglutide) and oral semaglutide.

Today Lilly presented their results from a 26 week trial and showed their phase 2 drug at doses of 5mg and higher to be superior to their own Trulicity® (dulaglutide) at a 1.5mg dose in terms of HbA1c reduction and weight loss.

The SUSTAIN 7 study by Novo showed semaglutide (0.5mg and 1.0mg) to be superior to dulaglutide (0.75mg and 1.5mg) in terms of HbA1c reduction and weight loss after 40 weeks. The figure below is from Pratley2018.

The figure below summarises all of the SUSTAIN studies and it is from Overgaard2018.

The phase 2 obesity trial on semaglutide showed an even greater weight loss than that observed with the new dual agonist from Lilly, but the trial ran for 52 weeks as opposed to the 26 week Lilly trial.

Study/Trial Drug Dosis HbA1c reduction (%) Weight loss (kg)
NCT03131687 Dulaglutide 1.5mg 1.1% 2.7kg
NCT03131687 LY3298176 1mg 0.7% 0.9kg
NCT03131687 LY3298176 5mg 1.6% 4.8kg
NCT03131687 LY3298176 10mg 2.0% 8.7kg
NCT03131687 LY3298176 15mg 2.4% 11.3kg
NCT02648204 (SUSTAIN 7) Dulaglutide 0.75mg 1.1% 2.3kg
NCT02648204 Dulaglutide 1.5mg 1.4% 3.0kg
NCT02648204 Semaglutide 0.5mg 1.5% 4.6kg
NCT02648204 Semaglutide 1.0mg 1.8% 6.5kg
NCT02863419 (PIONEER 4) Oral semaglutide 14mg 1.2% 5.0kg
NCT02863419 Victoza® (liraglutide) injection 1.8mg 0.9% 3.1kg

The dosis is important, since the dual agonist is inferior to dulaglutide at lower doses. As written in the press release “the most commonly reported side effects were gastrointestinal-related, and dose-dependent. These events included nausea, diarrhea and vomiting.” An analyst asked on the Lilly conference call today, whether the higher doses are workable. The answer was that it remains to be seen during phase 3.

Phase 3 will also involve the SURPASS 2 study, which will be a comparison with semaglutide (Ozempic®), and it is expected to finish before 2022.

Eli Lilly conquered some ground today, but neither the battle nor the nearly century old war has been won, and there are interesting drug candidates in both the pipeline of Novo Nordisk and the pipeline of Eli Lilly. Selected drug candidates from each of the two pipelines are mentioned below.

Company Phase Therapy Name Type
Novo 3 Diabetes Oral semaglutide GLP1 receptor agonist semaglutide
Novo 3 Obesity Semaglutide Obesity GLP1 receptor agonist semaglutide
Novo 1 Obesity AM833 Amylin analogue
Novo 1 Obesity PYY1562 Peptide YY analogue
Novo 1 Obesity GG-co-agonist 1177 Novel GlucagonGLP1 co-agonist
Novo 1 Obesity Tri-agonist 1706 Triple GLP1-GIP-GCG agonist
Lilly 2 Diabetes LY3298176 GIP/GLP-1 Co-agonist Peptide
Lilly 2 Diabetes DACRA-042 Dual Amylin Calcitonin Receptor Agonist
Lilly 1 Diabetes DACRA-089 Dual Amylin Calcitonin Receptor Agonist
Lilly 1 Diabetes “Oxyntomodulin” Oxyntomodulin

It is also worth noting, that Novo Nordisk on August 17th announced the acquisition of Bristol based Ziylo in an effort to develope glucose responsive insulin, which would reduce the risk of patients overdosing with insulin.

In conclusion it is probably much too premature to call it game, set and match. It is however quite certain, that the innovation of drugs and devices will continue and the best days for diabetes patients around the world are still ahead.

Teva and the approval of the migraine drug Ajovy®

Teva announced the FDA approval of their migraine drug Ajovy┬« (Fremanezumab) – a mAB CGRP inhibitor – in a press release on September 21st.

I felt it would be a good time to revisit Teva and migraine drugs, since a lot of things have happened, since their largest ever acquisition of Actavis Generics from Allergan for $40B – announced in July 2015 and closed in July 2016 – and the arrival of their new CEO (Mr. K├ąre Schultz) in November 2017; the day before their Q3 results were presented.

Ajovy® and other migraine drugs

Amgen got a headstart with their migraine drug Aimovig┬« (Erenumab). An advantage of Aimovig┬« is that it comes with an auto-injector pen, whereas Ajovy┬« currently doesn’t. An advantage of Ajovy┬« is that it only requires a quarterly injection, whereas Aimovig┬« requires a monthly injection. Both will be priced at a monthly cost of $575. Aimovig┬« binds to the CGRP receptor itself, whereas Ajovy┬« binds to the CGRPs, but both seem to significantly reduce the number of migraine days according to a 2018 meta-analysis. Lots of other mAB migraine drugs are in late stage development and some of them are listed below.

Amgen presented a few slides on May 18th regarding the potential of anti migraine drugs and on September 14th they presented prescription numbers.

Here are comments from Teva CEO K├ąre Schultz on Ajovy┬« from the Q2 earnings transcript.

And we think that that’s a fantastic market. The migraine market is very, very promising. We think there’s enormous unmet need. So with a good launch of Ajovy┬«, their sales will start to accumulate in 2019 and will be meaningful in 2020.

Aimovig® and other migraine drugs were discussed on the Q2 earnings call of Amgen.
[expand title=”Click for excerpts from the Amgen Q2 transcript”]

  • – Let me give you a few examples of some of the newer medicines that we’re seeing driving our growth. In the second quarter, we launched Aimovig in the U.S., where it is the first and only CGRP inhibitor approved for migraine prevention. Aimovig also marks Amgen’s first entry into a new therapeutic area for us, which is neuroscience. We’ve been very encouraged by the enthusiastic reception for Aimovig from physicians and especially from migraine patients who have waited a long time for a new treatment option like this.
  • – Also, in migraine, we expect the data from our proof-of-concept in dose-finding Phase 2 study of our PAC1 antibody for migraine prevention, AMG 301, to be available by the end of the year and presentation at a medical meeting in 2019. There have been a number of recent developments in Alzheimer’s disease clinical programs in our industry, so I thought it would be useful to highlight our partnership’s ongoing beta secretase inhibitor program and why we have such confidence in our approach.
  • – Now on to Aimovig, the first and only therapy specifically designed to prevent migraine by targeting and blocking the CGRP receptor. Patients and physicians share our excitement for this new therapy. And, as you know, we set up a hub to assist patients to gain early access to the product while we complete negotiations with payers. This program provides a free two-month trial of Aimovig. We have, in fact, received a large bolus of requests from the Headache Centers of Excellence reflecting the pent-up demand for this innovative new therapy. We’re busy working through these requests and expect to see the prescriptions coming through over the coming weeks. Should a patient not be approved by the insurance during this two-month period, we have a bridging program during their negotiations to ensure that patients are not denied drug. Negotiations with payers are progressing well and we have successfully completed contracts to attain coverage for just under 30% of lives already.


Migraine drugs and other pain relief drugs were also discussed on the Q2 earnings call of Eli Lilly.
[expand title=”Click for excerpts from the Lilly Q2 transcript”]

  • Q: And then my second question, just on galcanezumab. The feedback from the Amgen launch in the CGRP space seems to be pretty favorable. I’d just be curious to get your evolving thoughts on, do you think payers are going to cover multiple CGRP agents on par or parity or do you think that they will opt for exclusive contracts out of the gate?
  • A: As it relates to the assets in the migraine category, you know it is pretty early days here. I understand mostly payers havenÔÇÖt listed the new therapy. WeÔÇÖre of course for the guidance in FDA and early conversations with payers about our data and seeking that kind of feedback from them, I could tell you what our strategy is, which is reading broad access to these medications as appropriate and particularly given the population. So, these are mostly commercially insured, working women who are having anywhere between 4 and 20 headaches a month that is our study population, which causes absenteeism, debilitation, lack of ability to predict and schedule and plan, not to mention just the human suffering cost. So, we think employers will be very interested in covering this class. We need to get that message through. It could be a great category for some value and outcomes-based pricing approaches, and we’re optimistic long term that the class will have good coverage.
  • Q: Second question just has to do with the emerging pain, franchise, just to your optimism over that franchise, especially galcanezumab, which seem to have hit some pretty decent data in cluster headache, which is an area where nothing seems to have worked in that area, so just your thoughts on that and lasmiditan, the timing profiling of lasmiditan here in the back half?
  • A: Finally, on pain, you know weÔÇÖre excited about the pain portfolio, youÔÇÖre seeing data emerge now from tanezumab, we have the data as you mentioned on galcanezumabÔÇÖs of all the Phase 3 in-house. And lasmiditan, we do plan to submit before the end of the year as well. Clearly pain is a huge unmet need in this country. I think youÔÇÖre seeing good interest in the first CGRP antibody launch that we expect that to continue migraines in enormous problem in this country and there are many chronic and episodic sufferers there that we hope to reach with CGRP antibodies, as well as products like lasmiditan, which can relieve acute suffering. So, weÔÇÖre bullish on that category.


Copaxone® and Teva going forward

Teva announced Q2 earnings on August 18th. Revenue is still declining due to Copaxone® competition from Mylan and Momenta and due to price pressure on generic drugs in the US.

The Teva CEO during the Q2 earnings call commented that the revenue will probably start growing in 2019.
[expand title=”Click for comments from the Teva CEO”]

  • – That’s what I tried to explain, that I think that we are probably hitting the bottom of the valley, or the trough, whatever you want to call it, in 2019. And then based on the dynamics that Copaxone┬« is not dropping so much anymore because a big chunk of it is gone by then, and that Ajovy┬« is picking up, Austedo┬« is picking up, then I expect us to see positive momentum on sales from 2020.
  • – So if we think about the margin overall and what can be done, you could say longer term after 2019, then first of all, we have to realize that in 2019 there’s continued pressure on the margin from the fact that Copaxone┬« is reducing in sales and the fact that we don’t really see meaningful big sales of Ajovy┬« yet coming in and compensating for that. Of course, longer term there’s a better gross margin on Ajovy┬« and on Austedo┬« than there is in on the bulk of our business. So longer term that will affect the margin in a positive way.


Revenue from Copaxone® (Glatiramer acetate) in the US is still declining, but the prescription volume seems stable at 85%. Mylan decided in Q3 to cut the price of their generic version by 60% and their CEO commented on the move during their Q2 earnings call on August 8th.
[expand title=”Click for comments from the Mylan CEO”]

Market uptake of our Glatiramer Acetate Injection is a prime example of supply chain tactics capping generic utilization at 15% when two substitutable products have been available for nearly a year. Last year we launched our Glatiramer Acetate with a traditional approach. And for nearly nine months we worked within the system to increase access to no avail.

More recently, we’ve taken unconventional steps to increase access. If these steps do not prevail, we will make further moves to do our part where we can to reinstate the necessary balance between innovation and access, as this balance has historically been the one aspect of the pharmaceutical industry to simultaneously drive trillions in savings while ensuring patient access to medicine.

Our experience with Copaxone is representative of the perverse incentives embedded in the current system. Even after substantially lowering the price of our product, the supply chain chooses a higher priced alternative. This provides evidence that the business of healthcare feeds on higher prices, frequently putting system interest ahead of patients.

Rest assured, we will continue to be vocal about measures to improve the current environment.


The price pressure on generic drugs in the US is still ongoing and margins are still somewhat anaemic, but 1) Teva as measured by a P/S multiple is not overpriced historically and relative to its peers, 2) annual cost savings of no less than $3B will have been achieved by the end of 2019 and 3) Teva has economies of scale to achieve the best margins in the industry.

How big is the money laundering bank Danske Bank?

The largest financial scandal ever has arrived at the shores of Denmark. It involves money laundering at the Estonian branch of Danske Bank; the largest bank in Denmark. The story was first brought to daylight by Danish newspaper Berlingske in collaboration with journalists from the Russian newspaper Novaya Gazeta in March 2017:
Laundered billions poured through Danish banks

Recently it has received widespread media attention, as the reported numbers have grown to a somewhat astronomical size. Wednesday Danske Bank announced the conclusion of their investigation in a press release. The CEO (Thomas Borgen) also announced he would be stepping down voluntarily. Here a few of the recent articles regarding the case from the WSJ and others:

Sep20 WSJ: Denmark Reopens Investigation into Russia-Linked Money Laundering Case

Sep19 Reuters: Danske Bank CEO quits over $234 billion money laundering scandal

Sep19 Guardian: Danske Bank chief resigns over ÔéČ200bn money-laundering scandal

Sep19 NYT: Danske Bank Says Billions May Have Been Laundered at Single Branch

Sep19 CNBC: Danske Bank CEO quits in a $234 billion money laundering scandal

Sep14 WSJ: U.S. Probes Danske Bank Over Russian Money Laundering Allegations

The Danish and Estonian Financial Services Authorities released a joint statement in May and the former has commented on the case and commented on the investigation by Danske Bank.

I thought it would be beneficial to myself and others to get a grasp of just how big Danske Bank is, so I created 1) a figure showing the size of Danske Bank compared to other Danish banks in terms of assets, 2) a chart showing the revenue over time of Danish banks, 3) a table showing the size of Danske Bank and other international money center banks relative to GDP and 4) a histogram showing Danske Bank contributing approximately DKK3b of DKK60b in corporate tax revenue in 2016. I think it’s fair to say that the conclusion is that Danske Bank is BIG relative to its peers and the Danish GDP.

Country Name Assets (USDm) Assets / GDP (%)
JPMorgan 2,533,600 13%
Bank of America 2,281,234 12%
Wells Fargo 1,951,757 10%
Citigroup 1,842,465 10%
Danske Bank 559,167 172%
Svenska Handelsbanken 315,505 59%
Skandinaviska Enskilda Banken 291,858 54%
Swedbank 252,296 47%

Generals Mills 2019Q1

General Mills reported earnings today (press release). US yogurt sales are down once again (by 2.8%), but the loss of market share to Chobani and the negative growth seems to be slowing down (-22% the previous year and -15% the year before that) . Margins are down (gross 32.8% from 36.5% and operating 14.7% from 16.7%), whereas operating expenses do not seem to have spiralled out of control yet (SG&A $743M up 9.4% from $679M, which is only slightly outpacing the revenue growth of 8.6%). Here links to the press release, 8K, 10Q, webcast and transcript.

CNBC: General Mills drops the most since March after reporting falling demand, lower margins
– Cheerios cereal maker General Mills missed analysts’ estimates for quarterly sales.
– Results were hit by lower demand for its snacks and yogurts in the U.S.
– General Mills, like its rivals, is battling rising freight costs as railroads and truck fleets hike rates, as well as higher input costs.

Bloomberg: General Mills Dives Most in Six Months as Revenue Falls Short
– Cheerios, Yoplait maker reiterates tepid full-year forecast
– CEO Harmening defended price paid for Blue Buffalo pet food

Reuters: General Mills shares tumble as first-qtr sales, margins disappoint

CNBC NBR: Sales growth dissapoints at General Mills

Below figures with regards to revenue, expenses, profits, margins and YoY growth rates for the entire business and for each of the segments. Further below comparison of margins and multiples on an annual and quarterly basis with other packaged food companies.