DAY (5/15) - PRRN CHALLENGE!

 

Hello! I am Priya, and thank you so much for being here! :)

I recently watched the '100 day challenge' to build a career in finance by The Valuation School, and immediately jumped into it. This is a series where for the next 15 days I:

1) 'Pick' a sector

2) 'Read' relevant news articles, annual reports, sector analysis reports etc 

3) 'Report' what I've read

4) Make 'Notes' and see how they evolve!

To make it more interesting I've decided to pick a sector that has always been intriguing to me - the Pharma sector. I've picked 3 companies for my reference - Eli Lilly, Novo Nordisk, Johnson and Johnson.

A quick disclaimer, none of this should be treated as professional investment advise. Life is all about evolving into the best version of yourself, and I'd like to take you all on this journey of mine. Kindly only read this for gaining some additional insight, and feel free to give me any sort of feedback.

As a writer, I strongly advise you to do your own research as our team cannot assume any liability for your use of this information.

Let's get learning! 

21/03/2025

Hello again!

Quick disclaimer: There are a lot of medical and pharmaceutical terms mentioned below. Kindly note that this blog is simply to reinforce my learning and spread knowledge. I do not have a pharmaceutical background, so kindly make some provision for scientific inaccuracies, which may be possible! :)

Today's reading was very very interesting! I've still been reading the concalls, but today's section was focussed entirely on the CFO's viewpoint and analyst questions.

Credit: 5Y Financial statements from Yahoo Finance

The above graph shows the trend represented by different line items in Novo Nordisk's financial statements.  

REVENUE: As can be observed there is a 25% increase in revenue in 2024, driven by Novo's capacity expansion efforts and the 119% growth in the obesity market.

Both these ideas have been dicussed in our previous blog posts, but to summarize, Novo has been investing relegiously on expansion by acquiring smaller sites like those of Catalnet as well apparatus for improving their supply chain. 

GROSS MARGINS: Their gross margins, as can be visually understood from the graph, constitutes 84.7% of their revenue, up from 84.6% last year. This has been driven by a good pricing strategy, given the soaring demand for their weight loss injections. They also have a sound product mix with different medicines targeting the various nuanced segments of the obesity market.

This is interesting because one would think medicines like Wegovy and Cagrisema may closely substitute one another but in reality they may seek different usage approval for each of these medicines, which then helps them to EXPAND THEIR REACH, rather than RE-CATERING THE SAME AUDIENCE.

OPERATING PROFIT: A closer look at the trends of operating profit will tell you that it has increased by 25%. Now this figure obviously experienced some fluctuations due to the increased costs that arise due to acquisitions. 

The growth is largely a result of strong growth in revenues, but here operating costs must also be dealt with in detail:

1) Sales and distribution costs went up by 9%: Now the CFO has an interesting backing for this. He says that promotion costs in North America were primarily for their GLP-1 based treatments, which caters to diabetes and obesity both.

This is obviously because North America is facing extensive competition in this segment, from brands like Eli Lilly, which have already been making their way into many new prescriptions in the US.

In other regions the focus is more towards obesity care. Obviously both segments are similar, however, for those that read yesterday's blog, you'd notice that the growth in Novo's obesity specific segment alone has jumped by more than 100%. 

Technically all medicines might be for similar causes however brands tend to obtain approval of these medicines for varying causes, and this helps them to reach wider audiences. So yes, these expenses have worked favourably for them is my conclusion.

CREDIT: HALFPOINT AT PIXABAY

2) R&D costs have increased by 48%: R&D as a % of sales is a very critical KPI atleast from a theoretical perspective as we know. This gigantic jump in R&D is actually a good sign too, as this implies more early stage and late stage developments in pipeline, which requires more funding.

In some sense these are good signs as these means more products, however, for those that read yesterday's article again, you'd know that Novo's most recent clinical trial of their drug, Cagrisema, proved the drug's substandard efficacy when compared with Eli's Mounjaro. Hence such a big investment in research not delivering the outcome that is expected may be a sign of worry.

Having said that, when we discussed Eli Lilly's report itself in grand detail, we learnt that no pharma company ever has assurance that the drugs that they are developing may ever fully reap into cash flows. It is all a luck by chance, and no drug research is ever really so material when compared with the dozens of drugs that these companies would have in pipeline for development.

 Of course all investors rooted for Cagrisema, and given its launch has been pushed to 2026, maybe the company could come up with unique findings on dosage or duration of usage etc which may prove the drug's efficacy against Mounjaro.

CREDIT: BulentYILDIZ

Further the CFO went onto discuss net profit, which if you observe closely has increased, and by about 21%. Needless to say the aforementioned points are all relevant, but here I'd like to bring your attention onto 2 specfic items, that he discussed:

1) Net financial incomes: Compared to 2023, where financial income stood at 2.1B DKK, in 2024 there was a loss of 1.1B DKK. The company primarily attributes this to unhedged currency, and in fact on further examination, even forecast a loss of 9B DKK in 2025.

This is not the most significant item on their financial statements of course, but when comparing with Eli Lilly, I noticed there, a structured focus on financial management, where as I had discussed in Article 3, they use several derivatives.

I worry such big losses may indicate some level of financial mismanagement, which is all the more worrysome given they have embarked on quite a risky project with Cagrisema.

CREDIT: MOHAMED HUSSAIN AT PIXABAY

2) Tax rate overall has been increased by 0.5% which also had a pulling effect on net income. This doesn't have a large impact yet, but again, the OECD guidelines on introducing a minimum 15% tax on all global operations (refer article 3 for more detail) is relevant for Novo as well, given its global presence.

3) I noticed a very elaborate discussion on impairment of development expenditures. Pharma companies tend to impair developments when their launch has been delayed, which was the case with Cagrisena. Given the ineffective clinical trial, could we expect this trend to continue into 2025? My answer is yes.

 

The next aspect was focussed more on cash flows, which was interesting. Cash flows overall were negative for the company, however, given the nature of operations and how close they are to conluding their developments I would judge that this is natural.

FORECASTS FOR 2025!!

This part is obviously really interesting!

1) Sales: A growth of 16-24% in line with recent trends has been projected. The company has been earnestly investing in supply chain expenditures, which will help to improve the supply of their drugs.

As the CFO says, and we discussed in our article about Eli Lilly, challenges in supply is the biggest 'delta area' in pharma. To be honest, even if Eli Lilly's drugs are more efficient, if they aren't able to supply to the ever growing market of obesity, patients would be forced to shift to Novo. Of course Eli Lilly is also expanding, but their reach may still be limited compared to Novo.

These investments result in more accessibility of the drugs, meaning more prescriptions and more revenues.

2) Operating and net profit: A growth of 19-27% is projected, and interest expense is expected to be slightly higher, given the debt financing procured to finalize the acquisiton of Catalnet.

CREDITS: CATALNET

INSIGHTS FROM ANALYST QUESTIONS

I have reworded the analyst questions so we can understand the crux of how this industry works, and learn some valuable insights!

 

1) Why do sales usually fluctuate so much in the first and last few quarters?

There apparently is slight seasonality in how pharma works too. So towards the beginning and the end of the year, more holidays come along, which actually means more people tend to visit hospitals to purchase medications.

Also it is said that around this time co-payment plans, which is effectively insurance plans, undergo slight revisions. and this can cause patients to switch to alternate drugs. This can be both favourable and unfavourable for Novo depending on the plan itself.

2) Explain the discrepancy in the cagrisema testing. 

I was quite surprised at the number of analysts that posed this question. 

The R&D director went to describe the variations in the populations, where people have different tolerances to the drug. Since the titration (dosage) was flexible, there were patients who could have lost more weight but didn't.

On average in Q4 2024, a weight loss of 25.1% was observed. However recent trials have only shown 13.7%, despite the fact that more than 60% people have taken the fullest possible dose. Naturally this does raise some questions about the competence of this drug against Mounjaro. 

3) Eli Lilly is maximizing its supply by 60%. How are you planning to compete with it?

Now, Novo has been in the branded obesity market for quite a while, and as discussed before, their market share is actually about 64% globally in GLP-1 treatments. Eli Lilly and other companies stand in remaining 36%, so they would require more supply expansion than Novo.

However through their current investments in supply chain they are expecting the supply of their medicines to ramp up by 30%, which is bound to increase the availability of their drugs.

4) What are the biggest 'delta areas' coming to into 2025?

-Competition

-Supply

-Gross to net sales adjustments

All 3 are indeed critical aspects of running a pharma business. It would be critical for Novo to ensure that its presence in North America is not dissolved by Eli Lilly.

SEE YOU TOMORROW! :))