Zero growth pricing! Deutsche Bank: The market is too pessimistic about Novo Nordisk, and the weak guidance is all due to the new management's conservatism!

Novo Nordisk lowered its performance guidance for the fiscal year 2025 at the same time as the new CEO took office, delivering a "kitchen sink" of bad news that brought a dual impact to investors. The key issue currently is whether this downgrade reflects the management's conservative attitude or a substantial deterioration in business prospects.

According to reports from the Chasing Wind Trading Desk, Deutsche Bank stated in a report on July 29 that, in terms of data, the growth targets set by the new management are very conservative. The market currently prices Novo Nordisk as if it were a mature pharmaceutical stock. If the company's performance deteriorates in the coming months, the current levels will offer an attractive risk-reward ratio.

Ongoing Competition from Generic Drugs: 1 Million American Patients Still Using

Deutsche Bank noted that key information revealed during Novo Nordisk's conference call is that since May, the total supply of compounded generic drugs has not decreased, with approximately 1 million American patients still using compounded medications. Although there has been an increase in 503A supplies to offset the decline in 503B, the overall competitive landscape has not improved.

Over the past two years, due to surging demand, shortages of Wegovy, and patients lacking insurance to cover the expensive branded treatment costs, related generic drugs have flourished, severely impacting the sales of Novo Nordisk's branded medications.

Deutsche Bank believes this raises two core questions: First, does Novo Nordisk have a viable legal strategy to effectively reduce the supply of compounded drugs entering the market in the absence of clear regulatory enforcement? Second, if the obesity opportunity covered by 50 million commercial insurance policies is indeed accessible, then the stable base of 1 million compounded drug patients should not fundamentally hinder growth.

Analysts believe that Novo Nordisk should have expanded the market for (semaglutide) drugs in the second half of this year and beyond, based on stable usage of compounded generic drugs. If this cannot be achieved, it clearly indicates that the market's previous theories regarding the TAM market are flawed. More signals are expected in the coming months, and third-quarter performance will be instructive.

Novo Nordisk's new CEO stated that priority will be given to innovative investments and business execution. The company disclosed that the proportion of cash prescription business has increased from 4% at the beginning of the year to 12%. In terms of pricing, management maintains the communication from May, expecting net prices to gradually decline.

Regarding the outlook for the obesity market in the U.S., the company confirmed that out of 100 million obese individuals, 55 million have employer-provided Wegovy commercial insurance coverage. Compounded drugs account for about 30% of the market, with approximately 1 million patients. The prescription volume for Wegovy is about 275,000, with the share of new prescriptions rising to over 40%.

Significant Downgrade in Performance Guidance: Conservatism or Deterioration of Fundamentals?

At the press conference, Novo Nordisk adjusted its sales growth guidance for the fiscal year 2025 from the previous range to a growth of 8-14% at constant exchange rates, with EBIT growth of 10-16%.

Deutsche Bank pointed out that the upper end of the revised guidance (14% sales growth, 16% EBIT growth) is actually close to Deutsche Bank's previous expectations (16% sales growth, 22% EBIT growth) To reach the lower limit of the new guidance, which is an 8% sales growth, Novo Nordisk would need to achieve almost zero growth in the second half of the year, which is difficult to achieve under the circumstances of zero growth for Wegovy and Ozempic. This suggests that the company may have chosen an extremely conservative strategy.

Deutsche Bank stated that based on the revised performance guidance, assuming a 10% growth in reported EPS by 2025, Novo Nordisk will reach a earnings per share of 25 Danish kroner, resulting in a price-to-earnings ratio of 14 times based on the current closing price. This valuation level is comparable to its European peers, and the market is currently pricing Novo Nordisk as a mature pharmaceutical stock that has lost growth momentum.

Analysts believe that if the revised guidance for the 2025 fiscal year is indeed conservative, this relatively favorable starting point is worth noting. Even according to the current revised guidance, Novo Nordisk still expects to achieve 8-14% sales growth and 10-16% EBIT growth, far exceeding most of its peers