Friday, January 27, 2006

Pfizer (PFE) versus Novo-Nordisk (NVO)

Pfizer (PFE) received European approval for Exubera, the first inhalable non-injectable form of insulin. This action bodes well for PFE's FDA approval shortly.

One should keep in mind that several other drug companies are in the process of developing inhalable insulin, notably Novo (NVO), Lilly (LLY) and Alkermes (ALKS) in a joint venture, Mannkind (MNKD) and Kos Pharmaceutical (KOSP.)

Last night NVO reported earnings pretty much in line with expectations. There was some disappointment regarding its Novo Seven clinical trials relating to intra cranial hemorrhage.

But let's keep in mind how well this business has done and what management's expectations are.

The goals for this company are a 30% ROIC and a 25% EBIT margin. Currently, the business operates at about a 23% ROIC and an EBIT margin of around 26%. The company is clearly reducing its capital employed by its announcement of a an acceleration in its share buyback. The company has completed its 5 billion Danish kroner buyback and just stepped up to a new 6 billion Danish kroner buyback for 2006 and 2007.

Pfizer's ROIC has been drifting down from historical levels that exceeded 40% in 2001 and 2002 to its most recent 12%. On an EBIT margin basis, Pfizer's margins are similar.

Both companies spend about the same on R&D at about 15% of revenues.

Yet NVO has grown earnings in the last five years at 21% compared to PFE at 14.5%.

NVO also announced a 25% increase in its dividend for March of 2006. This should bring NVO's yield closer to about 1.85% versus PFE's much more substantial 3.9%.

On a valuation basis , NVO selss at less than 15 times EV/EBIT compard to PFE at 16 times. I believe that NVO, much more of a biopharmaceutical company, and with a more interesting drug pipeline, and substantially better return on capital characteristics deserves a higher valuation.


At 11:29 AM, Blogger Prasanth said...


I do not know much about NVO but as an aside, Pfizer has started an IT centre in Chennai, India to reduce their IT costs. I know this personaly as i work for one of the IT companies that is involved with Pfizer (though i do not work for Pfizer related business). I do not know the impact of this on Pfizer's bottm line but i think it will be too insignificant to matter.

At 11:27 AM, Blogger Madan said...

Where are you getting the EBIT and ROIC targets? Ive gone through transcripts for many companies and have never seen mgmt talk about EBIT or ROIC targets. Pls let us know. Appreciate your help


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