Why Novo Nordisk A/S Got Crushed Today

Image source: Novo Nordisk.

What happened

Novo Nordisk (NYSE: NVO) is down 13% at 3:35 p.m. EDT on Friday after releasing third-quarter earnings and cutting short- and long-term guidance.

So what

The diabetes specialist continues to deal with pricing pressure for its insulin products in the U.S. To win contracts and stay on insurers' formularies, Novo Nordisk and other insulin makers needed to offer discounts. As insurers have pitted the companies against each other, there's been a spiraling effect.

For the first nine months of the year, sales increased 6% at constant currencies, which isn't too bad given the environment that Novo Nordisk had previously warned about. Sales of its older insulin drugs dragged down sales with a 1% year-over-year decline, but Novo Nordisk's next-generation insulin Tresiba continues to take market share, with sales increasing 187% at constant currencies. Unfortunately, the drug is working from a small base, so the increase doesn't have much of an effect on the overall sales growth.

What seems to have investors most upset is the lowered guidance. Management cut 2016 revenue guidance in local currencies to a range of 5% to 6%; the previous guidance had revenue potentially as high as 7%. The top end of operating profit growth at constant currencies was also cut from a range of 5% to 8% down to 5% to 7%.

Management isn't giving formal guidance for 2017 yet, but said to expect "low single-digit growth in sales and flat-to-low single-digit growth in operating profit." Novo Nordisk's long-term operating profit growth target had been 10% per year, but management lowered it to 5%, given the challenges.

Now what

It's been a rough year for Novo Nordisk, and it appears the pricing pressure is going to continue in the years ahead. The most obvious way to avoid those pressures is to develop novel innovative products so there's no competition, reducing insurers' bargaining power. Novo Nordisk has some of those in its pipeline, such as an oral version of its GLP-1 drug semaglutide, but drugs take time to develop. For instance, the company has started just six of the 10 trials planned for oral semaglutide.

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Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Novo Nordisk. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.