Business vs. Innovation
It’s getting clearer with each passing earnings report and subsequent call that there is a disconnect between the pace of innovation and the business of making money. Nowhere was the trend clearer when Novo Nordisk (NYSE: NVO) reported results this morning. During the call the company put a slide which noted the regulatory milestones achieved by Victoza®, Fiasp® and Tresiba® on the next slide they noted some additional milestones which included the 16-0 FDA panel vote in favor of their long-acting GLP-1 semaglutide. Not a bad quarter it would seem.
Yet later the financial slides weren’t so great, no the company is not falling apart but they aren’t making money like they used to. The stark reality is Novo is in the commodity business and when you’re in a commodity business cost control is job one. This company which once employed an army of sales reps which flooded offices has been trimmed. The company has refocused their R&D making some difficult decisions on which compounds live and which die.
It’s not surprising that the company also had to put up an executive management chart, as there have been several changes. We won’t go as far to say out with the old and in with the new but it sure does feel that way. The reality is business Novo built – producing premium products which received premium reimbursement – no longer exists. The days of sending out an army of reps with reams of study data are over. The company can no longer afford to spend lavishly on R&D which does not yield an innovative new therapy.
This is the world Novo now lives in and quite frankly and we can’t blame them, they don’t see happy about it. They look around and see Lilly (NYSE: LLY) coming on with Basaglar a drug which is blowing up the long-acting insulin segment. They look the other way and see Sanofi (NYSE: SNY) with a biosimilar short-acting insulin which will do what Basaglar did to the long-acting market. They turn back the other way and there’s Lilly with Trulicity which will go against semaglutide. And not like they will get it right but AstraZeneca (NYSE: AZN) has a new Bydureon formulation.
The reality is Novo is amid an adjustment period. The new team is set, and they seem to understand that it can no longer be business as usual. They may not like being in a commodity business but unlike the old team they have acknowledged they are and have taken steps to make money in this environment. The sales force is being right-sized, R&D is focused, and the decision has been made that if necessary price will be used as a weapon.
The company has also somewhat departed from their diabetes roots as they move deeper into the obesity market. This is not just a natural extension but a wise and cost-effective move. Same products repositioned using the same sales force calling on basically the same doctors. And excuse the expression this is a huge and growing market.
Novo is also very strong globally and it would be far to say they are the most recognized diabetes company globally. This international scale even will help them while they navigate the choppy waters across the pond.
All in all, Novo is getting it right even if it took hitting them over the head with a large baseball bat. While they may not like it, they should be commended for recognizing that things could not go as they were, that changes had to be made. These changes are not yet complete, but they are progressing nicely and will yield the desired results.
We hate to repeat ourselves, but the diabetes drug sector has returned to a battle between two heavyweights, Lilly and Novo. Ready for round three?