Is there a way up?

After looking at the results Novo Nordisk released this morning we’re beginning to think their corporate communication team is going to need a class in creative writing. Look at this passage from this morning’s earnings release;

“Sales of insulin in North America Operations decreased by 17% in Danish kroner and by 7% in local currencies. The decline in sales in the USA in the basal insulin segment was mainly driven by lower realised prices for Levemir® and phasing of rebates in 2017 for Tresiba® partly offset by higher sales of Tresiba® following a net market share gain of approximately 3 percentage points in the basal insulin segment, underlying volume growth as well as increased sales of Xultophy® 100/3.6. The decline in sales decline in the USA in the short-acting insulin segment was driven by lower realised prices due to phasing of rebates in 2017 for NovoLog® partly offset by underlying volume growth.”

This is basically a very long-winded way of saying the insulin segment has commoditized. Something we have long known as Lilly used equally creative language to describe the same situation when they released their earnings. Success in the insulin market both long and short-acting no longer depends on product performance. The winner, if you can call it winning, is who can best come up with a package of price discounts/rebates which pleases payors.

Insulin is not the only area impacted by commodization as the GLP-1 area is starting to feel its impact. Novo is doing well in the GLP-1 area but acknowledged lower prices/higher rebates are beginning to impact this important product area as well.

Speaking of GLP-1 Novo continues to study the oral version of semaglutide, which looks like a pretty good product, but as per Novo the studies continue. We are just assuming at some point they will stop studying this drug and submit to the FDA. However, this being Novo, a company that has never meet a study they didn’t like, who knows.

Without a comprehensive portfolio of diabetes therapies, something Lilly has, and Novo doesn’t, the future for Novo lies exclusively in the hands of their injectable therapies. Something that would change if the oral version of semaglutide ever gets here. However even with that drug, which has blockbuster potential, we’re not sure that it would be enough to offset the carnage in the injectable area.

Now we do know that Novo is working with Dexcom to develop a Tyler something we’re sure they will also study to death causing them to come to market after someone else gets their Tyler on the market. Back in the day it didn’t matter much to Novo if someone else got to the market first as they typically come out with something better and be compensated accordingly. Well the world has changed unfortunately Novo hasn’t.

Although we did not listen to the call this morning we are not aware of any device projects Novo is working beyond a Tyler. Unlike Lilly who is venturing into the insulin pump space, Novo appears content to, excuse the expression, stick with insulin pens. Perhaps they are reluctant to enter this ultra-competitive arena, but Sanofi too is venturing into these waters. Given the follow the leader mentally in diabetes it’s surprising Novo isn’t doing something here. Granted we do not expect either Lilly or Sanofi to have much luck in the insulin pump market but it’s astonishing that Novo isn’t even talking about insulin pumps.

This creates a dilemma for the company as how to do they grow going forward when they sell what basically is a commodity. And what happens to the GLP-1 franchise, a bright spot among the dark clouds, when the Intarcia exenatide micropump or something like it arrives? It should be noted that Novo isn’t the only company with an oral GLP-1 under development and given their fondness for studies they may soon fall behind one of these projects.

The irony here is even if they can develop a better short-acting insulin or a long-acting insulin that is only administered say every 3 days, they payoff may not be worth it. The fact is payors are in no mood to pay a premium for any diabetes therapy not when they are in complete control and the drugs we have while not perfect do work just fine. So how does Novo grow from here?

In a traditional commodity market growth comes volume growth gaining additional market share. Well with Lilly and Sanofi trying to achieve the exact same thing this isn’t easy.

Another option would be to grow via acquisition but in diabetes about the only company that makes any sense at all is AstraZeneca, and as much as we think they should sell the fact is they aren’t selling, and Novo doesn’t seem to be buying either.

The other option would be to throw in the towel and put the company up for sale. The problem here, well there are several, but the biggest being is the value is being sucked out of the company’s sails. As we noted yesterday a cash rich techie could buy the company without breaking a sweat but none of the techies are ready to venture down this road just yet.

Novo is a company built on the premise of developing outstanding products which would then receive premium reimbursement. In the old days they could afford to study a product to death. In the old days they could afford to take their time. But those days are long gone, and the fact is the company is struggling to adapt. Diabetes therapies have become commodities with the power in the hands of payors.

The company is facing an uphill battle and without an answer soon they may find themselves on the downside of that hill.