Novo Nordisk 2011 Capital Markets Day – Challenges Ahead

Novo Nordisk 2011 Capital Markets Day – Challenges Ahead

Today Novo Nordisk (NYSE:NVO) provided a detailed analysis of where their business stands today and where they are headed in the future.  Taken in its entirety the company faces many challenges both near and long term. Some of these challenges are self-made; others are being forced upon them.  As is typical in these events the company did their best to place a positive spin on the many challenges they face. To their credit management understands the challenges and has formulated a cohesive strategy to deal with near and longer term challenges. While there will be some who disagree with individual aspects of this strategy, management should be given credit for being proactive, something uncommon in the diabetes arena these days.

The day began with the company describing what they termed as the “new” management philosophy; a philosophy which looks to strengthen their leadership position in diabetes, while placing an even greater emphasis on quality and business ethics. (The last aspect on business ethics most likely is the direct result of the ongoing Department of Justice investigation into the company’s sales tactics.) Considering that according to the company they hold a global diabetes market share of 24%, one just might wonder what was wrong with the “old” management philosophy.

Diabetic Investor believes this change in philosophy is directly related to changes in the insulin market both here in the United States and overseas. As Diabetic Investor has reported previously all the insulin companies and not just Novo are facing slower growth combined with intensifying pricing pressure. The company acknowledged that insulin sales growth is not attributable to volume growth and is more directly related to price increases.

Here is where things get a little tricky for Novo, as they have now acknowledged on multiple occasions that Lilly’s (NYSE:LLY) aggressive pricing and rebating is a cause for concern. Diabetic Investor also found it interesting that when asked whether they would match Lilly’s aggressive pricing and rebating to maintain share and managed care contracts the company noted they would not sacrifice margin just to maintain share. Although at the same time they noted they will not simply let share slip away just because their completion has become more aggressive.

Diabetic Investor sees some danger for Novo should they decided to focus on margin rather than maintaining market share. Roche facing a similar situation in the glucose monitoring market years ago, made the decision to focus on margin over market share; a decision that had disastrous results.  It also a decision from which they have never recovered.

This strategy carries with it another pitfall as besides Lilly becoming aggressive, Novo also publicly acknowledged for the first time that Sanofi-Aventis (NYSE:SNY) is also a formidable competitor, stating they are in a “tight fight with Sanofi.” Add in the fact that GLP-1 therapy is gaining traction with Type 2 patients, the future threat of generic insulin’s plus the impact of healthcare reform and it’s easy to see the conundrum facing the company.

This threat is not limited to the insulin market as looming on the horizon is Bydureon, the once-weekly GLP-1 from Amylin (NASDAQ:AMLN), Lilly and Alkermes (NASDAQ:ALKS). While it’s true Novo’s GLP-1 Victoza® has performed above expectations, Bydureon is a serious threat to this franchise. As Diabetic Investor has stated previously once-daily is better than twice-daily and once-weekly is better than once-daily administration. Just in case anyone doubts this Diabetic Investor suggest they listen to a replay of the event as Novo consistently stated that the future of diabetes management will involve therapy options which require fewer administrations. Something they touted aggressively when they spoke about Degludec and DegludecPlus (more on these drugs shortly).

The company’s GLP-1 pipeline also reflects their belief in therapy options that require fewer administrations as they have two once-weekly GLP-1’s under development; semaglutide and liraglutide depot. What Diabetic Investor found interesting here was the comments made by the company on both drugs.  Based on the comments made the company seem to imply that semaglutide, which is currently in phase 2, is a better option yet due to timing and cost considerations they would favor liraglutide depot as it’s closer to submission as it’s moving into phase 3. Perhaps the company, learning from their Levemir experience, understands with Bydureon coming to market and semaglutide more than two years away it’s a waste of resources to pursue this option and focus on liraglutide depot, which although not as strong as semaglutide, could make it to market quicker.

Also in the pipeline is IDegLira a combination of Degludec and liraglutide, targeted at type 2 patients and is now in phase 3. Based on the data seen to date Diabetic Investor remains skeptical  of this drugs market potential, perhaps as more data becomes available we will offer a different assessment.

Moving to the insulin pipeline there is something more than Degludec and DegludecPlus, as the company is working on an even faster acting short acting insulin. Here too Diabetic Investor isn’t quite convinced. Yes it is true, as the company stated, that fear of hypoglycemia is the single biggest reason why more physicians don’t prescribe insulin therapy. However, several respected researchers and diabetologiests have noted that it is possible that super rapid acting insulin can work too fast.  This was one of the issues with Afrezza® from MannKind (NASDAQ:MNKD), which according to study data showed a very low rate of hypoglycemic events.  The possibility exists that Afrezza worked too fast and while this was great at lowering hypoglycemic events it also hurt glycemic control as the insulin didn’t work long enough to get the job done.

There is no question this super rapid acting insulin is playing a minor role to Degludec and DegludecPlus. Here too Diabetic Investor isn’t convinced they will change the insulin market as Lantus did when it was introduced. While the data looks good, market conditions have changed dramatically since Lantus came on the scene. Novo is expecting a premium price for these insulin’s at a time when insurers, managed care organizations, basically everyone is demanding lower prices. Looking into the future Diabetic Investor believes newer therapies options will need to go beyond being safe and efficacious, they’ll also need to produce superior results when compared to existing options. Although the US has not adopted the British system which judges drugs beyond safety and efficacy and adds cost effectiveness to the mix, we are moving in that direction. As noted before the data for these drugs are good, it’s just not superior to existing, cheaper options. The simple fact is when it comes to price over improving medication adherence, price wins.

Still one should not doubt Novo as they remain the most dominate global diabetes player, something that was reinforced with their detailed discussion of China.  However, they are also acutely aware that while they are well positioned outside the US, Sanofi won’t go away as they too covet international markets. It is equally true that as strong as they are internationally the US market remains a critical market and market conditions are worsening at the same competition is intensifying.

Looking over all the earnings announcements from Novo, Lilly and Sanofi, combined with today’s event the strategy for these three players is coming into focus. Lilly has decided to use price as their primary weapon in the insulin market while they wait for Bydureon to get here. Sanofi is pursuing a systems based approach to diabetes management which includes everything the patient needs, including disease management, into one nice neat package with all the products and services provided by Sanofi. Novo for their part is staying away from devices, with the exception of insulin delivery systems most notably insulin pens, and is focusing on better therapy options.

Now that they have all staked out their respective strategies it comes down to execution, focus and resolve. While it’s difficult to predict who will win this battle Diabetic Investor believes all three strategies will have some success and all three will be handicapped by external factors like healthcare reform and the constantly changing regulatory environment. What this really means is that success comes down to what it all does, solid and steady leadership. At the moment Diabetic Investor would give a slight edge to Sanofi, but they also have the most daring and ambitious strategy.  Given their years of experience, deep knowledge of the global diabetes market and solid research staff it would be a mistake to discount Novo, while they have had some recent missteps, this company has a long and distinguished diabetes bloodline.