Novo Reports – A Changing Tune?
What does a company do when there pipeline is thinning, there current product line is facing stiffer competition and the prospect of further healthcare reform is unknown and could have a material impact on future sales? Add in the additional uncertainty of how your newest product, which is positioned for premium pricing, will perform once it makes its way through what could be a longer than anticipated regulatory process. This is exactly the situation facing Novo Nordisk (NYSE:NVO) who reported results this morning.
The stark reality for Novo is the world is changing and based on today’s call, the company while aware of the change isn’t quite sure how to deal with it. For years Novo has been operating in an environment where pricing while a factor did not impede the adoption of premium priced products. And for the first time in recent memory, this organization which in the past has been heavily committed to developing new products is lowering their commitment to research and development; a truly stunning move for a company like Novo where a commitment to research and development is part of their DNA.
While a great deal of ground was covered during today’s call the most stunning piece of news to Diabetic Investor was the company’s statements on Degludec and DegludecPlus, both drugs which were recently submitted to the FDA. During the Q&A portion of the call the company seemed to imply that the regulatory path for these two new drugs would be take longer than anticipated and noted that the FDA could ask for a panel meeting on these two new drugs. Although panel meetings are not that unusual, Diabetic Investor was surprised by this statement which leads us to believe there is something in the data set sent to the FDA that concerns the agency.
The fact is even had Degludec and DegludecPlus followed a “normal” regulatory path it’s unlikely either product would solve the many issues facing the company. Being a regular on these calls Diabetic Investor was somewhat surprised by slide the company used in their presentation entitled “Novo Nordisk continues to expand leadership position within diabetes care”. Granted Diabetic Investor’s memory isn’t what it used to be, still we cannot recall this slide being used before which basically showed that Novo continues to be the dominate global diabetes company. We were also somewhat surprised by the number of companies included in the slide which went beyond including their traditional competitors in the insulin world and showed nearly every company in the diabetes drug arena. To Diabetic Investor the slide was designed to reassure investors that Novo, while facing issues remains the leader in the industry. While this may be true one could tell by the tone of the questions asked by analysts they are concerned and based on what was said today they should be.
Their bread and butter insulin franchise is perfect example of the issues facing the company. While the numbers seemed to indicate that sales have rebounded in the US, the company did note they actually lost share and the sales gains may vanish when the impact of rebates become clearer. The company faced several questions over this anomaly and quite frankly did not have an answer that seemed to make sense. To put it bluntly it seems like the company is playing with numbers and trying to get investors to believe that 2+2=5.
The harsh reality for Novo is that Lilly (NYSE:LLY) due to their aggressive pricing and rebate policy has forced Novo to play in area that is foreign to the company; price. While the company did make a point of stating that are not taking this competition lightly, it’s obvious they are not comfortable competing based on price rather than performance. As Diabetic Investor noted after the last Novo call, traditionally the company has relied on high performance, premium priced products to drive sales growth. A strategy that worked very well before governments around the world started going broke and began instituting healthcare reform as means to control run away health care costs. To put it simply Novo has champagne priced products when governments and insurers are on a beer budget.
Victoza® continues to perform well but the company is keenly aware that while the product has done well its performance will surely be impacted by the coming launch of Bydureon. In one slide the company noted that more than 60% of prescriptions for Victoza are for the 1.8 mg dose. This is significant considering that based on what we have seen in Europe where Bydureon is approved, the 1.8 mg dose of Victoza is actually more expensive than Bydureon. The key question for the company becomes do they lower prices for this dose and take the lower margins that come with that move to more effectively compete when Bydureon gets here. As Diabetic Investor has reported Novo sales reps are very concerned about the impending launch of Bydureon and the more that becomes known it’s easy to see why. It’s bad enough to compete when you have two similar products one dosed daily and the other dosed weekly; it gets worse when the once daily version is actually more costly than the once weekly version.
Looking ahead as we noted earlier the company seems to be struggling to come up with a strategy to deal with new realities of the market. They understand that healthcare reform isn’t going away and the situation could actually get worse before it gets better. They also understand that global economic situation continues to be fluid and like healthcare reform may not improve in the near term. To their credit the company, unlike others in this space, are not sticking their heads in the sand and foolishly believing the issues they are facing will somehow magically go away. Also to their credit they are taking some painful steps to deal with this new world order as evidenced by their pullback in research and development spend; a truly painful step for Novo.
The real question is can the company transform itself to handle what is likely to be a rocky road ahead. Based on previous statements made by the company they have no desire to enter the diabetes device market beyond insulin pens; nor do they seem interested in expanding into helping patients manage their diabetes more effectively with some sort of disease management system. Given these statements the company must therefore rely on what they know best, developing high performance treatment options that come with patient friendly delivery systems. The only problem here is that while the products may be high performance the company due to conditions beyond their control will not be able to command a premium price.
This leads to a classic conundrum; do they cut costs, lower prices and take the lower margins that come with lower costs and basically ride out the storm or do they shift gears and change strategy entering areas that previously looked unattractive. Whatever road they decide to take they better make a decision soon as with their rather bear pipeline and their new products facing issues the company risks seeing the market leadership erode before their very eyes. While companies that make luxury consumer goods know that while the economic situation stinks there are still plenty of wealth folk out there willing to pay for their products, this is not the case when it comes to drugs companies. The fact is in the diabetes drug world Novo makes high end products which are sold to the masses not to a select few; this is like asking Mercedes Benz to sell cars at Hyundai prices.
The bottom line for Novo is that now more than ever they need solid leadership and vision. The fact that Novo continues to be the leading global diabetes company is great however as we have seen too many times it’s often more difficult to keep this position than to get there. All the company has to do is look at Roche, once the dominate player in glucose monitoring who due to poor decisions made by management is in serious danger of becoming an also ran in the category. Granted Novo is far more intelligent than Roche, who isn’t, but that does not mean they cannot fall into the same trap and believe that just because they had what it took to get to the number one position they have the leadership and vision to stay there.