Slammed from all sides

Slammed from all sides

With each passing earnings announcement it’s becoming increasingly clear that the diabetes drug market is moving closer and closer to becoming a commodity market. More evidence of this came this morning when Novo Nordisk (NYSE:NVO) released first quarter results which included the following; expected sales growth lowered from 8-11% to 7-10%, operating profit around 7% lower rather than 5.5% as noted back in January.

According to a company issued press release; “Sales growth has been negatively impacted by around 5 percentage points primarily due to the partial loss of reimbursement with a large pharmacy benefit manager, generic competition to Prandin® and changes in inventories at wholesaler level, all in the US, as well as the impact of a number of non-recurring events during the first quarter of 2013.” It also appears that the introduction of SGLT-2’s into the market has slowed sales of Victoza®.

Basically Novo is being slammed from all sides as the diabetes drug market is becoming increasingly competitive and the company’s pipeline is void of any new products that would reinvigorate growth. The company had hoped that Tresbia® would fill this void but the product remains stalled at the FDA, a move which will also stall the proposed combination of Tresbia with Victoza.

The harsh reality is that Novo like Sanofi (NYSE:SNY) who reported earnings earlier this week is ill-prepared for the changing dynamics in the diabetes drug space; a space where single source contracting by payors is becoming more common and while Novo remains a leader in the insulin and GLP-1 markets the company is void of any true oral medications. This change to single sourcing has put Novo in the uncomfortable position of having to be even more aggressive when it comes to pricing/rebates for their insulin and GLP-1 franchises as they frankly cannot afford to lose market share to the competition.

Looking towards the future this situation is likely to get worse before it gets better should Pfizer (NYSE:PFE) be successful and acquire AstraZeneca (NYSE:AZN). There is little doubt that a Pfizer/Astra combination would be a formidable competitor in the diabetes space as one reason Pfizer wants Astra is their diabetes portfolio.  Novo is also aware that generic insulin, both short and long-acting will soon hit the market another move which will adversely impact their core insulin franchises.

Try as they might to sell investors on the potential of their pipeline the company’s near term issues outweigh the prospects of future product sales. Given the lowered expectations, Diabetic Investor suspects that after years of bulking up its sales organization the company will soon reverse course and begin cutting costs in this area.  The fact is market dynamics no longer allow the company the luxury of having a large and very expensive sales organization.

Diabetic Investor also doubts that Novo will attempt to make any major acquisitions to fill the void in their diabetes portfolio for two main reasons. First it’s not in Novo’s DNA to acquire new or existing products and second other than Astra, which is already in play, there really isn’t anyone else available who has what Novo needs. As we noted yesterday about the only possible hook up for the company might be Johnson and Johnson (NYSE:JNJ). Yet even as well as Invokana® is doing this hook up would only fill part of the void in Novo’s diabetes portfolio.

This is one reason the company is aggressively pursuing Victoza as a treatment for obesity. Just as the diabetes market is growing at epidemic rates globally so too if the obesity market. The real question is can they convince the FDA to approve Victoza as treatment for obesity; should they be successful here this could provide at least a short term boost to sales.

Still there is little reason for optimism here. The insulin market is becoming more competitive and faces the very real threat of generic offerings. The GLP-1 market is also becoming more competitive and while there is no immediate threat of a generic new entrants to the space will surly use price as a weapon to gain share.  The GLP-1 market besides facing more entrants and greater pricing pressure faces threats like Invokana which as the company noted can slow growth in the category. Lastly the company has nothing in the oral space which places even greater pressure on their core injectable franchises.

In the past Diabetic Investor has noted that Novo is used to living in a world where premium products received premium reimbursement. This world no longer exists and so far the company has not adapted to the changes that are taking place. While trimming costs will help in the near term it does not solve the problems they have with their pipeline or deal with single source contracting. Simply put the company is getting slammed from all sides and so far has yet to unveil a strategy that would stop the pounding. Even worse at least in the short term other than cutting costs there really isn’t much they can do- OUCH!!!!