Stranger things have happened

Stranger things have happened

Listening to the Novo Nordisk (NYSE:NVO) conference call this morning which reviewed the first six months of the year it dawned on Diabetic Investor that we could be on the verge of some very interesting alliances in the diabetes drug world. As we have been reporting Novo’s main competitors Lilly (NYSE:LLY) and AstraZeneca (NYSE:AZN) have more comprehensive portfolios which are more closely aligned with the needs of payors.

As everyone knows when it comes to injectable therapy options no one does it better than Novo.  Novo has solid portfolio of insulin’s and expanding portfolio of GLP-1’s.  The company also has the finest injectable delivery systems on the planet, when it comes to deliver systems Novo sets the standard. Yet as good as they are in the injectable market they have nothing in terms of oral therapy options. Even though insulin and GLP-1 use is increasing this lack of an oral therapy option puts the company at huge disadvantage given how payors are moving more towards single source contracting.

The simple fact is if Novo intends to remain competitive the company either must develop, partner with or acquire the oral therapy options they need. This is even more important given the looming threat from generic insulin’s.  As we have been noting with regularity it’s not a question of if there will be generics but when they will get here. It’s also obvious that as much as companies like Novo and Sanofi (NYSE:SNY) like to tout the insulin’s they have in development, these products are just incremental improvements over what’s already on the market.

In the past when it appeared we were moving closer to one company selling a complete diabetes management system, a system which included both drugs and devices, the company partnered with Johnson and Johnson (NYSE:JNJ). At the time it seemed like a pretty good idea as the two companies complimented each other and many, including Diabetic Investor, thought JNJ would eventually acquire Novo. Yet as so often happens in this space this partnership which looked good on paper didn’t work out.  However, given how the diabetes drug market is changing it might just be time for the company to realize they can no longer go it alone.

Now this brings up the obvious question; Who could Novo partner with or acquire to fill the holes in their portfolio?  We really don’t consider developing their own orals an option for several reasons – time, money and lack of experience.  As we noted earlier Novo is all about injectable therapy options and history tells us when they leave this area things just don’t go very well – i.e. Prandin.

It seems like the default answer to this question would be Astra, as it seems Astra is almost the perfect fit for Novo.  As we’ve been noting Astra needs insulin in their portfolio and has a solid oral portfolio. The one area the two companies overlap is GLP-1’s but even here Diabetic Investor believes the two companies could find common ground. Let’s face facts the GLP-1 market is becoming more competitive as Lilly and GlaxoSmithKline (NYSE:GSK) are entering this market.

One thing that hasn’t been tossed around much in the analyst community is that Astra could sell off diabetes and not sell the whole company.  Once Pfizer (NYSE:PFE) made their play for Astra it was assumed that Astra would be solid in one piece and not piece by piece.  Having been around the block more than once Diabetic Investor knows that just because something hasn’t been discussed does not mean that it’s not possible.

The problem is that beyond Astra there is no one company that would fill Novo’s needs. To Diabetic Investor that means Astra even though they stated they want to remain independent will be pursed. Plus there is another possibility that again hasn’t received much attention in the analyst community as it just might be Astra who acquires what they need in diabetes.

What’s truly astonishing here is that Lilly is once again dictating what’s going on in the diabetes market. This is a near miraculous situation as years ago the company was on the verge of becoming irrelevant in diabetes.  Give the company credit for seeing where the market was going and adapting. As we have noted several times we don’t know if this strategy will work but one thing is certain already it’s impacting the entire market.

The fact is as it stands today Novo is dependent on injectables while their bread and butter insulin franchise is facing increasing competitive pressure; pressure that will intensify when generics arrive.  As well as Victoza has performed the GLP-1 market is also becoming more competitive.  More importantly the reimbursement is changing and single source contracting is becoming the norm. The harsh reality for Novo is the world they grew up in – one where premium drugs received premium reimbursement – is gone for good.  That cost containment is the order of the day and payors won’t provide premium reimbursement for new products that are just incremental improvements to what’s already on the market.

The real question can Novo adapt to this new environment or put another way can they adapt quick enough. Maybe we’re looking at this the wrong way and it should Astra buying Novo and not the other way around. Like we’ve said many times stranger things have happened in this wacky world.