The Danish Delusion

The Danish Delusion

There was a time when Diabetic Investor considered Novo Nordisk (NYSE:NVO) to be the preeminent diabetes drug company. While long a global power the company got off to a rocky start here in the US but thanks to solid leadership the company eventually overtook Lilly (NYSE:LLY) in the US insulin market. Today however it is a much different story as Lilly has recognized that the insulin market, both short and long acting, is transforming itself into a commodity market where price trumps performance. The GLP-1 is also undergoing this transition albeit at a slower rate.

This is what makes the comments made by Novo CEO Lars Sorensen so stunning, when interviewed by Reuters Sorensen states; “We need to price innovation at a premium, otherwise we will not be able to fund innovation going forward.” Well we hate to burst Mr. Sorensen’s bubble but that dog just don’t hunt no more. The fact is even Novo’s latest insulin product Tresiba, which is delayed at the FDA, isn’t all that innovative and quite frankly does not deserve to be reimbursed at a premium.

These comments are even more disturbing when one realizes that Novo actually is operating under the delusion that premium reimbursement is still within their reach.  That unlike everyone else in the diabetes drug space; they believe that the coming of biosimilar short-acting insulin or the coming Lantus knockoff from Lilly won’t strengthen the already strong hand held by payors. They seem to believe that payors will pay a premium for a new product just because it is new, when in reality payors are recognizing what everyone else has, in that these so-called new drugs don’t offer a compelling case for premium reimbursement.

But the insulin market is just the beginning as the GLP-1 market will also follow this path, a market which is critical to Novo. Here too Lilly could be the instigator of a price war as they too have a long-acting GLP-1 on the way and will use price as their primary weapon to gain preferred formulary placement. A move which will likely be anticipated by Bristol Myers Squibb (NYSE:BMY) who will surly fight back and once again give payors even more power to play all the companies against each other.

Regarding the GLP-1 market Mr. Sorensen stated; “We could have priced ourselves into the (Express Scripts) contract had we wanted to, but we believe Victoza is a better product and therefore demands a premium.” Really a premium price for what is basically a me-too product whose only so-called advantage is one less injection per day. We realized this is getting a bit redundant but it’s time everyone realizes that payors do not care about patient convenience and that it’s easier to take one injection per day versus two per day. This is even less important when payors also know there is a once-weekly product which they can reimburse at practically at the same level as a twice daily product.

Now so may say that the delusion Novo is operating under isn’t hurting the company all that much as based on history the company has performed well. While this is true it is also extraordinarily naïve, as past performance means nothing in the quickly changing landscape of diabetes. Should this delusion continue it would not surprise Diabetic Investor if the tables turned and Lilly came back to overtake Novo. In a stunning repeat of history it was Lilly who back in the day thought they were invincible only to see Novo come along and eat their lunch. Today it seems the roles are reversed and it is Novo who is ignoring the facts, is either too arrogant, not smart enough or both to see what’s going on in the marketplace.

Perhaps the scariest part here is that Mr. Sorensen has extended his mandatory retirement from 62 to 65. Now a cynic just might call this the ultimate in hubris, while others might believe that he is intent on making the job for whoever succeeds him easier by screwing things up now. For the moment Diabetic Investor will give Mr. Sorensen a pass hoping that he really does see what’s going on and is just trying to put up a brave face for Novo stakeholders. For if this is not the case then he is truly delusion and Novo stakeholders better watch out, all they need to do is look to history and see what Novo did to Lilly before Lilly found religion. Just as history is determined to repeat itself, so too is the fact that payback is a bitch.