Treading Water

Treading Water

Looking over the results released by Novo Nordisk (NYSE: NVO) it feels like the company is treading water. The company continues to operate in highly competitive price sensitive markets. A perfect illustration of this comes from one of the slides in this morning’s presentation which stated

“For 2018, formulary negotiations with pharmacy benefit managers and managed care organisations in the US are progressing

Subject to the final outcome of these negotiations, average prices after rebates are expected to be lower compared with the levels in 2017, predominantly driven by the basal insulin segment

Market access is anticipated to remain broadly unchanged across the diabetes portfolio at a level similar to 2017”

This simply summarizes the state of the diabetes drug market, a market which has fully commoditized.

While it is true that today’s results came in above expectations, it is also true the company had previously lowered expectations. Or put another way things aren’t as bad as they thought they were but they still aren’t great either.

The question is where does the company go from here. Based on today’s call the company continues to make a greater push into the obesity market while they wait for the oral version of semaglutide. As we have noted in the past this product has blockbuster potential for several reasons not the least of which being it would be the first oral GLP-1 to hit the market.

Yet looking further down the road one must wonder whether this drug can offset the impact of a biosimilar version of NovoLog. We have already seen what Basaglar has done to the long-acting insulin segment and can only imagine the devastation a biosimilar short-acting insulin will have. Once this happens the insulin market will be all about price and the GLP-1 segment will become the primary profit driver. Not to redundant but this is why the oral version of semaglutide has become critical to Novo’s future.

Frankly we are little surprised the company continues to invest so much time and money trying to prove Tresbia ® is a “better” long-acting insulin. Even if that was true the fact is it really doesn’t matter. Payers have already made their choice and when it comes to the long-acting segment of the market price/rebates/discounts trumps performance. This same scenario will play out when a biosimilar short-acting insulin arrives.

Given this set of circumstances Novo must consider a total reorganization of their priorities. Their bread and butter insulin franchise must be deemphasized with greater resources allocated to the GLP-1 segment. Now for Novo this is not a small step but a major leap and this is not a company known for making major leaps. Insulin is in their DNA and until now this franchise has been the goose that lays the golden eggs.

This is one reason we believe that in the battle with Lilly (NYSE: LLY) Novo is handcuffed as their portfolio is not as comprehensive. This is also the reason we believe the rumors about a possible Sanofi (NYSE: SNY) AstraZeneca (NYSE: AZN) hook up could be more than just rumors. Just based on their history we would say that Novo would not step in and make a play for Astra’s diabetes portfolio even if it does help fill the holes in their portfolio. This type of bold move just isn’t in Novo’s DNA.

The problem as we see it and this true with all the insulin companies is they are fighting the wrong fight. Each in their own way has tried to prove that their version of insulin is superior to the other. They have all made investments in technology so that patients can more effectively dose their insulin. Which basically means that these insulin dosing apps and “smart” insulin pens will also quickly commoditize. Yet all this money and time invested won’t solve the problem as payers have already made their choice and their choice is price not performance.

The reality is the diabetes drug market has become all about scale and to achieve the scale necessary to turn a decent profit you need a complete portfolio of drugs not just injectables. It is equally critical that the operation be run as efficiently as possible as there isn’t much room for error. Large sales forces are just too expensive and quite frankly are no longer necessary. The same can said with these huge clinical trials as the results just don’t seem to matter all that much anymore.

Not to get off point but when a payer choses Invokana over Jardiance you know this has nothing to do with performance and has everything to do with money.

So far Lilly has been the only insulin company to fully grasp just how dramatically the diabetes drug landscape has changed. Novo has finally arrived at the table but we aren’t sure they grasp the magnitude of the problem. Sanofi is well Sanofi and let’s be honest will go down as one hit wonder.

While the stock will likely rise today we are more concerned with what this company will be like 5 years from today. Heck with biosimilar short-acting around the corner even two years from now could be an issue. The new team leading Novo has their hands full, let’s hope they can do more than just tread water.