Wake Up Call

Wake Up Call

“In September, Novo Nordisk announced plans to reduce the workforce by approximately 1,000 employees of the 42,600 positions in the company’s global organization.

For 2016, the range for sales growth is now expected to be 5-6%, and growth in adjusted operating profit is now expected to be 5-7%, both measured in local currencies.

During 2016, the market environment in the USA has become significantly more challenging, negatively impacting future pricing for Novo Nordisk’s products. Consequently, the preliminary outlook for 2017 in local currencies indicates low single-digit growth in sales and flat to low single-digit growth in operating profit. Furthermore, Novo Nordisk no longer deems it achievable to reach the operating profit growth target of 10%, set in February 2016. As a result, the target has been revised and Novo Nordisk is now aiming for an average operating profit growth of 5%. The two other long-term financial targets remain unchanged.”

These three paragraphs from the Novo Nordisk (NYSE: NVO) earnings release in a nutshell tells the whole story. Besides cutting people and lowering expectations Novo is undergoing a seismic shift in how they operate. This company once known for producing premium products which received premium reimbursement is now operating in commodity market. The company forced to expect lower prices along with higher rebates is also restructuring their pipeline. Once known for ground breaking innovative research Novo is becoming more short term focused eliminating their oral insulin project as well as eliminating me-too products.

Check out these points from one the slides used during today’s call;

“R&D strategy and priorities have been updated to reflect the increasingly challenging payer environment, particularly in the US market, by applying an even higher innovation threshold for starting and progressing R&D projects within diabetes

• Intensified focus on exploring current projects into adjacent disease areas of high unmet need including NASH, CVD and CKD

• Build research portfolios via strengthened activities related to in-licensing of early stage projects and enhanced external academic collaborations

• Discontinuation of oral insulin and combinations involving oral insulin, as well as a number of changes to the portfolio of early-stage projects will also be implemented, reflecting the required higher innovation threshold”

This is a fundamental shift in how Novo views R&D a major departure from the past. Which in a nutshell is what’s going on throughout Novo a major departure, more like seismic shift from the past. We knew this change was inevitable, that it had to happen, that it was just a matter of time before what had to be done would be done. Still it is stunning to see it happen.

The key question now becomes can this company soon to be under new leadership transition to a lean and mean operation. Something they have no experience with, something that is foreign to their DNA. Novo has the tools to compete the question is do they have the will to compete. The insulin market has gone from a gentle competition to all-out war, the GLP-1 market is following the same path.

Put simply Novo must completely change the way they operate, the way they see the world and how they compete. The world has changed and they must change with it or risk seeing their core franchise slowly fade away. Today’s call should serve as a wakeup call to everyone management, employees and stakeholders. And to competitors too as now that Novo has seen the light and found religion that price war no one wanted but everyone helped start is now going nuclear.

Hold onto to your seats everyone, make sure your seats belts are firmly tightened it’s going to be bumpy ride from here.