Why Novo is a leader

Why Novo is a leader

This past Thursday Novo Nordisk (NYSE:NVO) conducted their Capital Markets Day were they outlined their short and long term strategy. Before we go into a detailed review of what was covered a few quick observations. Unlike the presentation given by Olivier Brandicourt the CEO of Sanofi (NYSE:SNY) when he outlined his company’s future there was no sense of panic or desperation in the Novo presentation. Novo clearly understands where the market is and more importantly where it is going.  It’s also becoming increasingly clear that Lilly (NYSE:LLY) as usual is Novo’s biggest competitor and even more so now that they will soon be launching their biosimilar version of Lantus in the US. What Lilly does with this product could forever alter the insulin market worldwide.

Looking at the presentation it is also clear that Novo understands where the market is not something we can say about their friends in France or the United Kingdom.  We hate to be redundant here but relatively speaking Sanofi and AstraZeneca (NYSE:AZN) are newcomers to the diabetes space and it shows with how they have managed their respective franchises. Sanofi’s biggest mistake was they could not capitalize on the huge success of Lantus. They like so many others could not execute on what once was a well thought out strategy. AstraZeneca by contrast really didn’t seem to have a strategy as to what to do with all this stuff after it was under one roof. Buying all the products was the easy part yet it is a whole different story to turn this collection of products into a thriving franchise.

Novo’s diabetes pedigree was evident when they outlined their pipeline, a pipeline that includes an oral version of semaglutide. As we have stated should this compound make it to market it could be a game changer. There is no question that the GLP-1 market continues to grow however it’s also clear that an oral version of what is now an injectable will be transformative. We were less impressed with their oral insulin project not because the product isn’t needed rather the technical and regulatory hurdles that this product faces. Following the less is more philosophy their once-weekly or what we could ultra-long acting insulin looks intriguing however given the dynamics of the insulin markets we’re not sure that payors would support this product.

Looking more near term Novo is set to become the fourth entrant into the once-weekly GLP-1 market with the injectable version of semaglutide. While the company continues to claim that semaglutide will be superior to the current offerings not just performance wise but also a superior delivery system we’re not as optimistic. A few quick thoughts here, first if Novo has an Achilles heel it’s their continued belief that premium pricing stills exists. A phrase they used throughout the day. Perhaps it’s just in the company’s DNA but given other statements made during the day we suspect even the folks at Novo know that premium pricing is a thing of the past.

Second, as we have noted in the past in this highly competitive environment delivery systems matter and no one is better at delivery systems than Novo. Having seen the delivery systems for Bydureon, Tanzeum and Trulicity there is still room for improvement.

Yet at the end of the day we suspect even the folks Novo know that coming to market as the fourth player means that have to buy their way onto formulary.

This is the same scenario they are facing with Tresiba which is just entering the now crowded long-acting insulin market. Just as Sanofi is trying to position Toujeo as a superior version of Lantus, Novo is doing the same with Tresiba. The problem here is threefold. First, Lantus the reigning leader in the category works pretty damn well. Second, neither Toujeo nor Tresiba is really that much better and third Lilly’s biosimilar version of Lantus not only works as well as Lantus but is cheaper than Lantus. Novo’s strategy here is to position Levemir against Lantus and Tresiba against Toujeo. While we have no argument with the strategy we’re just not sure it will work. As we noted earlier how Lilly prices their biosimilar Lantus could alter the dynamics of this market. Given that neither Toujeo nor Tresiba are that much better than Lantus why would a payor favor either option when there are other options which work very well and are cheaper.

The long-acting insulin market is just another example of how the diabetes drug market is commoditizing. It also illustrates just how dramatically the diabetes drug market has changed over the years. Back in the day innovation was rewarded with premium reimbursement, favorable formulary placement which in turn lead to market share. Today the exact reverse is true as price leads to favorable formulary placement which leads to market share. Scale is critical as it drives costs lower allowing any product with scale to achieve reasonable margins even at lower reimbursement.

Getting back to Novo’s oral version of semaglutide for a moment this product is a prime example of where innovation may actually be rewarded. Or put another way in today’s environment a product must be truly innovative in terms of performance, incremental improvements as Toujeo and Tresiba have shown are not being rewarded. This is also the reason that a product like Jardiance with its impressive cardiovascular data is impacting the entire diabetes drug market.

This was perhaps the one shocking item that came out of the day as Novo acknowledged that the SGLT2 category could adversely impact future growth. During the presentation one slide came with the title “Continued growth of the GLP-1 class in the US despite the rapidly growing SGLT-2 class”.  We knew the cardiovascular data for Jardiance would be impactful we just didn’t suspect the impact to be felt so quickly.

Another somewhat shocking development was management basically stating that given the ultra-competitive pricing dynamics they may abandon certain channels. This was a big topic when it came to their lack of Medicare coverage, a channel which will important due to pricing constraints does not allow for reasonable margins even with the increased volume it would bring. Frankly Diabetic Investor found Novo’s attitude here not just refreshing but very realistic. The company is basically saying they will only play in markets where they can make money and they will not sacrifice margins just to gain share.

This is in sharp contrast to others in the space who have chosen to achieve share no matter what the cost.  An odd move as it only brings about the one thing no one seems to want, an all-out price war.  The question for Novo is given this ultra-aggressive pricing dynamic how long can they hold out. How long before they are too are drawn into this war.

Thankfully for the company they continue to be a global player and while the US market is important they continue to remain dominate outside the US. Still even with this dominance they are not immune to the changing dynamics of overseas markets, markets which unfortunately for Novo are becoming as cost sensitive as the US market.

On balance Diabetic Investor sees Novo as well positioned for today and tomorrow. Even though the company talks about premium pricing we suspect they have begun to accept the reality that those days are over. They understand that the market has changed dramatically and they have begun to change as well. This is another reason Diabetic Investor believes in Novo as quite frankly we weren’t sure they could adapt to this changing market. That their past success would hamper their ability to adapt to new environment or put more bluntly they would not be able to change.

Now Diabetic Investor has no idea what brought about this change in attitude, although we suspect being hit over the head with a baseball bat had something to do with it.  Let’s be honest here no company likes to get their butts kicked and Lilly was doing just that.  A little ironic given this is exactly what Novo did to Lilly years ago. We further suspect that Novo isn’t really that concerned with Sanofi or AstraZeneca, yes they are competitors but given the issues they face with their respective diabetes franchises they aren’t a major threat, a nuisance perhaps but not a major threat.

Again we hate to be redundant but the diabetes drug market is battle between two heavyweights, Novo Nordisk and Lilly. Two companies with long and distinguished diabetes pedigrees. Ironically each company has needed a wakeup call, actually more like a punch in mouth, to wake them up. Even more ironic being the two heavyweights they are they did it to each other. Long time readers of Diabetic Investor may remember that there was a time when we felt Lilly could become irrelevant in diabetes, that if they didn’t get with the program this legacy franchise would fade away.

Although we never felt as though Novo would become irrelevant they too needed a wakeup call.  That if they did not change as the market was changing they would risk seeing Lilly overtake their global leadership position in diabetes.

While the strategies of these two heavyweights are different both are well thought out and refreshingly reflect market realities. Both in their own way have come down from the Ivory Tower and stopped looking at the world through rose colored glasses. These two diabetes giants have awoken from their slumber which is good news for their stakeholders and bad news for their competitors. Let the battle begin.