Fueled by the obesity epidemic and an aging population,
diabetes has become a global problem.
It affects an estimated 380 million people worldwide, 27
million in the U.S. But for drug companies, it's an
Denmark'sNovo Nordisk (
) is a leading player in the market. Unlike chief rivalsEli Lilly
) andSanofi (
), which target many other diseases, Novo Nordisk focuses mostly
on diabetes therapies.
That sharp focus is a competitive advantage, says Ronny Gal,
analyst with Sanford C. Bernstein & Co.
"They have very good technical skills, and they spend a lot of
money on sales and marketing," he said.
Karen Andersen, an analyst with Morningstar, calls Novo
Nordisk "the most innovative player in diabetes."
But Novo Nordisk got off to a slow start this year.
First-quarter sales were hurt in the U.S. as pharmacy benefits
managerExpress Scripts (
) removed three of the company's top drugs from its preferred
provider list in favor of drugs with lower prices from Eli Lilly
Analysts expect 2015 and 2016 to look healthier as Novo
Nordisk benefits from price hikes and new drug launches. In May,
it raised prices on insulin drugs by 10%.
"When you have a growing market and take pricing, you
typically have a good business," Gal said.
Morningstar estimates that the global diabetes market will
grow 12% a year over the next five years.
"Even if pricing power weakens, (Novo Nordisk) will see strong
growth over the long run," Andersen said.
She says growth in the U.S. is driven by increased diagnosis
rates and patients moving to newer and pricier therapies. In
emerging markets such as China and Mexico, the growth potential
is rooted more in richer diets and less exercise as people move
from rural to urban areas. Obesity is one of the biggest risk
factors for developing diabetes.
Andersen expects the impact from the Express Scripts decision
to linger through the year.
The three drugs cut from the preferred list were NovoLog, the
firm's best-selling insulin drug in the U.S., NovoLog Mix and
non-insulin drug Victoza.
Sales of Victoza, in a class known as GLP-1, had been growing
at double-digit rates. But first-quarter sales slowed, to $535
million from $587 million in the fourth quarter, though they were
still 9% higher than a year earlier.
Foreign-exchange head winds didn't help, nor did industrywide
inventory cuts by U.S. wholesalers. Also, the company faced
generic competition for Prandin, its blood-sugar-lowering oral
Not only did Novo Nordisk miss sales forecasts in Q1, it
lowered its forecast for the full year for the first time in a
Revenue in the quarter grew just 2% in Danish kroners to the
equivalent of $3.73 billion, or 7% in local currencies.
The new forecast for 2014 calls for 7% to 10% growth vs. 8% to
The quarter's sales results broke a streak of 47 straight
quarters of double-digit top-line growth, says Kasper Poulsen,
head of investor relations.
"We knew there would be a head wind in Q1," he said. But he
says the company was "surprised by how fast Express Scripts
implemented the (preferred provider) change," which went into
effect Jan. 1. It took just one month rather than the typical two
to three, he said.
The bottom line fared better. Novo Nordisk earned 45 cents a
share in the first quarter, a penny above views, and up 10% from
the earlier year.
Gross margin (83%) and operating profit (39.5%) were up 3% and
Still, analysts expect per-share profit growth in American
depositary receipts to slow this year to 11% from 25% last year.
Revenue is seen climbing 7.5% to $16 billion.
As efforts in the U.S. to cut health costs continue, "The big
risk is that people begin to push back (on prices)," Gal
Poulsen says increased pressure to contain costs could result
in higher rebates, making it more important to come out with
The company's new-generation insulin drug Tresiba has been
launched in 12 countries outside the U.S., including the U.K.,
Germany and Japan. Approval in the U.S. will depend on results of
a new clinical trial.
The Food and Drug Administration asked for more data on heart
risks for the long-acting insulin product.
Novo Nordisk says the U.S. trial is progressing ahead of plan
and expects to have enough data by mid-2015 to support an interim
If Tresiba shows positive data from the trial, as analysts
widely expect, it would bode well for a U.S. launch as early as
"Tresiba would help to extend their growth and renew their
insulin portfolio," said Andersen, who expects the drug to
generate $3.5 billion by 2023.
Tresiba is an "improved version of Levemir" and has "better
pricing power," Andersen said.
Tresiba has patent protection through 2028 vs. Levemir's
Levemir competes with Sanofi's Lantus. Both modern insulin
drugs are growing at a robust clip, and are different enough from
each other to maintain pricing power, she says.
Lantus will likely see competition in 2016 from a biosimilar
Tresiba's launch in the U.S. would leave both Levemir and
Lantus behind as older-generation products more likely to do
better in emerging markets, Andersen says.
Novo Nordisk's pipeline includes a combination drug of Tresiba
and Victoza, called Xultophy, which could launch in Europe around
the new year, pending regulatory approval. A drug to treat
obesity is under review by the FDA and by officials in
Data from other trials are due out next year, including a
faster-acting version of NovoLog. An oral GLP-1 class drug is
also in development.
"While we expect 2014 to be low on events, we believe 2015 is
likely to bring some of the most important events for Novo
Nordisk," analyst Peter Hugreffe of Stockholm-based SEB Equity
Research said in a recent research report.