Novo Nordisk Raises Insulin Prices As Demand Grows

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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 opportunity.

Denmark'sNovo Nordisk ( NVO ) is a leading player in the market. Unlike chief rivalsEli Lilly ( LLY ) andSanofi ( SNY ), 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 ( ESRX ) removed three of the company's top drugs from its preferred provider list in favor of drugs with lower prices from Eli Lilly andAstraZeneca ( AZN ).

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%.

Growth Estimates

"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 drug.

Not only did Novo Nordisk miss sales forecasts in Q1, it lowered its forecast for the full year for the first time in a decade.

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 11% previously.

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 6%, respectively.

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 said.

Poulsen says increased pressure to contain costs could result in higher rebates, making it more important to come out with differentiated products.

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 analysis.

U.S. Launch

If Tresiba shows positive data from the trial, as analysts widely expect, it would bode well for a U.S. launch as early as 2016.

"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 2019.

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 drug.

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 Europe.

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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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