By Denise Roland
Danish drug giant Novo Nordisk AS is living through a corporate
nightmare that any CEO might recognize from business school.
After the company concentrated on making essentially one product
better and better -- and charging more and more -- customers have
suddenly stopped paying for all that improvement. The established
versions are, well, good enough.
In Novo Nordisk's case, that product is insulin, a hormone that
is deficient in people with diabetes. Since its founding in 1923,
the company has made successive waves of better insulin. It is the
world's biggest producer of the stuff, and insulin brings in more
than half of the company's revenue.
Over the years, that innovation has translated into an ability
to charge more and more for the latest version, boosting profit
margins and swelling the company's stock price. As diabetes -- an
incurable disease -- morphed into a global epidemic in recent
years, Novo Nordisk's tight focus on insulin provided reliable and
growing profits.
Lately, that flow ended. Doctors, health-plan managers and
insurers all have balked at paying for Novo Nordisk's newest
version of its insulin. Clinical trials show it works as promised
in controlling diabetes and delivers significant side benefits
compared with its predecessors. But for many customers, all that
isn't enough to warrant paying more -- because the older drugs on
the market already work pretty well, too. In Europe, the company
had hoped to price Tresiba at 60%-70% higher than its previous
product.
"The incremental improvements don't seem to justify the premium
prices," said Steve Miller, chief medical officer of Express
Scripts Holding Co., one of America's biggest pharmacy-benefit
managers, a key middleman that buys drugs in bulk on behalf of
insurers.
Novo Nordisk's hopes for the new drug -- which it once expected
to generate blockbuster profits -- have dimmed. The company has
warned repeatedly it won't meet its long-term growth targets, and
its stock price has shrunk by more than a quarter since the
beginning of last year. Executives are scrambling to diversify --
pouring money into research outside its core insulin-focused
science. The company announced 1,000 job cuts last fall.
"A lot of staff -- anyone who joined within the last 18 years --
had not seen anything but success and constant growth," said Chief
Executive Lars Fruergaard Jørgensen in an interview.
As the turmoil at Novo Nordisk shows, there are commercial
limits to innovation. Nokia Corp. and BlackBerry Ltd. both lost
their market dominance in smartphones because competitors beat them
with major technological advances. Both firms are in the process of
reinventing themselves.
In other cases, though, innovation has hit a wall. That is
especially the case in some pockets of the pharmaceuticals
business, where the scope for big improvements is narrowing.
Common, deadly ailments, such as asthma, high cholesterol and
heart disease, were the focus of the pharmaceutical industry during
a golden age of drug launches in the 1990s. Now, building on those
advances has proven costlier and more complex, and usually results
in smaller gains. Incrementally improved medicines are harder to
sell at the prices needed to cover their development costs.
Sanofi SA and Amgen Inc. are struggling to make headway with
their new cholesterol-lowering drugs. These medicines, known as
PCSK9 inhibitors, bring about a greater reduction in cholesterol
levels than older statins alone for certain people. But the
companies have yet to convince insurers that it is worth putting
these patients on them: Both cost more than $14,000 a year before
rebates and discounts. Older statins are available for just pennies
a day.
Novartis AG hoped its new heart-failure medicine Entresto's
proven superiority to older, so-called ACE-inhibitors would
guarantee rapid uptake among cardiologists. But insurers initially
incentivized doctors to prescribe older, cheaper drugs, leading to
a much slower launch. That is changing as insurers gradually adopt
more permissive policies toward Entresto.
People with diabetes don't make enough insulin, a hormone needed
to convert sugar into storable energy. In Type 1 diabetes, the body
doesn't make insulin at all. In Type 2, the far-more-common form
linked to obesity, the body develops resistance to insulin, and the
pancreas cannot produce enough for the proper effect.
Around 12% of American adults have diabetes, according to an
estimate published this year by the Centers for Disease Control and
Prevention, though around a quarter of those aren't aware they have
the disease. That figure could rise to as many as one in three
American adults by 2050, according to a 2010 report by the CDC.
Of those diagnosed with diabetes, about a third depend on
insulin injections, the CDC said. That was about six million people
in 2011.
Novo Nordisk has been making insulin since the hormone was
discovered in the early 20th century. That breakthrough, by two
Canadian scientists, led to the first effective treatment for
diabetes.
August Krogh, a Danish medical professor and Nobel laureate,
heard about the discovery in 1922 while lecturing in the U.S. with
his wife, Marie, a doctor who suffered from Type 2 diabetes. After
a stopover in Toronto, the couple returned to Denmark with
permission to manufacture the lifesaving treatment in
Scandinavia.
Nordisk Insulinlaboratorium was founded the next year. Denmark,
home to one of Europe's biggest pork industries, made sense for a
business based, in its early days, on harvesting the hormone from
the pancreases of pigs and cows.
In 1924, two brothers left Nordisk to set up their own firm,
Novo. The rival companies competed fiercely, one-upping each other
with insulin innovations, such as injections with longer
effects.
Novo adopted new genetic engineering technology in the 1980s.
The technology ushered in synthetic human insulin and ended the
dependence on animals. The two companies joined forces in 1989,
leapfrogging America's Eli Lilly & Co. as the world's biggest
insulin producer.
Over its history, the company's narrow focus was a strength: Its
deep expertise boosted its ability to produce ever-better
products.
Through the 1990s, the company tweaked the basic insulin
molecule to fine-tune its performance. It developed a fast-acting
insulin, called Novolog, that enters the blood quickly, providing a
ready boost at mealtimes. It also rolled out a long-acting version
called Levemir that releases a steady stream of insulin into the
blood throughout the day.
In the mid-2000s, Novo Nordisk launched a handful of these
so-called analog insulins, as patients clamored for more convenient
forms. Doctors, patients and health-care managers in the U.S. and
Europe were appreciative, willing to pay more for the new
benefits.
Novo Nordisk's stock surged. By 2013, Copenhagen's tiny stock
exchange was forced to change its blue-chip benchmark index to keep
it from being overwhelmed by the company's swelling market
value.
By then, Novo Nordisk enjoyed a duopoly for its longer-acting
drug, competing only with French giant Sanofi SA.
After the success of Levemir, Novo Nordisk aimed higher. It
developed Tresiba, even more convenient: The drug can be taken at
any time of day, whereas Levemir and Sanofi's equivalent, Lantus,
require a regular dosing schedule. In addition, Tresiba is
associated with fewer episodes of dangerously low blood sugar, or
hypoglycemia.
An early set of results for Tresiba impressed executives, Novo
Nordisk's research chief, Mads Thomsen, recalled. "We just sat
there and said, 'Wow,' " he said. "We had kind of realized we were
very close to perfection."
As it awaited final blessing from the U.S. Federal Drug
Administration, the company rolled the drug out across Europe,
starting in 2013. It hit the market with a thud.
Drug pricing in Europe is very different from the U.S. The
biggest buyers aren't insurance companies and health-plan managers,
but government-controlled entities or their middlemen. They
typically negotiate hard with companies for supplies for an entire
country. The system keeps prices lower than in the more-fragmented
U.S. system.
Once a price is set by one of these bodies, it is very difficult
to raise. So, drug companies typically launch a new drug at the
highest price they think they can get, knowing they won't likely be
able to increase it.
Novo Nordisk, however, struggled from the start to convince
European buyers that Tresiba was different enough from Levemir to
command a big premium.
In Germany, for example, a pricing board set the price for
Tresiba at the same level as the basic synthetic human insulin that
had been available since the 1980s, which has none of the
long-acting or other special benefits of newer forms. An agency
that assesses the cost-benefit of new medicines concluded Tresiba
had no real advantage in terms of controlling the disease itself.
Novo Nordisk withdrew Tresiba from Germany, Europe's largest drug
market.
Other countries, like the Netherlands, Denmark and Spain,
allowed Novo Nordisk to launch Tresiba at around its desired price
of 60%-70% higher than Levemir and Sanofi's Lantus.
But to minimize the impact on their budgets, the health systems
wouldn't reimburse patients for Tresiba, and the new insulin gained
very little market share. Last year, Novo Nordisk lowered its price
to a level that the health systems would reimburse, and use of
Tresiba has picked up.
"In Europe, we launched with a very high premium," said Mr.
Jørgensen, the CEO. "That turned out to be too high." He said
Tresiba's premium over Levemir and Lantus is now around 20% in most
European markets.
Still, executives were sanguine. Prices in Europe were now
locked in at much lower rates than they had expected. But they
thought they could rely on the U.S. market to more than make up. In
the U.S., drugmakers usually introduce new products at a modest
premium over previous versions, with the assumption they will be
able to raise prices for years to come.
Novo Nordisk launched Tresiba in the U.S. in early 2016, ahead
of the presidential election. Politicians on both sides were
slamming drug companies for raising prices. Beyond the campaign
rhetoric, insurers and health-plan managers were targeting diabetes
medicine, in particular, for cost-cutting scrutiny. The medicines
are their second-largest drug outlay, after cancer medicines,
according to analyst Ronny Gal of investment research firm
Bernstein.
Payers were girding for expected cost increases related to a
raft of new cancer-fighting drugs, many of which promised big gains
for patients. In the diabetes field, a string of new, pricey drugs
designed to control blood sugar levels in early-stage Type 2
patients were also stretching budgets. These pressures made
insulin, where the older products worked pretty well, an obvious
target for cost savings.
Diabetes "is on payers' radar with big, red, flashing lights,"
said Barry Farrimond, a European drug-pricing analyst at ZS
Associates, a management consultancy.
Amid that environment, Novo Nordisk couldn't convince executives
at pharmacy-benefit managers such as Express Scripts that Tresiba
was enough of a game-changer to warrant a significantly higher
price.
For that, large clinical groups like the American Diabetes
Association "have to tell us that this medication is clearly
superior and as a result everybody who has diabetes should have
access to it," said Troyen Brennan, chief medical officer of CVS
Health Corp., another large pharmacy-benefit manager.
Doctors and the ADA view Tresiba as "not much different," he
said. This year's ADA guidelines group Tresiba alongside other
long-acting insulins and note that patients with well-managed, Type
2 diabetes can use basic synthetic human insulin "safely and at
much lower cost."
Novo Nordisk accepted a list price for Tresiba only around 10%
higher than Levemir. The list price doesn't take into account
rebates and other concessions, and some pharmacy-benefit managers
are charging a higher copay for Tresiba to steer patients to
cheaper drugs.
At the same time, Novo Nordisk was being hit by another new
threat: competition. Eli Lilly, which for years had mostly played
in the short-acting insulin market, launched a low-cost,
longer-acting one, pressuring prices even more.
"We knew the dynamics were going to change, but it ended up
being more dramatic than we anticipated," CEO Mr. Jørgensen said in
the interview.
This month, he told reporters the price for Tresiba would take
another hit in 2018, having already fallen in 2017. "The
competitive environment we are in is now a permanent situation," he
said.
Tresiba is gradually gaining traction. As of June, it had
grabbed a 6.2% share of the U.S. long-acting insulin market,
according to health data provider Quintiles IMS. That momentum
helped Novo Nordisk post better-than-expected earnings in the
second quarter this year, leading the company to brighten its
full-year outlook.
But the tougher U.S. pricing environment took executives by
surprise. Last year, the company slashed its long-term
profit-growth forecasts twice: in February, to 10% from 15%, and in
October, to 5%.
The company's breakneck growth of the past two decades is "an
era that's over for now," said Claus Johansen, senior portfolio
manager at Danske capital, a top-15 investor in the company.
The company is protected from some market forces. In a quirk of
its Danish ownership structure, a foundation owns the majority of
the company, shielding it from an opportunistic takeover.
The Tresiba experience has prompted a strategic overhaul. Mr.
Jørgensen, who had been chief executive-designate since September
2016 and formally took up the role in January, has pivoted the
company away from making incremental improvements to insulin.
"The market will probably not be screaming to get a slightly
better Tresiba," he said in a February investor call.
It is widening its research to diseases that the company
considers "adjacent" to diabetes. Novo Nordisk has long had a
sideline in hemophilia treatments but has generally refrained from
dabbling in other diseases. Now, it will start investigating drugs
for conditions like NASH, a disease in which fatty deposits build
up in the liver; diabetic kidney disease; and cardiovascular
disease.
Within the diabetes field, the company still makes and sells the
popular, less-expensive insulins. A Novo Nordisk drug called
Victoza is part of a new class of treatments that boost insulin
production in Type 2 diabetes patients. And it hasn't given up on
insulin research altogether. In October, it scrapped a project
working on a tablet version of the medicine. Instead, it is now
focusing on more meaningful improvements, such as "smart insulin"
that acts only in the presence of high blood sugar.
"I still believe we will bring new insulin to the market," said
Mr. Jørgensen. "But the innovative height has to be better than
what we have today."
Write to Denise Roland at Denise.Roland@wsj.com
(END) Dow Jones Newswires
August 15, 2017 11:12 ET (15:12 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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