NVO - Novo Nordisk

[DooDiligence]

"This is the very reason I have stated that (I believe I've posted it) NVO has moat. To create a generic version of a biologic rather than chemical drug is approximately 15x-100x the R&D costs. There are a couple of Indian companies attempting to do so, but maintaining a stable bacteria (DNA mutations are frequent and unpredictable) is a huge headwind. There are many other quality assurance factors that need to be addressed by any generic attempt. The risks of a mistake are massive."

 

I agree.

But.

 

-The diabetes market is huge and will likely grow++. A LOT of money to be made. So a lot of parties will have an incentive to produce a generic "equivalent" or a substitute.

-Recombinant DNA technology is still in its infancy, in a way. Expect accelerating effects due to innovation.

-The insulin analog market is a typical example of decreasing marginal returns (drug price over clinical efficacy) just like many other specialized drugs coming to the pharma market in the last few years. Expect pressure from the payer (whoever it is).

 

With that said, regulatory barriers to entry will likely remain relatively high for some time due to concerns about clinical efficacy, safety and immunogenicity (think of what happened to erythropoietin). In effect, time will tell.

 

https://onlinelibrary.wiley.com/doi/full/10.1002/btpr.2066

http://www.ema.europa.eu/docs/en_GB/document_library/Scientific_guideline/2015/03/WC500184161.pdf

https://www.liebertpub.com/doi/full/10.1089/dia.2014.0362

 

DooDiligence,

Isn't it hard to believe that the genetic similarity between humans is 99,9%!

Difference at the margin does count. :)

 

Yes, that amazed me at 1st.

 

We just covered genetics & its use in forensics.

Bio-Chick says that they use the 99.9% (which performs little or no known function) when fingerprinting suspects, because of the huge variation there.

 

As opposed to the, super important, 0.1% of protein producing code (which also gets used to identify baby Daddy's.)

[DooDiligence]

Mostly agree.

 

The FDA's "progress" has been slow and sometimes confusing but I wonder if the differences between the EU and the US are not overestimated.

 

Would add:

 

-The « generic » biosimilars (including the analog insulins) are complex molecules (compared to the simple molecule generic pill) and are highly sensitive to the manufacturing process but they are not truly « new » products and this is not well reflected by regulatory pathways actually in place.

 

-If you think of the US 1984 Hatch Waxman Act which allowed sponsors to refer to the previously approved product on which the patents had expired as part of their abbreviated new drug application for generic small molecule drugs, the passage of the BPCIA (Biologics Price Competition and Innovation Act, 2009) is likely to eventually facilitate the approval process for the « newer » biologics. The Act gives authority to the FDA in terms of the necessity to complete clinical studies for comparability purposes.

 

-The FDA framework is likely to continue to converge to global standards (or vice-versa) and « abbreviated » pathways to reduce burdens on sponsors are likely to come.

 

-So, from the regulatory standpoint, the competitive landscape is likely to ease to some degree.

 

-The estimated regulatory price tag of $75–250 million per developed drug in this space will be a relative deterrent to entrants outside of the oligopoly but the regulatory hurdles will likely come down as an unusually large number of patents are expiring.

 

A loosened, and more internationally conforming, FDA framework should be beneficial to us all.

 

I'm betting on the necessity of scale in production and distribution.

Smaller new entrants will just get gobbled up before they can get big.

[DooDiligence]

I thought the whole oral insulin thing was dead?

 

https://globenewswire.com/news-release/2018/04/26/1488143/0/en/Emisphere-Amends-License-Agreement-with-Novo-Nordisk.html

[Cigarbutt]

I thought the whole oral insulin thing was dead?

 

https://globenewswire.com/news-release/2018/04/26/1488143/0/en/Emisphere-Amends-License-Agreement-with-Novo-Nordisk.html

 

Potential value there but still in early stages.

May want to look at the following:

https://www.researchgate.net/publication/270654470_Oral_insulin-delivery_system_for_diabetes_mellitus

 

Dated to some extent but not too technical so helpful if you put yourself in the perspective of the venture-capital-like executive at Novo Nordisk who understands that something may come up and may need to be harvested opportunistically. The article is nice in terms of conceptualizing the possibilities where the barriers to entry may come down with new products such as oral insulin. If you can't beat them, buy them.

 

Some vaccines are now given as a nasal spray and nobody is complaining.

Needle or nasal?

 

[DooDiligence]

I thought the whole oral insulin thing was dead?

 

https://globenewswire.com/news-release/2018/04/26/1488143/0/en/Emisphere-Amends-License-Agreement-with-Novo-Nordisk.html

 

Potential value there but still in early stages.

May want to look at the following:

https://www.researchgate.net/publication/270654470_Oral_insulin-delivery_system_for_diabetes_mellitus

 

Dated to some extent but not too technical so helpful if you put yourself in the perspective of the venture-capital-like executive at Novo Nordisk who understands that something may come up and may need to be harvested opportunistically. The article is nice in terms of conceptualizing the possibilities where the barriers to entry may come down with new products such as oral insulin. If you can't beat them, buy them.

 

Some vaccines are now given as a nasal spray and nobody is complaining.

Needle or nasal?

 

Thanks, that ties in well with what I learned in Intro to Biology this semester.

(I hated learning all that stuff but am glad that I did.)

[John Hjorth]

Novo Nordisk A/S 2018Q1 out today.

 

Pretty disastourous to me - to be candid. Currency headwinds painted all over. It seems like Group Treasury has done a good job on forward contracts on both USD and JPY.

 

- - - o 0 o - - -

 

This sucker just went up about 5 percent today, while I expected it to go down. I willl never get it here for Novo Nordisk A/S. Seems today like Scandinavian investors selling, while investors abroad buying.

 

- - - o 0 o - - -

 

I just have to say, that getting thrown off the back of this rodeo bull today, by what happened today in the market, made me land on the other side of [yet another] one foot [~million DKK] hurdle. [ 8-D].

 

- - - o 0 o - - -

 

Jeff & Sharad - I would like to read your thougths here in this topic.

[Sharad]

Novo Nordisk A/S 2018Q1 out today.

 

Pretty disastourous to me - to be candid. Currency headwinds painted all over. It seems like Group Treasury has done a good job on forward contracts on both USD and JPY.

 

- - - o 0 o - - -

 

This sucker just went up about 5 percent today, while I expected it to go down. I willl never get it here for Novo Nordisk A/S. Seems today like Scandinavian investors selling, while investors abroad buying.

 

- - - o 0 o - - -

 

I just have to say, that getting thrown off the back of this rodeo bull today, by what happened today in the market, made me land on the other side of [yet another] one foot [~million DKK] hurdle. [ 8-D].

 

- - - o 0 o - - -

 

Jeff & Sharad - I would like to read your thougths here in this topic.

 

 

Hi John,

 

I'm honoured that you value my opinion, but, on this one quarterly report, I have not had much opportunity to think things through. For long-term positions, like this one, I am trying to avoid looking too deeply into single reports. The biggest takeaway I have is that NVO continues to buy back shares and still has slack to increase dividends over time. I don't feel the company is necessarily cheap, nor is it necessarily expensive here. I am hoping to see the price fall to the low $40s (for the ADR), so I can buy more then. I remain confident that management has the expertise to steer the business forward, while the pharma industry faces significant headwinds.

 

I am still eagerly anticipating a positive decision on oral semaglutide at the end of this year. Such a decision leads to many new possibilities for NVO, and many new avenues for growth (over-the-counter weight loss pills come to mind). Hopefully the company will consider those once the decision comes through.

 

Sharad.

[John Hjorth]

Thank you for your reply here, Sharad,

 

This currency issue [uSD / EUR] has basically saturated so many things that I'm involved in - it has become a bit better in the last few months, though. Thank you for reminding me not to be too short sighted here. I have not gotten cold feet here. There is no consideration to reduce position for me. I still think the future long term for this company look bright, despite the current headwinds with regard to the US diabetes market. We get paid for carrying the risks by dividends and share buybacks here.

 

Just a supplementary question to you here:

 

When you look at NVO, how do you approach the financials? - I mean do you look at it in DKK or USD [Appendix 8, p. 27 in the 2018Q1 report or the US SEC filing]?

[Sharad]

Thank you for your reply here, Sharad,

 

This currency issue [uSD / EUR] has basically saturated so many things that I'm involved in - it has become a bit better in the last few months, though. Thank you for reminding me not to be too short sighted here. I have not gotten cold feet here. There is no consideration to reduce position for me. I still think the future long term for this company look bright, despite the current headwinds with regard to the US diabetes market. We get paid for carrying the risks by dividends and share buybacks here.

 

Just a supplementary question to you here:

 

When you look at NVO, how do you approach the financials? - I mean do you look at it in DKK or USD [Appendix 8, p. 27 in the 2018Q1 report or the US SEC filing]?

 

 

I try to look at NVO in the context of both currencies (and then it gets complicated with CAD for me). With quarterly financials, I am trying not to dwell too much on the granular, and I more or less focus on gross margin, return on assets, R&D spend and weighted average common shares, in comparison to the prior years. When the year-end results are published, I take a look at the 10 year results, and it gives me perspective of the growth rate for the company overall, and especially for the individual shareholder (this is easier said than done - I pretty much sold out of my entire portfolio in January, and have been buying back since then).

 

Public companies have so many levers to pull to build long-term shareholder value, and I strongly feel NVO has done an amazing job applying these levers over the years. I feel like NVO can show the same properties as Altria has in the past: Even if the long-term revenue becomes impaired by further regulation (US pricing pressures), they can generate massive rates of return on a per share basis by pulling the right levers (buybacks, dividend growth, capital structure, etc.).

 

As an aside, I have become absolutely obsessed with high ROA businesses that payout 80%+ of their earnings to shareholders on an annual basis. I like them even better when they sport a close to market P/E ratio, as it simply means they will outperform the market in the long-term (because they have more free cash flow to buy back shares and increase their dividend). I'm happy to see NVO being out of favour for most of the last 24 months. It simply means larger buybacks by a company that has maintained a massive ROA, year in and year out, for the 18 years I've followed them. If that doesn't change anytime soon, then we'll keep reaping the rewards into the future.

[John Hjorth]

This is an awesome post from you, Sharad. Thank you for sharing your thoughts.

 

I haven't thought much about the ROA side of this business, combined with cash conversion and pay outs, compared to market P/E. More to think about, thank you.

[DooDiligence]

I echo the words of Sharad.

 

Keep the faith & ignore the quarterlies (well, not entirely.)

Go where the consensus is not rosy (but it really is, rosy that is.)

 

Humans celebrating success by overeating + great capital allocation = LT gains

[John Hjorth]

Thanks, Jeff,

 

Going forward, I think I'll try to stay more disciplined with dividend reinvestment in this stock.

[Sharad]

https://www.statnews.com/2018/05/15/diabetes-insulin-novo-nordisk-north-carolina/

 

 

[John Hjorth]

Novo Nordisk Foundation News Release [May 17^th 2018]: Lars Rebien Sørensen to become new chairman of the Novo Nordisk Foundation.

[John Hjorth]

I've had a private discussion with Sharad today of what's been going on now with the EUR/USD pair, especially related to the DKK/EUR peg, again related to a company like Novo Nordisk A/S, or any other Danish company with material exports to the US. [there are several.]

 

About the DKK/EUR peg [, on the rim]:

 

Danmarks Nationalbank [the name of the Danish FED]: Denmark's fixed exchange rate policy.

Danmarks Nationalbank: Foreign-exchange-rate policy and ERM 2.

Wikipedia: [Danish] Fixed foreign-exchage-rate policy.

 

It has been so for about 35 years [almost] now. I have no idea if it will ever change going forward long term, but I can't see anything, that would call for this change right now. Danmarks Nationalbank has been hell bent to this policy for long time now, using interest rates and money markets operations to make it so. Personally, I take it as a given. I would be absolutely in shock, if it changed.

 

At my investment bank Nordnet Bank AB a Danish investment economist called Per Hansen is branding the bank with his stuff whereever it's possible for him. He's promotional on behalf of the bank - I don't like all the stuff I read from him - but he's for sure professional competent with regard to investing. His circle of competence is wide with regard to especially Danish companies, and the number of dots connected inside his head is just enormous.

 

Among his activities he's writing a column in the Danish paper called Berlingske, and actually today he has published a piece about how to think about those Danish companies like Novo Nordisk A/S related to the currency movements we experience right now. You can read the piece here. To me, what he here has written, is spot on.

 

- - - o 0 o - - -

 

I'm sure you don't need assistance in inverting it with regard to currency as being on the other side of the Atlantic pond.

[thowed]

https://www.bloomberg.com/view/articles/2018-06-07/high-tech-insulin-is-more-problem-than-solution

[DooDiligence]

Mads Krogsgaard Thomsen, Chief Science Officer of Novo Nordisk  |  Published 16 May 2018

 

"A recent, big breakthrough happened about a year ago when we cracked one of the hardest nuts of all in the search for a cure of type 1 diabetes: we were able to transform stem cells to glucose-sensing, insulin-secreting beta cells, just like those produced in the pancreas of a healthy person. We showed that we could implant cells that were differentiated from embryonic stem cells into mice with type 1 diabetes and basically make the animals normal."

 

"That wasn’t all. Collaborating with Lund University and BioLamina, we were also able to convert the stem cells into dopamine-producing neurons that have the potential to one day treat Parkinson’s disease in a curative manner. Again in partnership with BioLamina and alongside the Duke-NUS Medical School in Singapore, we made heart cells that in future could help to treat chronic heart failure. Importantly, these achievements can be repeated efficiently, robustly and consistently."

 

https://www.novonordisk.com/about-novo-nordisk/perspectives/the-exciting-potential-of-stem-cell-research.html

[Jurgis]

https://www.npr.org/sections/health-shots/2018/09/01/641615877/insulins-high-cost-leads-to-lethal-rationing

[Cigarbutt]

https://www.npr.org/sections/health-shots/2018/09/01/641615877/insulins-high-cost-leads-to-lethal-rationing

 

For additional perspective:

http://spectrum.diabetesjournals.org/content/29/3/130

...One woman on an insulin pump noted after she went to pick up her insulin and had to pay the full retail price that “my insulin now costs more than my home mortgage.”

 

Long term perspectives for returns continue to look favorable.

But there is a customer concentration risk where the customer (who is the customer?) may eventually somehow achieve effective action.

 

So potential adjustments in pricing power with capital allocation implications but the long term horizon is clear even with reversion to the mean.

 

[DooDiligence]

Will the connected pen improve care & reduce costs for patients & payers?

 

https://www.novonordisk.com/media/news-details.2218400.html

[Cigarbutt]

Will the connected pen improve care & reduce costs for patients & payers?

https://www.novonordisk.com/media/news-details.2218400.html

 

My humble take is that this is mostly, in itself, for NVO, a marketing tool.

 

For diabetic patients, as for any chronic disease population, the potential value is likely to be uncovered when technological devices (insulin pen, iPhone, alexa or whatever) used as remote monitoring tools are combined with remote consultation, case management and education.

 

Many studies out there showing promising results for the monitoring aspect but there is a large publication bias. There is convincing evidence though for remote monitoring based on technology for people living in rural or remote areas but this is a small market.

 

Just in case you're interested, when diabetic patients come for evaluations, typically hemoglobinA1c is measured. Contrary to simple glucose measurements which tell you where the sugar level is now, the hemoglobinA1c gives additional info as it is a relatively crude representation of the exposure of the hemoglobin molecule to levels of blood sugar for the last few weeks, which may say a lot about patient compliance and adequacy of treatment. That's an example of the potential advantage of remote and regular monitoring. So, one may want to disactivate the device before having that second piece of chocolate cake unless one enjoys to speak to the nurse who would instantaneously call to enquire about the recent sugar spike. :)

 

If you are interested, here's a widely quoted landmark article about tele-medicine.

https://www.researchgate.net/profile/Douglas_Perednia/publication/15362592_Telemedicine_Technology_and_Clinical_Applications/links/581fce9308ae40da2cb24f59.pdf

Published in 1995, the authors mention that there are still unresolved problems but that the future is bright. I still agree.

"Finally, decisions about large-scale implementation should be based on the services to be provided rather than the technology used."

 

This transformational aspect of the industry is still in its infancy and it will be terribly fun to watch and to participate.

 

Hope this helps.

 

[DooDiligence]

Will the connected pen improve care & reduce costs for patients & payers?

https://www.novonordisk.com/media/news-details.2218400.html

 

My humble take is that this is mostly, in itself, for NVO, a marketing tool.

 

For diabetic patients, as for any chronic disease population, the potential value is likely to be uncovered when technological devices (insulin pen, iPhone, alexa or whatever) used as remote monitoring tools are combined with remote consultation, case management and education.

 

Many studies out there showing promising results for the monitoring aspect but there is a large publication bias. There is convincing evidence though for remote monitoring based on technology for people living in rural or remote areas but this is a small market.

 

Just in case you're interested, when diabetic patients come for evaluations, typically hemoglobinA1c is measured. Contrary to simple glucose measurements which tell you where the sugar level is now, the hemoglobinA1c gives additional info as it is a relatively crude representation of the exposure of the hemoglobin molecule to levels of blood sugar for the last few weeks, which may say a lot about patient compliance and adequacy of treatment. That's an example of the potential advantage of remote and regular monitoring. So, one may want to disactivate the device before having that second piece of chocolate cake unless one enjoys to speak to the nurse who would instantaneously call to enquire about the recent sugar spike. :)

 

If you are interested, here's a widely quoted landmark article about tele-medicine.

https://www.researchgate.net/profile/Douglas_Perednia/publication/15362592_Telemedicine_Technology_and_Clinical_Applications/links/581fce9308ae40da2cb24f59.pdf

Published in 1995, the authors mention that there are still unresolved problems but that the future is bright. I still agree.

"Finally, decisions about large-scale implementation should be based on the services to be provided rather than the technology used."

 

This transformational aspect of the industry is still in its infancy and it will be terribly fun to watch and to participate.

 

Hope this helps.

 

Thanks, this does help & I agree that it will be fun to watch.

 

I'm hoping that my trust in NVO management has been well placed & the investment participation aspect will pay off over the next decade.

 

Here's to moderation in chocolate cake consumption & not having to participate as a patient  :)

[Spekulatius]

https://www.npr.org/sections/health-shots/2018/09/01/641615877/insulins-high-cost-leads-to-lethal-rationing

 

Looks to me like there is a cartel at work here that works to keep the prices high. The substance itself is a commodity and has been off patent forever. The process has been improved with some benefit to the patients, but what also happened is that the older cheaper version have disappeared from the market causing a price free over the years. According to the price study below, there are price difference as high as 40x for the same product. Just by the outcome alone, one can tell thet what is happened in here has nothing to do with competition.

http://haiweb.org/wp-content/uploads/2016/04/ACCISS-Prices-report_FINAL-1.pdf

 

Quite frankly, the government should step in, set up a production facility and produce and sell a generic insulin at or above cost for Medicare/ Medicaid. It wouldn’t be great for the shareholders of these cartel companies, but it would be better for society.

[Cigarbutt]

https://www.npr.org/sections/health-shots/2018/09/01/641615877/insulins-high-cost-leads-to-lethal-rationing

Looks to me like there is a cartel at work here that works to keep the prices high. The substance itself is a commodity and has been off patent forever. The process has been improved with some benefit to the patients, but what also happened is that the older cheaper version have disappeared from the market causing a price free over the years. According to the price study below, there are price difference as high as 40x for the same product. Just by the outcome alone, one can tell thet what is happened in here has nothing to do with competition.

http://haiweb.org/wp-content/uploads/2016/04/ACCISS-Prices-report_FINAL-1.pdf

 

Quite frankly, the government should step in, set up a production facility and produce and sell a generic insulin at or above cost for Medicare/ Medicaid. It wouldn’t be great for the shareholders of these cartel companies, but it would be better for society.

 

Are you serious or just want to stir the pot?

 

Interesting because the opacity of the insulin market may become a poster child of big pharma "practices" and pseudo-collusion. It seems that self-regulation is better than imposed regulation but the former requires foresight and can always be delayed, it seems. I don't think nationalization is in the cards but when the pendulum does swing, the big three, including NVO, may suffer. The fact that this pseudo-cartel scenario has been going on for so long provides IMO a false sense of security.

 

I would say that the numerous published reports inspired by the financial hardship imposed on some "customers" due to high insulin prices are due to gradually higher deductibles whereas before, the gradually increasing costs were "absorbed" by the "system". An argument could be made that Standard Oil was too profitable and what tilted the balance was when a sufficient amount of public pressure was reached for a populist political movement to catch the wave of discontent. But Standard Oil was not nationalized, it just became something else, less visible. I would say that a similar scenario is possible with the insulin market, with the black-box opaque pricing mechanism becoming more transparent and NVO adjusting with a lower cost structure somehow (and maybe a slightly lower return on equity).

 

The industry and NVO have hugely benefited from complexity but this has gone too far. The implicit growing risk is that the response also may go too far with government involvement, with the possibility of lower prices but the very real uncomfortable disadvantages of central planning. Tell me where I'm going to die so I don't go there.

 

Edit: Just finished looking at the linked report and realize that your post may have been more "global" in nature. But who would "step in" in our deconsolidating world?

 

[Spekulatius]

I think stiring the pot in this cases seems in order in this situation. I think at this point, , if market based system were at work, there should be a source of dirt cheap generic insulin available to buyers.

The fact that prices are rapidly rising for a commodity tells us there is something wrong and the market isn’t working. Very likely, there is collusion at work here, there is virtually  no other explanation. I am not really pushing on the high deductible or the mechanisms of payment, just on the cost of the product. The government is the single biggest customer, so they have an interest to get to the bottom of this.

 

Sometimes you can tell that there is a crime simply by the outcome. As a shareholder in any of these cartel stocks, I would be careful.