Novo Nordisk - An Opportune Time To Book Profits

Mar.14.14 | About: Novo Nordisk (NVO)

Summary

NVO, which has so far dominated the diabetes market, is expected to face tough times as competition is growing fierce and strong and will unfavorably impact NVO share.

Launch of four new basal insulin products over the next 2 years will constrain the growth prospects for NVO’s basal insulin product Levemir.

NVO’s fastest growing product Victoza will eventually meet strong competitors that may offer considerable benefits over Victoza.

Insulin market growth will slow down for three reasons.

In the last five years (2009-13) Novo Nordisk (NYSE:NVO) has delivered extraordinary growth. It clocked an EPS CAGR of around 19%, which is unmatched by most of its peers. Investors have appreciated this growth. The stock price has appreciated almost five times from $9.7 in January 2009 to $46 now. However, I see signs of a major slowdown going forward. NVO sales growth should slip from double digits now to low single digits from 2015 onwards. (Check Table 1.)

NVO, which has so far dominated the diabetes market, is expected to face tough times. Competition is growing fierce and strong and this will unfavorably impact NVO's share in the diabetes space over the next 5 years.

There are primarily 3 forces that will dampen NVO's growth:

1. Launch of four new basal insulin drugs over the next 2 years will constrain the growth prospects for NVO's basal insulin product Levemir. Levemir's share in the overall basal insulin market will drop from over 25% to about 17%.

2. NVO's fastest growing product Victoza will eventually meet strong competitors that promise considerable benefits over Victoza.

3. Insulin market growth will slow down for three reasons -

  • Patients can delay switching to insulin as SGLT2 and GLP-1 drugs' acceptance is increasing
  • Patients already taking insulin can be titrated to a lower dose by adding SGLT2 inhibitors
  • A major part of meal-time insulin sales will be replaced by fixed dose combination of GLP-1 drugs and basal insulin

About 78% of NVO's sales come from diabetes products, and this segment is currently growing around the mid teens. Levemir, Victoza and other modern insulins, which are driving growth for NVO currently, will be adversely impacted by therapeutic alternatives and competitive forces.

Table 1

Forecast of Novo Nordisk Sales (2013 -2018)

Annual Sales (2013)

USD billion

Growth (%)

Year over Year

% of Overall Group Sales

Annual Sales (2018)

USD billion

CAGR 2013-2018

Victoza

2.1

27

14%

2.1

0%

Novo Rapid

3.2

12

21%

3.5

2%

Levemir

2.1

22

14%

1.8

-3%

Novo Mix

1.7

4

11%

1.5

-2%

Human Insulin

2

-6

13%

1.2

-4%

Others

0.9

-2

6%

0.7

-5%

Diabetes Care

12.1

12

78%

10.5

-2%

BioPharmaceuticals Business

3.4

12

22%

5.5

10%

Novo Nordisk

15.5

12

100%

16.2

2%

Click to enlarge

NVO group sales growth should slip dramatically from over 12% now to 2% annually over the next five years. This would lead to a rerating in the stock. The price-earnings multiple should contract to reflect the subdued growth. At the current price, the stock trades at about 8x sales and 25x 2014 net earnings. From 2015 onwards we will see competition reaching the market and adversely impacting NVO's growth prospects.

I think this is an opportune time to book profits in NVO.

New entrants in the basal insulin segment will hit Levemir sales adversely

Levemir is basal insulin marketed by NVO and currently growing at 20% year-over-year. The drug generated approximately $2b for the full year 2013 and comprises 20% of NVO's diabetes care sales. Currently, there are just 2 basal insulin products on the market - Sanofi's (NYSE:SNY) Lantus and NVO's Levemir.

In the next 2 years four new basal insulin candidates are expected to hit the market. Some of these newer versions are supposed to be better than the existing basal insulin available on the market. As a result, I am expecting the market share of Levemir to fall from the current 25% (in the basal insulin market) to 17% in the next 5 years. The insulin market is growing 6% in volume terms and after factoring this in the growth calculation, Levemir sales growth rate is expected to decline to low single digits annually.

Basal insulin products that are expected to hit the market in the next two years -

  1. LY2963016 - Lilly (NYSE:LLY) in collaboration with Boehringer Ingelheim has submitted a new drug application to the USFDA under the 505(b) (2) pathway for the approval for LY2963016. LY2963016 is supposed to be the variant of Sanofi's insulin glargine (Lantus), but bioequivalent to Lantus. LLY is expected to price the drug at a discount to both Lantus and Levemir. LY2963016 will draw share from both Lantus and Levemir and thus impact their sales growth adversely.
  2. LY2605541 - LLY is expected to submit an NDA filing for this novel basal insulin this year. In clinical trials LY2605541 has demonstrated a clinical profile better than current market leader Lantus. LY2605541 demonstrated weight loss in addition to lower rates of hypoglycemia. The weight loss benefit is unique as all other insulin are seen to cause weight gain.
  3. MK-1293 - This is a biosimilar version of Lantus under development by Merck (NYSE:MRK). We anticipate this should reach the market by 2015 when the patent on Lantus expires.
  4. U300 - U300 is supposed to be a superior version of Lantus and is currently in Phase 3 development by SNY. SNY will make a filing for the drug this year and thus the drug should reach the market by 2015. U300 is associated with a lower risk to cut down the risk of hypoglycemia when compared to Lantus. With two basal insulin in its basket (if U300 is approved) SNY will be in a good position to play the pricing card to maximize its market share.

Overall insulin market sales will decline for three reasons -

1) Growing acceptance of SGLT2 and GLP-1 agents in non insulin dependent diabetes patients will delay patient shift to insulin therapy - Those patients who fail to respond to oral anti diabetes drugs are put on to insulin therapy. With the recent approval of a new class of drugs called SGLT2 inhibitors (Forxiga and Invokana), and growing acceptance of GLP-1 agonists, Type-II diabetes patients can continue oral anti diabetes treatment for a significantly longer period of time. This will delay a switch to insulin by another 2 to 3 years.

2) Those patients currently on insulin will be titrated to a lower dose by adding GLP-1 drugs and SGLT2 agents - When SGLT2 inhibitors or GLP-1 agonists are added to insulin therapy, the amount of insulin dose a Type-II diabetes patient needs can be significantly curtailed. Since insulin is the ultimate resort, physicians would like to delay its use as much as possible. In clinical trials it was demonstrated that when SGLT2 inhibitors are combined with insulin, it leads to a statistically significant reduction in the mean dose of insulin consumed over the trial period while producing the same glycemic control. This was also accompanied with weight loss, which is an important unmet need in the current treatment paradigm.

3) Significant part of meal time insulin sales will face competition from fixed dose combination of insulin and GLP-1 - Phase 3 clinical trials evaluating fixed dose combination of insulin and GLP-1 are ongoing. Use of this combination drug will reduce the need for meal time insulin. Patients can also expect other benefits such as reduced number of injections and weight loss. The risk of hypoglycemia is also lower when meal time insulin is replaced with GLP-1 agonists.

Victoza should encounter fierce competition from both GLP-1 drugs in pipeline as well as approved ones.

The pipeline of GLP-1 agents is full and these are expected to have major benefits over existing ones on the market including Victoza. Among the existing GLP-1 drugs on the market, Victoza is the market leader with a share of around 60%. The market share of Victoza will significantly go down as newer and better GLP-1 drugs reach the market. Many of these newer pipeline GLP-1 drugs offer significant patient compliance benefits and reduced side effects. The prominent ones that will reach the market include:

  1. Dulaglutide -The phase 3 head-to-head trial comparing dulaglutide to Victoza, showed both the drugs are equally efficacious; however, dulaglutide wins over Victoza by virtue of its once weekly compliance.
  2. Bydureon dual chamber pen - Last week the USFDA approved a dual chamber pen for Bydureon which allows patients the convenience of once weekly dosing without the hassles of reconstitution before using. AstraZeneca has announced that the pen shall be available to patients later this year.
  3. ITCA-650 - Being developed by Intarcia Therapeutics, ITCA 650 is a once- or twice-yearly continuous subcutaneous delivery of exenatide - a GLP-1 agonist. ITCA-650 is currently in Phase 3 trials and should reach the market by 2015/2016. ITCA-650 would be available as an implant which is nothing but a matchstick-size, miniature osmotic pump inserted subcutaneously in the body. The implant would provide continuous and consistent drug therapy. Phase 2 Data on ITCA 650 demonstrated that the implant produces significant and sustained reductions in HbA1c as well as the body weight in over 48 weeks of treatment. The best part was that unlike other GLP-1 drugs on the market, the rate of gastrointestinal safety issues (nausea and vomiting) was much lower with ITCA-650. Since the drug is an implant and not an injection, patients' compliance and convenience would be unmatched and also significantly enhance the quality of life for diabetes patients. Phase 3 trials evaluating ITCA 650 are currently ongoing and should report data around 3Q -2014.
  4. Lyxumia - This once daily GLP-1 from Sanofi is a head-to-head competitor for Victoza and like Victoza, it is also to be dosed once daily. The drug is already approved in EU, while it is under regulatory review in the US. Lyxumia has demonstrated a differentiated profile when compared to Victoza. It makes more sense to use Lyxumia in combination with basal insulin than Victoza because of its superior post prandial glucose reduction effect. A superior post prandial glucose impact justifies Lyxumia as a superior replacement of meal time insulin than other GLP-1 drugs.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.