Another Prize Slips Through Novo's Hands As Big PBM Looks Elsewhere

| About: Novo Nordisk (NVO)
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Novo Nordisk (NYSE:NVO) has chalked up a second big miscalculation in 2013. Losing purchasing contracts with the US pharmacy benefit manager (PBM) Express Scripts after raising prices this year for its premium diabetes products will be another hit to its bottom line, and limit access to Victoza and Novolog for about 155 million privately insured Americans.

With the long-acting insulins Tresiba and Ryzodeg benched for at least four years in the US while new cardiovascular data are gathered, the Danish company has been pressing to get the most out of its fastest-growing product, Victoza – and with the new products on the sideline its beefed up US sales force has had little else on which to focus. The decision illustrates the furious competition in the diabetes space, where just a few giant players fight for every last point of share, albeit in a growing market.

One last hope for Novo is the potential for pushback from patients and plan sponsors denied access to what has been proven as the best GLP-1 analogue on the market (Amylin scores own goal in Bydureon vs Victoza head-to-head study, March 3, 2011).

Trimming forecasts

Novo shares fell 3% to DKr936 yesterday on the news, which was not announced formally by either company. Express Scripts, the biggest PBM in the US, has selected Eli Lilly to supply Humalog, the alternative for fast-acting insulin analogue NovoLog (known outside the US as NovoRapid), and AstraZeneca and Bristol-Myers Squibb to supply Bydureon.

Novo had no comment beyond confirming that it had lost the contracts. A spokeswoman said executives would provide an update when it releases third-quarter earnings in October; however some analysts were forecasting that the decision would reduce earnings per share by as much as 3% in 2014.

Bryan Garnier analyst Eric Le Berrigaud wrote today that winning a similar contract in the fast-acting insulin space with number two PBM CVS Caremark, which has 85 million covered lives, was worth 1-2% of market share. Mr Le Berrigaud said the decision would reduce group sales by 1-1.5% in 2014.

Victoza was on the “preferred brand”, or third tier of Express Scripts plans, which meant patients’ cost-sharing was greater than with generic or lower-cost branded drugs, although it was not the highest-cost tier in the Express Scripts coverage scheme. It costs over $150 per 18mg pen, each of which can deliver at least 10 once-daily doses.

Drip, drip, drip

Taken alone, this might not have been a major blow for Novo. Had Tresiba and Ryzodeg got their approvals in the US – Novo failed to conduct the cardiovascular safety investigation the FDA wanted – and seen impressive launch momentum, investors could have been ebullient enough to see past the impact on sales of the older products.

But Investors are aware of how tough the diabetes market is, and know its risks. More than two thirds of the forecast $54.9bn in sales of branded diabetes drugs in 2018 is controlled by just four companies – Novo, Lilly, Sanofi and Merck & Co. Outside of the long-acting insulin space, the only significant players globally are Lilly and Novo, so a win for one is by definition a loss for the other.

NovoLog is the biggest-selling product in Novo’s portfolio today, forecast to sell $3.18bn this year and grow to $4.57bn in 2018, while Victoza is growing at 20% a year to $4.03bn in 2018, according to EvaluatePharma data. Being cut off from a major share of the world’s biggest drug market will not help meet consensus, and a more modest outlook will now emerge.

In essence, Novo has seen nearly all of its most promising growth prospects blocked off this year, which should be a huge knock to sentiment. This is combined with new entrants in the GLP-1 market and the emerging threat of biosimilars in the long-acting insulin space, as Lilly’s own asset approaches the market and Sanofi responds with a new Lantus formulation (Event – Sanofi pins hopes on its new Edition of Lantus, May 17, 2013).

Analysts from Bernstein Research, in initiating coverage on Novo last week, have noted a lack of significant catalysts in 2014 outside of what competitors will report, which is not likely to lift share prices.

On the other hand, taking Victoza away from diabetics will not be a popular decision, and this is likely a complaint that patients as well as plan sponsors, particularly self-insured corporate plans, will take to Express Scripts. It could help fuel the arguments of those who believe that Express Scripts’ merger with Medco treads close to a monopoly (Express Scripts, Medco tie-up cements cost-cutting trends, July 22, 2011). Some political pressure and a price break could help bring the PBM back to the table.

But that could be the big hope for Novo through the end of 2014. For now, it appears that the Danish group is in retreat, and a stalemate may be the best it can hope for in this phase of the diabetes wars.